Despite falling to its lowest value in seven years, the Philippine peso remains “very strong”, as local finance officials assert that the drop will even be helpful in raising the value of dollar remittances and the competitiveness of exported products.
The Department of Finance, through undersecretary and chief economist Karl Kendrick Chua, said that the Philippine peso is expected to remain “broadly stable” over the medium term, supported by solid macroeconomic fundamentals and a steady stream of remittances from overseas Filipino workers (OFWs) and dollar receipts from the business process outsourcing (BPO) sector.
DOF defends the peso
“This means that the depreciation in recent weeks is welcomed as it will help improve export competitiveness and value of remittances, which benefits around 40 percent of the economy,” said Usec. Chua.
“While the peso has moderately depreciated in nominal terms in recent weeks, the peso in real terms is still very strong, which deters competitiveness,” he added.
Usec. Chua said the movement of the peso aligns with movements in the global currency market, as our currency’s depreciation of about 2 percent is lower than the fall in the value of the Malaysian ringgit (3.5 percent), British pound (2.7 percent), Australian dollar (2.2 percent) and Japanese yen (2 percent).
“Compared to these currencies for the same period, the peso is broadly in line with the market,” said Chua in reaction to the peso’s depreciation by 2 percent against the greenback from the US$ 1 versus Php 47 rate of July 1. “[But] we should be prudent to ensure that volatilities are managed,” he pointed out.
Another finance undersecretary, Gil Beltran, said “the peso is just seeking its appropriate value, given that it has appreciated significantly in previous years.”
“The gross international reserves at US$ 85.6 billion, which is equivalent to 10.5 months of imports, is higher relative to ASEAN and should not be a cause for alarm,” Beltran explained.
BSP affirms peso’s power
Meanwhile, Bangko Sentral ng Pilipinas (BSP) data over the January 2010-August 2016 period showed that “the real effective exchange rate, which shows the purchasing power of the peso, appreciated by 1 percent against developing-country trading partners and by 17.7 percent against advanced-country trading partners.”
In a report, the BSP said that “emerging market economies like the Philippines could experience bouts of volatility in asset prices, including exchange rate, amid uncertainties on the timing and potential impact of further US rate hike, slowdown in China, seesaw of oil prices and, more recently, the unfolding of BREXIT (British exit from the European Union).”
“Nonetheless, the peso is expected to remain broadly stable over the medium term, supported by the country’s solid macro fundamentals as well as by the steady the stream of remittances from overseas Filipinos and dollar receipts from the BPO sector,” according to the report.
The BSP said the temporary depreciation of the local currency is likely to have “minimal” impact on macroeconomic conditions over the medium term, as it takes a permanent drop of Php 1 in the peso’s value against the dollar to raise inflation by about 0.15 to 0.20 percentage points over a two-year period.
“This limited impact on the price level gives flexibility for monetary policy to refrain from reacting aggressively on such movements of the peso,” the BSP reported.
The BSP pointed out that as a result of the depreciation trend, “the peso gained external price competitiveness against its trading partners.”
This is reflected in “the recent decline of the peso’s Real Effective Exchange Rate (REER) index against the basket of currencies of all trading partners, trading partners in advanced and developing countries.”
“A decrease in the REER indices suggests that the peso gains external price competitiveness while an increase indicates otherwise,” the BSP reported.