Softer peso due to global volatility – BSP


The central bank said its recent peso-dollar rate forecast revision indicating a weakening of the local currency toward the year-end was triggered by volatility in the global markets and rising Philippine imports.

Explaining the assumptions for the revised forecast of P42 to P45 to $1 for 2014, against a previous projection of P41 to P44, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo said the new range came as a result of an assessment of global factors by the inter-agency Development and Budget Coordinating Committee (DBCC).

Following its meeting last week, the DBCC announced it has retained the 6.5-percent to 7.5-percent growth target for the country this year.

“The volatilities are given, global financial volatilities are given,” Guinigundo told reporters late Monday.

An analyst interviewed by The Manila Times said the government’s projection of a softer peso does not necessarily reflect a slackening of the country’s economic growth.

“A weaker peso may not reflect weaker GDP [gross domestic product]growth,” Jeff Ng, economist at the Standard Chartered Bank, said in an email to the Times.

Ng said there are many reasons why a currency might depreciate, such as government positioning, policy rate outlook, or capital flows. However, he cited one positive impact of a softening of the peso. “A weaker peso may encourage stronger export growth and GDP growth.”

Volatility, imports factored in Guinigundo said the latest actions by the United States Federal Reserve and the European Central Bank (ECB) formed an important basis for the revised assumptions made for the weaker peso forecast this year.

The US Fed recently trimmed its monthly asset purchase program by a further $10 billion from $45 billion to $35 billion as the US economy sustained a gradual recovery, making it an attractive destination again for investors.

Think tank First Metro Investments Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said in their June issue of the Capital Markets Research alliance publication, The Market Call: “The [peso]exchange rate will tend to be stable to weak for the rest of the second quarter, but renew the depreciation bias in the third quarter as the US economy’s growth is expected to exceed 3 percent starting the second quarter.”

The ECB, meanwhile, lowered all three of its key interest rates: the benchmark refinancing rate to 0.15 percent from 0.25 percent, the interest rate on the marginal lending facility to 0.40 percent from 0.75 percent to support businesses in the eurozone.

The Philippines is expecting to see higher demand for import goods this year to fill the requirements of massive infrastructure projects under the reconstruction program of the government in the typhoon-hit areas.

The higher import bills are bound to cause an outflow of funds from the country as local importers pay for the goods ordered from abroad.

“If you check the current account, you’ll see it a bit lower because of higher imports,” Guinigundo said.

The latest central bank data showed that the country’s current accounts posted a surplus of $2 billion in the first quarter of 2014, with the trade in goods account posting a narrower deficit of $4.1 billion, compared with the $4.2-billion deficit registered in the same quarter the previous year.

Besides the new peso assumptions, the budget committee also raised its imports target for 2014 and the next two years.

From a previous forecast of 6 percent, the government is now seeing 9 percent growth in imports this year. For 2015 and 2016, the inter-agency body said that imports will grow by 10 percent and 12 percent, respectively.


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