Peso rises to strongest level in over 2 months

But cost of stabilizing currency may dampen economic growth

The Philippine peso closed at 56.94:$1 on Wednesday—its strongest level in just over two months—but Goldman Sachs warned that stabilizing the local currency might dampen economic growth as this would entail greater cuts in government spending.

Market watchers said the peso was benefiting from a temporary correction of the US dollar which “may be nearing its bottom.“

Michael Ricafort, chief economist at the Rizal Commercial Banking Corp., said Wednesday’s closing was the strongest since 56.77 on Sept. 13 or 10 weeks ago.

“President Marcos signaled that the government may have to defend the peso in the coming months [through interest rate hikes] consistent with earlier and recent signals from the economic team on various measures to help stabilize the peso and overall inflation,” Ricafort said.

But efforts to stabilize the value of the peso against other currencies, particularly the dollar, may need bigger reductions in public spending, which is already a major cause of an expected slowdown in economic growth in the coming quarters, no thanks to persistently wide trade deficit. According to Goldman Sachs, Philippine real gross domestic product (GDP) will grow by 7.2 percent for full-year 2022.

This suggests that fourth-quarter growth will be the slowest this year at about 5.5 percent, which follows the 8.2 percent recorded in the first quarter, 7.5 percent in the second quarter and a faster-than-expected 7.6 percent in the third quarter.

Philippine growth will be even slower in 2023, when Goldman Sachs forecast a full-year rate of 5.8 percent as the boost from economic reopening fades.

The company’s economic research teams also cited as reasons for a growth slow down the persistently high inflation which would dampen consumer spending despite improved employment data. Meanwhile, private investment spending is weighed down by the rapid increase in domestic interest rates and tightening in domestic financial conditions due to the weak peso.

“Overall investment spending will also be impacted by the planned public [capital expenditure] spending cut next year to 5 percent of GDP from 5.8 percent of GDP this year,” Goldman Sachs said.

“In our view, with the current account deficit likely to stay elevated at 5.8 percent of GDP next year despite slowing growth, efforts to stabilize the currency may necessitate larger cuts to public spending than currently envisioned, should broad US dollar strength persist,” it added.

Data from the Bangko Sentral ng Pilipinas (BSP) show that as of the end of June 2022, the country’s current account—the sum of all its transactions with the rest of the world—was pegged at a deficit of $7.9 billion that represented 7.7 percent of GDP. This widened from a $1.3-billion deficit or 1.3 percent of GDP in the same period of 2021.

The BSP said the widening of the current account deficit was driven by the widening of the trade in goods deficit.

“With stable [foreign direct investment] inflows only partly able to cover this trade deficit, this pushed the broad-balance of payments into a bigger deficit, leading to ongoing [peso] underperformance,” Goldman Sachs said.