Depreciated

Over the past few months, the peso has been soft, often described as one of the worst performing currencies in Asia. Even when the dollar flagged, the peso maintained its fall.

But the experts tell us not to worry.

Even at the $1-P52 exchange rate, our fundamentals remain basically sound. There would be reason to worry if our foreign debt exceeded 50% of GDP. Our debt remains well below that threshold.

Government’s policy of borrowing in the local currency helped shield us from exchange rate risks. The Department of Finance maintains an 80-20 borrowing policy in favor of the peso. That policy helps us soak up domestic liquidity part from protecting us from exchange rate shocks.

The BSP has amassed $81 billion in international reserves. That is enough to fund eight months of imports. The benchmark for prudential maintenance of reserves is six months of imports.

In a word, we are not about to run out of foreign currency to buy oil or the capital equipment we need to industrialize. We can import all the rice we need. Foreign currency is not about to be rationed as it once was many years ago. 

When we were hit by the 1997 Asian financial crisis, our debt-to-GDP ratio was much higher and our international reserves much lower. We carried much more sovereign guarantees and other contingent liabilities than we ought to. Our private sector is now more cautious about exchange risks than they were in 1997 where, after many years of constancy in the exchange rates, the risks were underplayed.

After the 1997 Asian financial crisis, and especially after the 2008 global financial meltdown, the ASEAN member countries have been putting together a common fund to help douse any exchange rate contingency. That provides additional buffer for the peso.

It is usual to equate a strong currency with a strong economy. That is not the case. An economy can be strong even if its currency enters a phase of depreciation.

Analysts expect the peso to be range-bound for the rest of the year. That means the exchange rate is not likely to stray too far away from what it is at present.

Several factors explain why the peso is exactly where it should be.

Our economy has not traditionally been an export powerhouse. Our foreign currency inflows draw mainly from the remittances of our migrant workers and the earnings of the BPO sector. A weaker peso will help domestic manufacturing become more competitive.  Much has to be done to grow our manufacturing base. That is key to having a more inclusive economic growth pattern.

Families dependent on remitted incomes gain by having more pesos in disposable income. Our BPO enterprises become a bit more competitive under the current exchange rate environment. Tourism will likewise gain as the Philippines becomes a cheaper place for holidaymakers.

Over the past few months, government advanced its borrowing to fund infrastructure investments to take advantage of a more benign interest rate regime. It is generally expected interest rates will rise across the board this year as countries move out of the various stimulus programs instituted after the 2008 global financial meltdown.

Also, in anticipation of the Build, Build, Build program coming into full swing, enterprises massively imported raw materials and capital goods. The increased importation pulled down our gross international reserves slightly.

Finally, weeks of volatility in the equities market resulted in the withdrawal of hot money from the economy. That was the immediate causal factor influencing the erosion in the peso’s exchange rate.

All of these are passing factors. They do not constitute permanent debilities in our economy.

The retreat in our stock market is due to external factors. The New York Stock Exchange went into a wild roller-coaster ride since late January. On two separate trading days, stock prices dropped massively. The Philippine market tracked the events at the New York Stock Exchange more closely than most Asian markets.

The volatility in the US equities market, for its part, is now considered a correction from the unwarranted exuberance following the passage of the Trump tax measures that was seen as favoring corporate profits. The correction happened when people realized interest rates will likely rise, marking the end of stimulus policies. There was mass migration to fixed income financial instruments.

At any rate, the volatility in the US equities market produced a net outflow of hot money from our market.  That had causal effects on the erosion of the peso’s exchange value. That, too, could be reversed if our listed companies demonstrate better profitability than dollar-denominated fixed income instruments.

In conclusion, it seems the factors causing the peso’s depreciation have all been exhausted. The probability for a more stable exchange rate is larger.

The peso, at its present exchange rate, is very likely more beneficial to the economy. It has not depreciated at a pace that is likely to drive up inflation. The peso has not depreciated to the extent that it might prevent us from achieving the 7 percent growth rate we expect for this year.

There are good reasons to expect that our currency could claw back some of the value it lost the past two months. The dollar has yielded ground. There are no indications of any looming disturbance in the financial markets. 

The challenge is not to achieve currency stability, however. That should never be the goal of economic policy.

Rather, we should work harder at refining the policies that will make domestic costs competitive for investment flows. The next generation needs that.