BSP dismisses worry over peso weakness

By Riza Lozada

The Bangko Sentral ng Pilipinas (BSP) soothed worries about the recent weakening of the peso saying that the currency is merely undergoing an “adjustment process.”

BSP Gov. Nestor Espenilla Jr. attributed the recent weakness of the peso, which fell to an 11-year low last week to expectations of additional hikes in the Federal Reserve rates due to speculations on the new US Federal Reserves chief.

Last Wednesday, the peso closed at 51.77 per $1, 23 centavos down from the previous day’s close and the weakest since its 51.87 finish last July 25, 2006.

Espenilla said the peso remains stable and that there is no need to worry about its recent depreciation.

Espenilla said domestic economic fundamentals remain sound, with external debt still low, inflation remains manageable, growth continues to be firm and the current account, despite being in deficit, is still “highly financeable.”

“The Philippines today is a very different economy than the crisis economy in the 1980s wherein our reserves are negative if you include the liabilities of the BSP,” he said.

Espenilla said the BSP does not need to intervene in propping the peso since the central bank has taken a market-determined policy on the foreign exchange.

“The exchange rate is a policy instrument of the BSP not a target so it is allowed to move flexibly in line with global external and domestic shocks,” he said, noting that “all of the fears and uncertainties in the world are reflected in the day to day volatility of the exchange rate.”

He considers the latest depreciation level of the local unit as moderate and gradual and assured the public that the central bank is always ready on its “tactical intervention” to address extreme volatility.

“My only point is that it is not a target for the BSP but we believe that the peso is going to be generally stable over the medium term horizon,” he said.

The central bank chief also said there is no need to adjust policy rates because of the latest peso movement because increasing the key rates, which is focused on inflation, “has a bigger economy-wide impact.”

“If the foreign exchange is already beginning to influence inflation in a way that makes us breach our target, then that may warrant a response from the BSP. But I said we have other tools. We’ve got big reserves that we use for tactical intervention,” he said.

The BSP currently have one of the lowest key policy rates in the world.

To date, its overnight borrowing or reverse repurchase (RRP) rate is three percent, the overnight lending or repurchase (RP) rate is 3.5 percent and rate of the special deposit account (SDA) rate is 2.5 percent.

These three represent the central bank’s Interest Rate Corridor (IRC), put in place since June 2016 to make the BSP better manage inflation and support long term growth.

As of end-September this year, the country’s gross international reserves (GIR) reached USD 81.35 billion, enough to cover 8.5 months’ worth of imports of goods and payments of services and primary income.

Meanwhile, rate of price increases continues to rise, with the September 2017 level at 3..4 percent from month-ago’s 3.1 percent.

However, average inflation rate in the first nine months this year stood at 3..1 percent, within the government’s two to four percent target for 2017 to 2019 and below the central bank’s 3.2 percent forecast for the three-year period.

An economist of ING Bank Manila projects the peso to end the year at 51 per $1.

In a research note, ING Bank Manila senior economist Joey Cuyegkeng attributed the peso’s recent weakness of market’s reaction on the country’s trade report last August, wherein imports rebounded and rose 10.5 percent year-on-year and surpassed the 9.4 percent expansion of exports.

He said the big jump of inflows from Overseas Filipino Workers (OFWs) last August addressed the margin between exports and remittances although this margin is seen to remain erratic in the next months.

“This would keep the Philippine peso on the defensive bias,” he said, citing that “a hawkish BSP would moderate the weakening bias.”

The ING Bank economist, thus, keeps his projection for a rate hike in the BSP’s key rates by December “especially if inflation continues to rise.”

“The pre-emptive move would likely stabilize inflation expectations,” he said, adding that the International Monetary Fund (IMF) raised the need for rate hikes if inflation pressures sustain its uptrend.

Since May 2016, the BSP’s reverse repurchase (RRP) rate is at three percent, the repurchase (RP) rate is 3.5 percent and rate of the Special Deposit Account (SDA) facility is 2.5 percent.

As of end-September this year, rate of price increases averaged at 3.1 percent, slightly higher than the mid-point of the government’s two to four percent target for this year until 2019.

Last September alone, inflation posted a faster rate of 3.4 percent from the previous month’s 3.1 percent on account of faster pace of inflation in several indices namely the heavily-weighted food and non-alcoholic beverages index as well as the alcoholic beverages and tobacco; clothing and footwear; housing, water, electricity gas and other fuels; transportation; and restaurant and miscellaneous goods and services.