Philippines does not need to follow other Asian economies on the currency devaluation path to maintain competitiveness as strong domestic fundamentals provide enough cushion for the impact of weakening overseas markets, a central bank official said.
Reacting to Vietnam’s decision on Wednesday to devalue the dong for the third time this year after China relaxed the renminbi’s peg to the US dollar earlier, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo said the Philippines is not overly dependent on exports for its current accounts health.
“Exporters have reasons to be wary about what they call a currency war. But we need to understand why they are doing it. Soft economic prospects drive some countries to devalue because their dependence on external trade is so much,” Guinigundo said in a text message to reporters on Wednesday.
In the case of the Philippines, resilient domestic factors are a strong feature of the economy, including consumption, private capital formation and public spending, he said.
“Thus, directly devaluing the currency or reducing interest rates to force the currency’s weakening does not make much sense [here]because there could be unintended, unwanted consequences on imports, debt servicing and price movements,” Guinigundo pointed out.
Competitiveness comes easy with devaluation but Guinigundo stressed that the more durable, more sustainable sources of external competitiveness go beyond that. External competitiveness may be achieved through comparatively lower costs of power, of doing business in the country and through better quality goods, he said.
Caution vs weakness spread
In a separate message to reporters regarding devaluations, BSP Governor Amando Tetangco Jr. warned that such central bank actions could result in the spread of currency weakness in the region.
“Authorities will do what is best to address country-specific concerns . . . but because our markets are interconnected, it is reasonable to expect that these actions of central banks in the region could result in weakness in the other currencies, including the peso,” Tetangco said.
The BSP governor, however, added that as long as markets do not overact and adjustments are orderly, these policy actions should lead to overall stability in the region and higher regional growth in the medium term.
To date, the Philippine currency continues to trade on the soft side against the US dollar, remaining at its weakest level in five years.
The peso traded flat on Wednesday and closed at P46.35:$1, remaining at its weakest finish since July 22, 2010, when it stood at P46.49 to the greenback.
The peso opened at P46.25 to $1 on the Philippine Dealing System (PDS) on Wednesday before trading between P46.25:$1 and P46.35:$1.
Total volume transacted on the PDS rose to $555.5 million from $468.6 million in previous trading.