BSP allays concerns as peso skids to fresh 11-year low

MANILA, Philippines -  There is no fundamental reason to panic as the peso continued to weaken against the dollar due to the rising tension between the US and North Korea as well as the projected deficit in the country’s current account (CA), the Bangko Sentral ng Pilipinas (BSP)  said yesterday.

The peso lost one centavo to close at 51.35 from Tuesday’s 51.34 to $1. This is the weakest level for the peso since closing at 51.38 to $1 on Aug. 25, 2006.

The peso opened weaker at 51.45 before  hitting an intraday low of 51.60 to $1.  Volume turnover  rose  to $824.7 million from $659 million last Tuesday.

BSP Governor Nestor Espenilla Jr. said the recent depreciation of the peso against the dollar partly reflects market concerns on  the expected deficit in the country’s CA balance  despite the fact that macroeconomic fundamentals remain sound.

“The recent depreciation of the peso may also be considered a normalization from sustained past appreciation of the peso. Thus looking at the real effective exchange rate, the peso gained external price competitiveness against its trading partners due to the combined effects of the peso’s nominal depreciation and lower consumer prices against these currency baskets,” Espenilla said.

The BSP expects the CA position turning into a deficit for the first time in 14 years at $600 million this year.

“The recent reversal of the current account to deficit is attributed to higher imports of capital goods as well as raw materials and intermediate goods and consumer products. This broad-based import mix reflects sustained expansion in the domestic economy,” he said.

Espenilla said the BSP sees continued strong inflow of remittances from overseas Filipino workers from increasingly diversified geographical locations.

“All of these are expected to maintain the BSP’s ample foreign exchange reserves, which are currently more than enough to meet the country’s foreign exchange liquidity requirements,” he said.

The peso is also expected to be broadly stable for the medium- to long-term as the recent decline in the local currency should have minimal effects on the country’s macroeconomic conditions over the medium term, according to Espenilla.

BSP Assistant Governor Johnny Noe Ravalo said the central bank continues to let the peso move so that it reflects the changing market conditions as well as the demand and supply situation.

Ravalo explained the movement of the peso-dollar rate has not only been unindirectional as there would always be cycles or periods where the local currency would appreciate and there would be periods that it would depreciate.

“That is a good thing because that reflects that the price is able respond to changing market conditions. From the central bank’s point of view, we continue to believe that the numbers will speak for themselves,” he said.

Ravalo said The BSP does not “target a particular exchange rate number so there is no magical number beyond which there is a panic button either upwards or downwards.”

“The economic behind market prices and changes in market movements seemed to be all aligned. So we don’t see any fundamental reason for the panic,” Ravalo said.

The country’s gross international reserves (GIR) stood at $80.78 billion in July, enough to cover 8.6 months worth of imports of goods and payments for services.

“Today we have space to participate both ways,” Ravalo said adding the BSP would smoothen the volatility in the foreign exchange market.

Francis Dakila, managing director at the BSP, reiterated the market conditions are different now compared to when the peso hit its weakest level of 56.45 to $1 on Sept. 27, 2004.

He added the impact of the exchange rate on inflation has gone down to 0.14 percentage points for every P1-depreciation against the dollar from 0.48 percentage points when the inflation-targeting framework was adopted in 2002.