The Market Monitor Minding the Nation's Business
By Riza Lozada
The Bangko Sentral ng Pilipinas (BSP) has said it will not intervene in the foreign-currency market, even as the peso continues its slide to record lows.
On January 21, the peso plummeted to its lowest level in more than six years as it weakened to 47.94 to $1. Currency traders blame external pressures for the weak currency, particularly the weakening of the renminbi or yuan.
Last Friday, the peso recovered on news of a possible increase in the European Central Bank’s (ECB) stimulus program by March. It gained 13 centavos after finishing the week at P47.80 per $1 from P47.94. A trader said risk sentiment in the local bourse was high during the day and helped the local currency.
For the day, the peso opened at 47.84 to the US dollar, sideways from the P47.81 in the previous session.
It traded between P47.91 and P47.80, resulting in a P47.85 average. Volume of trade reached $511.8 million, a little lower than day-ago’s $584.4 million.
This week, the trader expects the currency pair to trade between P47.60 and P47.90.
The fluctuation of the peso-dollar rate is market-determined and the weakness of the local currency is not seen to last long, said BSP Managing Director Francis Dakila Jr.
He pointed out that the weakening of the peso is not totally bad since it increases the peso value of remittances, which continue to fuel consumer spending and domestic growth.
The BSP usually intervenes in the market when the peso’s strength shoots up, which triggers widespread complaints from traders and families of overseas Filipino workers (OFWs).
OFWs and exporters earn more in peso terms from their dollar earnings when the currency is weak.
BSP Deputy Governor Diwa Guinigundo said the exchange rate will remain market, driven, even should the peso dip below the government’s assumption in the formulation of the 2017 national budget at a range of P46 to P47 per $1.
At a recent Kapihan sa Manila Hotel forum, Guinigundo also said the BSP was not inclined to alter policy rates; there have been speculations the BSP might follow the recent US Federal Reserve (the Fed) decision to raise interest rates.
He said the local economy was “growing with a very good prospect that precludes the need to adopt monetary-stimulus adjustments through the interbank rates.”
He said that in a scenario of an asset price inflation and capital inflow, money supply will increase and interest rates will go down, thus stimulating lending that would boost capital, primarily in the robust real-estate sector, that will maintain the healthy growth of the economy.
“We don’t want to avoid a boom, but we have to take prudential measures,” he said.
Guinigundo added that the BSP was also looking into the country’s monetary condition, including excess liquidity.
“We have to monitor domestic factors to make a decision on monetary adjustments,” he said.
He said the economy remained on an “uptrend” and inflation was expected to range from 2 percent to percent, which leaves the BSP a lot of room in terms of monetary policy.
Based on a National Statistics Office (NSO) report, core inflation rate grew 2.1 percent in December 2015 from a year ago.
The core inflation rate averaged 4 percent from 2001 until 2015, reaching an all-time high of 7.25 percent in October 2008, and a record low of 1.4 percent last September.
Guinigundo said the exchange rate is affected by two factors: macro fundamentals and market sentiment.
With the Philippine economy moving up, the balance of payment in surplus, and the people investing, he said capital inflow will support the peso.
However, “even if you have good market fundamentals, if the market sentiment is negative, this can negate the macro fundamentals like good inflation and economy growing,” he said.
Guinigundo said the peso has weakened partly due to the sentiment of the market that the US economy was recovering.
The Fed decision to adjust policy rates was a clear indication that the US is on the recovery path, the euro market was getting better with creation of jobs, and the housing market was going up in the US.
Another factor pushing down the currency’s value is China’s poor economic prospects that have led to the depreciation of the yuan.
China’s economy has weakened from stellar growth rates of 11 percent-12 percent to “perhaps 6 percent this year,” based on China’s own calculations, according to Guinigundo.
He added that the performance of China at 6 percent was “still very modest growth, but China officials said they need to grow faster than 7 percent.
The BSP deputy governor further said the slowdown of China’s economy would affect Philippine exports, with 14 percent of the trade exports going to China.
He said trade imbalance would result from the devaluation of the yuan because Chinese exports would be more competitive while their capacity to import would be lower.
Guinigundo said investors believe the economic turmoil in Asia would have a ripple effect on the Philippines, despite the country’s strong macroeconomic fundamentals.