STRONG macroeconomic fundamentals will continue to give the peso the stability a currency needs, according to government economic managers, but an analyst believes monetary authorities will have to tap its dollar reserves to keep the currency stable.
On Wednesday, the peso returned to a seven-year low of P48.25:$1 after gaining some ground on Tuesday at P48.17:$1. The Philippine currency first hit its weakest level is seven year on Monday.
The peso is so far the worst performing currency in the region, but the country’s fundamental have not moved one or another, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo said.
“It is the same macroeconomic policies that produced a resilient economy in the last so many years. It is the uncertainty, the negative market sentiments that is bringing the peso down,” he said at the Stratbase-ADR Institute (ADRi) for Strategic and International Studies forum on Wednesday.
“But you need to understand that this does not indicate that foreigners have already left the Philippine markets. We have to look at another indicator—the interim peso deposits,” he said.
Guinigundo said interim peso deposits are where new investments are brought in or those liquidations coming from government securities and the stock market.
“The situation today is that the interim peso deposit has not broadly changed. It’s still at more than P200 billion, representing liquidations from the stock market and the government securities market,” he said.
The BSP official noted the peso is still relatively stronger than the P55:$1 level in 2005 when the government declared a deficit crisis.
Meanwhile, the Department of Finance (DOF) said the Philippine peso remains “very strong” in real terms and the current movement of the local currency will actually help improve the competitiveness of exports and the value of dollar remittances.
In a statement, Finance Undersecretary and concurrent Chief Economist Karl Kendrick Chua said the Philippine peso is expected to remain “broadly stable” over the medium term as it is propped up by solid macroeconomic fundamentals along with the steady stream of remittances from overseas Filipino workers (OFWs) and dollar receipts from the business process outsourcing (BPO) sector.
“While the peso has moderately depreciated in nominal terms in recent weeks, the peso in real terms is still very strong, which deters competitiveness,” Chua said.
“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,” he added.
Another finance undersecretary, Gil Beltran, said the peso is seeking its appropriate value after appreciating significantly in previous years.
“The GIR (gross international reserves) at $85.6 billion, which is equivalent to 10.5 months of imports, is higher
relative to Asean (Association of Southeast Asian Nations) and should not be a cause for alarm,” Beltran said.
Chua said the movement of the peso is in line with the global currency market, as the local currency’s depreciation of about 2 percent was even 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 $1:P47 rate on July 1.
But Chua noted “we should be prudent to ensure that volatilities are managed.”
Budget and Management Secretary Benjamin Diokno, meanwhile, said he is not worried about the current performance of the peso.
“The peso did not really deteriorate. It just moved a little,” Diokno said during the ADRi forum.
The depreciation of the peso relative to other currencies is really not that bad. “The weakening of the peso is the reflection of the strengthening of the dollar,” Diokno noted, saying it was mainly because of the normalization of policies in the United States.
Tapping the GIR
“Now that the peso has strayed, expect Tetangco to be the good shepherd once more and look to stem the stark weakening trend of the peso to help guide it back to his comfortable middle,” said Nicholas Antonio Mapa, associate economist at the Bank of the Philippine Islands (BPI).
Mapa recalled that Tetangco officially began his term with $21 billion worth of GIR tucked away to help defend the peso, representing roughly 4.9 months of import cover and higher than the “international” convention for having 3 months worth of imports.
Over the course of his stewardship, the GIR grew at an unprecedented pace to hit $85 billion as of August 2016 or 10 months of cover, due to remittances, he added.
“Of course there are several camps out there estimating the ‘optimal’ level of GIR but what we have noticed is that with increased levels of buffer stock, Tetangco has become more confident to help stem excessive foreign exchange pressure on both sides of the pair,” he noted.
For instance, the BPI economist noted that beginning November 2010, the peso moved within a tight band as Tetangco attempted to keep the peso in the comfortable middle.
“In times of excessive peso appreciation (2012), Tetango held the deluge of foreign funds to help defend the 40 handle. Throughout the last few years we’ve witnessed the same narrative of BSP defending on both the top side and the bottom to build on GIR in good times and to flood the market with foreign exchange liquidity to calm depreciation swoons,” he said.
Tetangco’s virtue of building the defenses early on will pay dividends now that winter is here, Mapa noted.
“Expect Tetangco to resort to heavy foreign exchange presence in the next few weeks to keep the peso from straying too far from the proverbial middle of the regional pack,” he said.