MARKET volatility will continue to plauge the Philippines, weakening the peso and compelling fund managers to repatriate gains from the stock market, until the Federal Reserve decides to raise interest rates in the US.
In the face of the market play on US interest rates, it is up to investors how they would judge the Philippine economy an its macro economic fundamentals, according to the Bangko Sentral ng Pilipinas (BSP).
The weakness of the Philippine peso is being driven mainly by external factors, BSP Governor Amando Tetangco Jr. told reporters on the sidelines of the signing of the memorandum of agreement between the Financial Stability Coordination Council and the Housing and Land Use Regulatory Board on Friday.
“That is why if you look at the movements in other jurisdictions in Asia, we would also see a weakening of their currencies. At this point in time, there seems to be some risk aversion given . . . the uncertainty about when the US Fed is going to finally increase interest rates,” he said.
Going by the statements of various United States Federal Reserve governors and presidents, there seems to be a split—some want to increase interest rates and some would want to wait, Tetangko noted.
“So that causes some volatilities in financial markets,” he pointed out.
Another factor is the European play, particularly the German bank that is causing concern about the financial system in that part of the world.
Tetangco said there are also some domestic factors, for instance, the increase in corporate demand for dollars for both fixing and import requirements.
“So together, these factors have pushed down the exchange rate. But the increase in corporate demand is not negative, because it indicates that you are growing and businesses are importing their requirements that they can use for further expansion,” he said.
On Friday, the peso closed to a new seven-year low of P48.50:$1 against the US dollar, losing 17 centavos from P48.33 on Thursday. It was the weakest for the Philippine currency in seven years since it settled at P48.62:$1 on September 4, 2009.
BSP Deputy Governor Diwa Guinigundo also cited the waiting game regarding the US Fed move on interest rates that serves as catalyst for capital flight from the Philippines.
Latest data from the central bank showed foreign portfolio investments flows in the week ending September 16 were a net outflow of $347 million, compared with $252 million the week prior and $40.39 million in net inflow a year earlier.
Foreign portfolio investments are a component of the balance of payments (BOP), which summarizes the country’s economic transactions with the rest of the world over a certain period. Other components of the BOP include trade, direct foreign investments, and remittances.
“In fact if you read the commentaries . . . uncertainty will continue until such time that the market is sure when the US adjustment will really take place” Guinigundo said.
“Number two, the global economy is still soft. The recovery is very uneven. There are some countries that are recovering fast. So in general, there is uncertainty about the global economy,” he added.
In light of all this, Guinigundo said monetary authorities are assuming that the market is rational and “can digest both positive and negative news and in the end judge whether going into the emerging markets, including the Philippines, is good.”