The Philippine peso closed last year at Php49.85 per US dollar, 0.50 percent weaker than the previous year’s close of Php49.60.
That kind of change doesn’t look like much but it stands out in Asia, where most currencies, on average, appreciated or got stronger by 5.44 percent last year, according to Entrepreneur Philippines calculations using year-end currency levels in 2017 and 2016 compiled by the Department of Finance (DOF)’s Economic Bulletin on Asian Currencies.
Comparing 12 Asian currencies listed in the DOF bulletin dated January 4, the Philippine peso was the region’s third weakest currency and was one of only three currencies that depreciated. The other two were the Hong Kong dollar, which fell 0.64 percent, and the Indonesian rupiah which dropped 0.60 percent. The rest of Asia’s currencies rose by a range between 0.28 percent (Vietnamese dong) and 12.97 percent (Korean won).
“The peso avoided hefty appreciation that occurred elsewhere in Asia and boosted export competitiveness amid the recovery of global markets. The 12 Asian currencies appreciated by almost five percent in stark contrast to three currencies that depreciated slightly,” said the DOF.
Like many economists and policy makers, the DOF thinks that hefty currency appreciation is a bad thing for the economy because it tends to make the country’s exports more expensive in terms of other currencies and, therefore, less competitive. While depreciation tends to make imported goods such as petroleum products and cars more expensive, it also boosts the value of earnings of exporters, overseas Filipino workers and the business process outsourcing (BPO) industry. Besides, more expensive imported items could be a good thing if it encourages more local producers to make import substitutes.
Another reason for the DOF’s benign view of the peso’s performance last year was its relative stability. “Volatility measures indicate that the peso was among the four Asian currencies which moved within the tightest range,” the DOF said. Using standard deviation from the mean as an indicator of how wild the peso’s swings up and down were, the DOF said the Philippine peso’s volatility averaged only 0.9 percent compared to the Asian average of 1.5 percent.
The peso’s movements within a tighter range are “due to sustained strong macroeconomic fundamentals backed by prudent fiscal and monetary policy and continuing economic reforms,” said the DOF. “This occurred as the legislature passed the first package of tax reforms, the BSP (Bangko Sentral ng Pilipinas) adopted foreign exchange liberalization measures, and the US Federal Reserve Board continued monetary policy normalization.”
What all these suggest is that Philippine policy makers value currency stability more than the direction of the peso’s movements. While a degree of depreciation is welcome to help boost Philippine exports’ competitiveness and the incomes of dollar earners, policymakers prefer the peso’s movements to be gradual rather than abrupt. This could be a challenge this year as some economists expect the peso to drop to as low as Php54 by the end of the year.