SHOULD WE WORRY ABOUT THE PESO DEPRECIATION?

AS THE peso-dollar exchange rate crossed the P53.00/$1.00 on June 11th, a lot of people, including foreign analysts, raised their “worried” flag. Indeed, the next days thereafter the peso slid further to some 5.8% higher than the P50.40/$1.00 average in 2017. But should we worry? The answer should depend on the factors that are driving the peso’s weakness.

First, the US dollar has been strengthening since the end of Q1-2018. There are several reasons for this. IMF projects that the US economic growth to accelerate 2.9% this year compared to 2.3% in 2017.

Apart from the growth momentum, the Trump’s tax cuts get to be felt by individuals and corporations starting Q2 2018.

Next, the same tax reform tries to attract back to the US some $ 2 trillion of cash held by US multinationals abroad. Even if half of that returns, that would add significant demand for the greenback.

Finally, we have the Fed raising policy rates now to 1.75% and so 6-month T-bills yield 2.06% while in Germany the 6-month yield is -0.63% on June 13th. It becomes attractive for German institutions to invest in US Treasuries because of the large differential.

Second, foreign stock and bond investors are selling off their peso-denominated financial assets as they stand to lose with a peso depreciation. Foreigners have been net sellers in the local stock market by a total of P52.6-B (~$1.0-B) from February to May this year.

Third, the Philippine balance of trade has been deteriorating and has reached a record -$3.6-B in April 2018.

For the first four months, this amounted to $ 12.2- B which if multiplied by 3 (simple annualization) yields $36.6-B which will be more than 20% higher than a year ago. However, this may not be viewed too badly as imports of capital goods (additions to productive capacity) have shown ro-