The recent increase in foreign direct investments (FDI) and external debts are providing strength to the local currency, ING Bank Manila Economist Nicholas Antonio T. Mapa said.
Mapa said in a report on Monday the country’s legal tender has remained the best performing currency in the region this year.
“A modest pick-up in FDI coupled with a surge in foreign borrowings have also helped support [Philippine peso],” he said.
In June, the Bangko Sentral ng Pilipinas (BSP) reported that FDI net inflows climbed by 7.1 percent year-on-year to $481 million from $440 million in the same month last year. The increase was attributed to the gradual reopening of advanced economies that are eyeing investments in the Philippines, “coupled with the country’s robust macroeconomic fundamentals.”
The June growth tempered the cumulative contraction in FDI to 18.3 percent in the January-to-June period from 21.9 percent during the first five months. All FDI components saw improvement in June, with net investments in equity capital taking the lead, according to the BSP data.
Meanwhile, the BSP reported this month that the Philippines’s outstanding external debt rose by 7.4 percent to $87.5 billion in the second quarter from $81.4 billion three months earlier.
“[B]ut as the peso continues to strengthen, we lament lost potential output with the investment boom now gone,” Mapa said. “Foreign investors have exited in troves [$3.7 billion] as foreigners may have turned skittish after the economy fell into recession.”
He said that the “fast-fading investment boom” was evident as the economic outlook remains bleak after entering into a widespread recession amid the coronavirus pandemic.
Mapa explained that for the investments to go up again, there should be resurgence of imports with raw material, among others.
“Import demand has dried up as a result and so has the demand for the US dollar, translating to a relatively ‘stronger’ peso; at the expense, however, of the vaunted investment boom of yesteryear,” the ING economist said.
The BSP earlier said that peso is seen to remain stable for the rest of the year on the back of ample international reserves and manageable inflation.
In 2020, the Central Bank is projecting the peso to trade within the P50 to P52 range. The local currency is seen to move within the P50 to P54 level next year.
Image credits: Nonoy Lacza