Economic imbalances weighing on the peso

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P51:$1 hit; ANZ says currency likely to stay the region’s worst performer

The peso fell to P51 versus the dollar on Monday — a near 11-year low — and the currency is expected to remain the region’s worst-performing given growing economic imbalances.

The peso closed at P51.08:$1, a level it briefly touched on Friday before recovering slightly to end that day at P50.98 versus the greenback.

Monday’ close was the weakest since the currency settled at P51.21:$1 on August 28, 2006.

“The peso weakened towards the end of the day amid concerns over the conflict between the US and North Korea,” Land Bank of the Philippine market economist Guian Angelo Dumalagan said.


Monday’s result coincided with the release of ANZ Research’s “Philippine Insights” report, which declared that an “intensifying build-up of imbalances” arising from strong economic growth was weighing down the peso.

Already the region’s worst-performing currency, the peso is “likely to remain so in the remainder of the year,” it said.

ANZ Research noted that the Philippine economy had undergone structural improvements in the last decade with potential growth now at about 6.5 percent, more than double what it was during the 1990s.

“However, the recent period of strong growth has resulted in the build-up of imbalances in the economy, which in our view are intensifying,” it said.

ANZ’s based its contention on three inter-related indicators: rising credit intensity, persistently high exposure to the real estate sector alongside rising property prices, and deterioration in the external position.

Bank lending, based on Bangko Sentral ng Pilipinas (BSP) data, grew by 19 percent in June as loans for production activities and households also expanded.

Philippine residential property values, meanwhile, were up 1.1 percent in the first quarter of 2017, led by prices in Metro Manila and nearby areas. The BSP’s Residential Real Estate Price Index rose to 117.2 in January to March from 115.9 in the same quarter in 2016.

The central bank also forecasts the country’s balance of payments position to hit a deficit of $500 million this year in a reflection of global and domestic economic developments.

Monetary authorities, ANZ Research claimed, have refrained from addressing these factors in favor of promoting economic growth.

“Although macro-prudential standards have periodically been tightened, the central bank has resisted hiking rates,” it said.

The Monetary Board has kept the policy rate unchanged since it cut the reverse repurchase rate in May last year — to 3 percent from 4 percent — in the run-up to the adoption of the interest rate corridor system.

“Against this backdrop, the Philippine peso would need to bear the burden of adjustment,” ANZ Research said.

On Sunday, central bank Governor Nestor Espenilla sought to assuage concerns over the peso, saying: “It’s natural for it to show volatility as it adjusts to market conditions and all the short-term uncertainties such increased tension in North Korea.”

“The peso is capable of correcting itself as the market calms down and digests the relevant information. Moreover, BSP will always be there strategically if volatility is considered excessive,” he added.

Monetary authorities, said Espenilla, do not expect the peso to go into a free fall.

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