Fierce peso defense shows 1997 crisis still haunting Philippines
AN INTENSE BATTLE to stem currency declines in the face of dollar strength is reminding some emerging markets of the trauma inflicted by the 1997 Asian financial crisis. Just ask authorities in the Philippines.
Fearing a weaker peso could fuel inflation and spark social unrest, Bangko Sentral ng Pilipinas has unleashed aggressive intervention in recent weeks to prevent it from sliding past 59 against the greenback. As Southeast Asia’s worst performer plunged 11% this year, the government has declared the 60 level as a no-go area. However, forecasts compiled by Bloomberg show some bearish strategists predicting a slump of almost 8% to 62 by June.
The central bank has spent $6.4 billion of its foreign-exchange reserves in the first 10 months of this year to support the peso, according to Exante Data, Inc. The amount is equivalent to 5.9% of its end-2021 stockpile. Authorities have also more than doubled the benchmark interest rate this year, and said they will raise it again by 75 basis points at a meeting Thursday.
“The lessons of the Asian financial crisis are still very much in mind in the Philippines,” said Carlo Asuncion, chief economist at Union Bank of the Philippines in Manila. “Officials want to prevent any perception they are lax in managing economic risks, including the risk of a collapsing currency.”
In 1997, after the Thai baht’s devaluation sparked a deep crisis across much of the region, the peso slumped
34% as money managers pulled billions of dollars from Asia. Philippine economic growth cratered in the aftermath, while inflation soared to more than 10%.
We look at the main concerns behind the latest efforts to support the peso:
INFLATION:
The biggest worry is cost of living in a country that’s still struggling to reduce extreme poverty. As the nation imports almost all of the oil it needs, a weaker currency hurts local consumers.
While growth is still holding up for now, inflationary pressure is already building, with the gauge set to exceed the central bank’s target this year for the first time since 2018.
“Imported inflation remains an ongoing concern for the Philippines given pronounced currency weakness,” said Sonia Zhu, associate economist at Moody’s Analytics in Singapore. —