The peso’s weakness is not a major threat to the economy given subdued inflation and the country’s relatively low foreign currency debts, London-based research firm Capital Economics said.
In a report released during the weekend, Capital Economics noted that the peso was now down nearly 9 percent against the dollar, making it the worst–performing Asian currency.
“The key factor behind the drop in the peso has been a sharp widening of the country’s trade deficit, which has pushed the current account into the red,” it said.
One of two main channels by which a weaker currency can pose an economic threat, the company said, is via higher import costs that can add to inflation.
“This is unlikely to be a big concern in the Philippines at the moment. Not only has inflation been trending down since the start of the year, but at 2.8 percent year-on-year [in July], the headline rate remains comfortably within the central bank’s 2-percent 4-percent target range,” it said.
The second channel, meanwhile, is where a weaker currency makes a country’s foreign-denominated debt more expensive.
“We estimate that total foreign currency debt in the Philippines is the equivalent to 29 percent of the country’s GDP (gross domestic product) which is relatively low compared to other emerging markets,” Capital Economics said.
Countries that have suffered from foreign currency debt crises, it said, typically had ratios of around 50 percent of GDP or more.
The peso is now in P51 per dollar territory with analysts expecting P52:$1 to be hit before the year ends.
The currency lost 4 centavos on Thursday to close at P51.17:$1.
The Bangko Sentral, however, has said that there is no cause for alarm.
“Definitely, we are not in a foreign exchange crisis. We allowed the peso to adjust moderately and gradually but I can assure that the BSP is in full control of the exchange rate,” central bank Governor Nestor Espenilla Jr. said last month.
On Friday, Finance department said market forces should be allowed to dictate foreign exchange movements, with monetary authorities intervening only during times of extreme volatility.