EARLIER this week, the value of the peso relative to the US dollar declined to its lowest level in seven years at P48.25 to $1 in trading on the Philippine Dealing System (PDS).
Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. was quick to reassure jittery investors and economic observers that “the peso movement reflected the continuing uncertainty about the US Fed’s next policy action, just like the other regional currencies, plus strong foreign exchange demand for fixing and corporate requirements.”
Along the same line, Department of Budget and Management (DBM) Secretary Benjamin Diokno pointed out that a stronger dollar – which is, in turn, partly attributable to the US Fed’s hints that it might raise interest rates in December – was largely the source of the peso’s weakness, a view shared by other officials and analysts.
The consensus of the various official comments on the peso exchange rate, in other words, is that fluctuation in the local currency is due to external factors, and not really a cause for concern. They explain that the domestic economy is fundamentally sound, though they did not explain that in detail. In terms of peso valuation, that includes things like foreign currency reserves and the overall money supply in the country, meaning that any volatility in the peso should be relatively mild and short-lived.
An economist from the ING Bank offered a slightly different view, however, one that suggested that the peso’s apparent weakness may be caused by more domestic factors than the country’s economic managers care to admit.
ING’s Joey Cuyegkeng explained that investors have “priced in” expected economic improvements over the next few months, and are reacting negatively when there are signs those expectations might not be met. As one example, Cuyegkeng pointed to the country’s current account surplus, which is now predicted to be much smaller at the end of the year than government forecasts, and might even slip into a deficit. Investors respond predictably to these negative indicators by pulling their money out of the Philippine financial markets – stocks, fixed-income securities, and currency – and retreating to the safe haven of markets in the US or other advanced economies.
What the government economic managers are not explaining is, it is not just the value of the US dollar, but more the comparative amount of dollars and pesos in the Philippine financial system that has an effect on the peso’s value. Recent indicators such as the country’s expanding money supply (which rose 13.3 percent year-on-year in July, and 0.57 percent from the previous month) and the constant oversubscription to the BSP’s term deposit facility, despite the central bank’s raising of the volume offer amount four times in the five months since it introduced the liquidity management tool, show that there is a lot of money (in peso form) in the Philippines. This essentially causes inflation of the US dollar value – the more pesos in the financial system, the more pesos it will take to purchase a dollar.
There are two things the government can do to boost the peso value. In the short term, it can release some of its large foreign reserves into the financial system. The more sustainable solution, however, is to do what every economic observer has been exhorting the government to do, which is to accelerate its promised spending programs for infrastructure and other development.
That would, in turn, give investors confidence to increase their own long-term investments, and all of that together would increase the peso’s value by ‘soaking up’ excess, idle money in the economy.