LAST week, in the briefing announcing the Monetary Board’s non-decision on the BSP’s benchmark interest rate (the overnight reverse repurchase rate was left unchanged at 3 percent), Deputy Governor Diwa Guinigundo commented, “In terms of economic fundamentals, there is no reason why the peso should be as weak as it is now.”
Most people who have a basic understanding of the Philippine economy would probably agree with that statement, as unsettling as it is. Growth has slowed slightly, but is still at least the second fastest growing economy in Asia, and the mood among businesses and consumers is generally upbeat; big sectors like real estate and automobiles expect to top their results from last year, and Filipino consumers at this point are showing every sign of willingness to help them do that.
The BSP since late last year has been consistent in pinning the blame for the peso’s depreciation on the movement of the US dollar, which has gained strength since Donald Trump’s election as President. The current conventional wisdom about the dollar’s appreciation is that it is not necessarily a vote of confidence in the US economy under Trump—although there is a significant minority who does believe he is a harbinger of growth—but rather flight to the world’s safest currency out of uncertainty about how Trump will affect the global economy.
In that context, Guinigundo’s comment expresses some understandable frustration that the strengths of the Philippine economy are being overlooked. What he seems to be saying is that too much emphasis is being put on “external factors,” and the economy here ought to be judged on its own merits; it follows, then, that if that was happening, the peso would not be stuck below P50 to $1.
When that argument, direct or implied, is made for so long, however, it begins to ring hollow. On August 16 of last year, the peso hit a high point of P46.23 to $1. Since then, up to this past Monday, the peso has steadily weakened to P50.087 (it is trading at about P50.22 as I write this Wednesday morning), a drop of 8.34 percent.
No other currency in the world apart from utter disasters like Zimbabwe or Venezuela is performing so poorly against the dollar; therefore, the movement of the dollar cannot possibly be a complete explanation for the peso’s weakness.
What other causes there might be for the currency’s decline are not obvious, because otherwise, one would assume, the BSP and the government’s economic managers would be addressing them, and the peso would not be falling as rapidly as it is. The fact that the uncertainty about the economy is undefined is alarming, because the currency market activity that is driving the peso downward is largely being carried out by domestic players – notably, local banks. So while a great deal of confidence in the Philippine economy is being expressed in public utterances, actions say otherwise.
Even if we don’t know where the weakness, real or imagined, in the economy actually is, we do know where things are headed if it is not identified and addressed soon. The estimate from the BSP for March inflation is a broad range between 3 and 3.8 percent; reading between the lines, that is a warning it will be higher than in February (3.3 percent), a warning that was reinforced by the central bank’s forecasting inflation would rise into the third quarter of the year.
A weaker peso puts upward pressure on inflation; so far, no one has officially ascribed the increase in inflation (up 0.7 percent so far this year) to the declining currency, but that omission is becoming as absurd as placing all the blame for the peso’s drop on the rising dollar. Higher inflation can make the peso decline even farther, which in turn pushes up inflation, and so on, in a kind of loop that usually can only be arrested by dampening economic activity with higher interest rates.
Most analysts believe the BSP will do exactly that sometime later this year, and Bloomberg recently pointed out that prior to last week’s Monetary Board meeting, the analysts it routinely polls were for the first time in three years not unanimous in their guesses about what the MB would do—most felt the benchmark rate would be left unchanged as it eventually was, but a couple of them thought a rate hike was already in order.
Unless the peso’s slide is arrested, it is likely that any rate hike, even at the next MB meeting in a few weeks, will already be too late. That puts the economy at risk of underperforming for this year, even with government and analysts’ assumptions that growth will not quite keep up with last year’s levels. Perhaps it’s time the BSP stopped telling everyone that everything is actually okay; likewise, it is well past time for the Duterte administration to stop dallying with political distractions and get to work already.