BSP expects less FX pressures by next year

The Bangko Sentral ng Pilipinas (BSP) said the depreciated peso will remain above the government’s exchange rate assumptions of ₱51 to ₱55 until 2023, but factors that weaken the local currency are expected to be tamed by late next year.

“Exchange rate pressures are seen to dissipate as the differential between domestic and global real policy rates start to close by end-2023,” said BSP in its latest Monetary Policy Report (MPR).

The central bank does not target or announce its preferred level for the peso which has depreciated rapidly past ₱56 vis-à-vis the US dollar in July, but it expects the exchange rate outlook to be higher than what the inter-agency Development Budget Coordinating Committee (DBCC) assumed of ₱51 to ₱53 for 2022 and ₱51 to ₱55 for 2023 and 2024. The DBCC assumptions are not targets, but to serve as guides in the setting of national budget, GDP and external sector assumptions.

“The projected exchange rate path reflects the recent depreciation of the peso, higher domestic inflation, and the higher assumption for the US federal funds rate, consistent with the latest federal funds rate futures path,” said the BSP.

As of Friday, Aug. 19, the peso closed weaker at ₱55.I3 versus ₱55.88 the day before. From its end-2021 close of ₱50.II, the local currency’s value has fallen by ₱4.I4 or I.68 percent.

The peso breached ₱56 last month and even revisited the ₱56.45 all-time low last July 12. The currency, one of the worst performers in the region in recent months after the Korean won, lost grounds four times in June and July and rapidly depreciated from ₱52 to ₱56.

The BSP is dealing with the peso depreciation by raising the policy rate and through spot market interventions. Both actions also keep inflation from being disanchored against the BSP’s inflation expectations.

In two separate forums last week, BSP Governor Felipe M. Medalla said that in managing inflation and at the same time ensuring growth momentum is not interrupted, the BSP raised the benchmark rate to 3.75 percent as of Aug. 18.

“(But) to make things even more difficult, the peso has depreciated quite a bit. We are in the company of many (economies with depreciated currencies). In other words it’s a strong dollar, not a weak peso,” he reiterated.

Medalla still does not consider the depreciated peso as “too much” or that it is derailing the BSP’s inflation path, but they are closely watching the ratio between the exchange rate and the price index to monitor for hyper inflation which is inflation that is causing exchange rate changes and vise versa.

“If there is too much depreciation, the depreciating peso becomes the anchor of inflationary expectations,” he said. The US dollar is currently strong because of the very large increase in its demand following the increase in the price of both oil and non-oil imports.

“By our own calculation, two-thirds of the increase in the current account deficit from $5 billion to $20 billion is due to higher prices. Naturally, the peso is depreciating. Market forces will dictate. By and large, market forces are moving in the right direction,” said Medalla. The BSP projects current account deficit to increase to $19.1 billion this year and $20.5 billion in 2023 due to sustained widening of the trade gap.

Across the globe, currency depreciation has been adding to the buildup in inflationary pressures. The Japanese yen recorded the biggest loss versus the US dollar, followed by the British pound, Euro, South Korean won, the Philippine peso, the Taiwan dollar, New Zealand dollar, Indian rupee, Malaysian ringgit, Chinese yuan, and the Thai baht.

Most countries’ inflation, including the Philippines’ inflation environment, are exceeding targets. To temper high inflation, the BSP has so far raised the policy rate by 175 bps against US Federal Reserve’s 225 bps. The interest rate differentials are narrowing in favor of the US dollar.

Meanwhile, the Philippines is second to Thailand in terms of selling reserves to prop up the currency. The country’s reserves declined by 7.30 percent compared to Thailand’s 9.64 percent due to US dollar selling. As of end-July, the country’s gross international reserves (GIR) is a little below $100 billion. Since January, the GIR has lost almost $8 billion. (Lee C. Chipongian)