The Philippine peso remains “very strong” in real terms and its more recent adjustments should actually help improve export competitiveness and the value of the remittances that benefit an estimated 40 percent of the local economy, according to the Department of Finance (DOF).
DOF Undersecretary Karl Kendrick T. Chua said the Philippine peso is expected to remain “broadly stable” over the medium term as it is propped up by solid macroeconomic fundamentals along with the steady stream of remittances from overseas Filipino workers (OFWs) and dollar receipts from the business-process outsourcing (BPO) sector.
“While the peso has moderately depreciated in nominal terms in recent weeks, the peso in real terms is still very strong, which deters competitiveness. This means that the depreciation in recent weeks is welcomed, as it will help improve export competitiveness and value of remittances, which benefits around 40 percent of the economy,” Chua said.
Finance Undersecretary Gil S. Beltran also said the peso is just “seeking its appropriate value, given that it has appreciated significantly in previous years.”
“The GIR [gross international reserves] at $85.6 billion, which is equivalent to 10.5 months of imports, is higher relative to the Asean and should not be a cause for alarm,” Beltran added.
Chua said the movement of the peso is in line with the global currency market, as the depreciation of about 2 percent was even lower than the fall in the value of the Malaysian ringgit at 3.5 percent, the British pound at 2.7 percent, the Australian dollar with 2.2 percent and the Japanese yen at 2 percent.
Chua explained the economic managers “should remain prudent to ensure that volatilities are managed.”
Bangko Sentral ng Pilipinas (BSP) data over the January 2010 to August 2016 period showed, the real effective exchange rate, which shows the purchasing power of the peso, appreciated by 1 percent against developing-country trading partners, and by 17.7 percent against advanced-country trading partners.
“Emerging market economies like the Philippines could experience bouts of volatility in asset prices, including exchange rate, amid uncertainties on the timing and potential impact of further United States rate hike, slowdown in China, seesaw of oil prices and, more recently, the unfolding of Brexit [British exit from the European Union],” said the BSP in a report.
“Nonetheless, the peso is expected to remain broadly stable over the medium term, supported by the country’s solid macro fundamentals, as well as by the steady stream of remittances from overseas Filipinos and dollar receipts from the BPO sector,” it added.
According to the BSP, the temporary depreciation of the local currency is likely to have “minimal” impact on macroeconomic conditions also over the medium term, as it takes a permanent drop of P1 in the peso’s value against the dollar to raise inflation by about 0.15 percentage point to 0.20 percentage points over a
two-year period.
The BSP pointed out that as a result of the depreciation trend, “the peso gained external price competitiveness against its trading partners.”
This was reflected in “the recent decline of the peso’s real effective exchange rate [REER] index against the basket of currencies of all trading partners [TPI], trading partners in advanced [TPI-A] and developing countries.”
Starting January 1 to September 20, the central bank said the year-to-date average of the REER index fell against the basket of currencies in the TPI by 3.01 index points to 89.97 index points from 92.98 index points a year ago.
The REER index likewise averaged lower by 6.11 index points against the TPI-A and by 0.78 index point against the TPI-A.
“A decrease in the REER indices suggests that the peso gains external price competitiveness, while an increase indicates otherwise,” the BSP said.