Peso’s drop ‘not a major concern’
THE continued weakness of the peso should not be a source of concern for the Philippines given the country’s low stock of foreign debt, an analyst at Capital Economics said.
Gareth Leather, senior Asia economist at Capital Economics, said the surprise cut in bank reserves from the Bangko Sentral ng Pilipinas (BSP) as well as a wider current account deficit dampened market sentiment towards the peso. However, he noted that current exchange rate levels are not worrisome.
“A low level of foreign currency debt in the Philippines means the recent weakness of the peso is not a major concern,” Capital Economics said in its weekly report released late Friday.
The peso sank to P52.34 versus the dollar on Feb. 19, its worst showing since it closed at P52.745 on July 19, 2006. Mr. Leather said the peso is the second worst-performing currencies from emerging markets against the greenback in recent weeks.
However, the global research firm said that the current drivers of the peso weakness should actually be seen as a boon for the local economy. For one, the rapid growth of imports which is putting pressure on the country’s current account should be viewed as a “broadly positive” development.
“Instead of being a cause for concern, booming demand for capital goods is an encouraging sign that the government’s infrastructure drive is making progress,” the report read.
The country’s trade-in-goods deficit logged a new all-time high in December at $ 4.017 billion which brought the full-year gap at $29.786 billion, the highest on record.
Central bank officials dispelled fears over a wider deficit, saying that a narrower current account driven by an increase in investments and imports of capital goods is actually a necessary step to accelerate economic growth towards the 7-8% target set by the Duterte administration.
A “falling” currency also affects an economy by way of a bigger foreign debt burden, but such is not the case for the Philippines given its relatively lower share of dollar-denominated loans.
The Philippines’ external debt stood at $72.368 billion as of November 2017, 5.6% lower than the $ 76.622- billion liabilities from the comparable year-ago period. According to preliminary BSP data, this accounted for 23.4% of gross domestic product, down from a 25.4% share the prior year.
The government has maintained fiscal prudence in recent years, with only a fifth of its annual borrowing program sourced from foreign lenders.
Hefty dollar reserves maintained by the central bank — which totalled $ 81.206 billion in January — also dodge fears of exchange rate-related shocks.
The central bank taps the reserve fund to intervene during the daily peso-dollar trading by buying or selling more units in order to temper sharp movements in the exchange rate.
The pass- through cost of a weaker exchange rate to inflation is likewise “very weak,” Mr. Leather said, a trend seen sustained over the coming year. Inflation clocked in at a faster-than-expected 4% pace last month, largely due to the impact of higher taxes on select goods due to the new tax reform law.
On the flipside, the weaker currency is seen to boost Philippine exports, in line with the government’s goal to make the local manufacturing sector more globally competitive.
The research firm said the BSP’s “sanguine” view on recent currency trends would likely mean that authorities will keep interest rates steady throughout the year, against the popular view that tightening moves are expected as early as March.