‘Herd mentality’ causing peso to weaken, says central bank

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) believes the current weakness of the peso is not reflective of the sound economic fundamentals of the Philippines which is backed by the steady growth of remittances from overseas Filipinos as well as earnings by the business process outsourcing (BPO) and tourism sectors.

Diwa Guinigundo, BSP deputy governor, said the value of the local currency is being affected by the “herd mentality” in the Asia Pacific region.

“It is a regional phenomenon. People are speculating that the US dollar because of the pending normalization in the US will continue to strengthen versus regional currencies including the peso. We were affected by the herd mentality prevailing in the foreign exchange markets today,” he said.

According to Guinigundo monetary authorities are confident the Philippines would be able to survive external shocks brought by the global economic slowdown, the debt crisis in Greece, the stock market rout in China, the impending interest rate increase by the US Federal Reserve, among others.

“Because we have fundamental basis for stability, we always say that once the market is able to digest what is happening abroad and here in the Philippines. They should be able to think twice before leaving the Philippine market,” he said.

The peso has shed a little over four percent to P46.73 to $1 since the start of the year.

Guinigundo said, the Philippines has booked a record 66 straight quarters of gross domestic product (GDP) growth. “We have resilient growth amid manageable price environment,” he said.

The country’s GDP expanded at a faster rate of 5.6 percent in the second quarter of the year from the revised five percent in the first quarter on the back of improved government spending.

However, the country’s economic expansion of 5.3 percent in the first half of the year is slower compared to 6.4 percent in the same period last year due to weak global demand and lack of government spending.

Guinigundo explained the country’s gross international reserves (GIR) remain strong amid the general weakness of the currencies in the region against the greenback.

“To me, being an small open economy, we are prone to these volatilities and occasional weakening and strengthening of the peso against the dollar. That to me does not fully reflect the fundamental health of the economy,” he said.

The country’s GIR dipped slightly to $80.4 billion in July from $80.6 billion in June on the back of the strong US dollar and the decline in the price of gold in the world market.

Guinigundo said the government expects an average of $24- to $25-billion in cash remittances from overseas Filipinos and another $50 billion from the BPO sector.

The GIR is the sum of all foreign exchange flowing into the country. The reserves serve as buffer to ensure the Philippines would not run out of foreign exchange to pay for imported goods and services, or maturing obligations in case of external shocks.

The reserves remain ample as it could cover 10.6 months’ worth of imports of goods and payments of services and income.

If it deems necessary, the BSP buys dollars from the foreign exchange market to prevent sharp depreciation of the peso. It can also sell to avoid sharp appreciation of the local currency.