BSP seen keeping rates till 2018

Capital Economics said the weakening of the peso against the US dollar is not a major threat to the economy as the Bangko Sentral ng Pilipinas (BSP) is seen keeping interest rates untouched until next year.

In its emerging Asia economics weekly titled “Philippines: No need to worry about the weak peso,” Capital Economics senior Asia economist Gareth Leather said subdued inflation and a relatively low level of foreign currency debt continue to cushion the impact of the weakness of the local currency.

The peso continues to flirt with a new 11-year low after breaching the 51 to $1 last month and has now depreciated nearly nine percent against the greenback over the past year, making it the worst performing currency in Asia.

Leather pointed out the key factor behind the drop in the peso has been a sharp widening of the country’s trade deficit, which has pushed the current account (CA) into the red amid the surge in imports of capital goods for investments.

“As a fast –growing developing country with plenty of opportunities for investment, it makes sense for the Philippines to be importing capital from abroad,” he added.

The Bangko Sentral ng Pilipinas (BSP) now expects the country to book its first CA deficit in 15 years at $600 million or 0.6 percent of gross domestic product (GDP) instead of a surplus of $800 million or 0.6 percent of GDP this year.

The economist explained there are two main channels through which a weaker currency could pose a threat to a country.

He said a weak peso could push up the cost of imports and add to inflation.

“This is unlikely to be a big concern in the Philippines. Not only has inflation been trending down since the start of the year, but at 2.8 percent year-on-year, the headline remains comfortably within the central bank’s two to four percent range,” Leather said.

Likewise, he added a weaker currency could damage the economy by pushing up the local currency value of the country’s foreign denominated debt.

According to Leather, countries that have suffered from foreign currency debt crises have typically had ratios of around 50 percent of GDP or more.

“We estimate that total foreign currency debt in the Philippines is equivalent to 29 percent of GDP, which is relatively low compared to other emerging markets,” he said.

He reiterated the weaker currency benefits the country’s export sector and the development of a more competitive manufacturing sector would get a boost from a weaker peso.

“There is little indication that policymakers are concerned, and there are in fact signs that policymakers are welcoming the weaker peso,” Leather said.

The economist said the BSP should have been selling its reserves to support the currency and possibly thinking about hiking interest rates if it is concerned about the peso.

“But the central bank’s sanguine response to the fall in the peso supports our view that interest rates will remain on hold not just until the end of this year, but throughout 2018 as well,” he said.