The weak peso, next to rice, is the most significant contributor to surging inflation. For a country that is heavily dependent on imported oil and capital goods in fueling economic growth, the Philippines has to endure the pressure on the peso and the volatilities in the global financial markets that weigh down on the local currency.
The peso on Wednesday breached the 54-per-dollar level for the first time in nearly 13 years amid reports of widening trade deficit and the worsening global trade war between the United States and China. It closed at 54.13 against the greenback the other day, the local currency’s weakest finish in nearly 13 years.
The strong US dollar, which has pummeled other Asian currencies, including the peso, is largely the cause of the local currency’s weakness. The US Federal Reserve Board has made it known to the global financial markets that it will raise the interest rate to prevent an overheating of the American economy. Previous rate hike adjustments have made the yields or returns on US dollar and other dollar-denominated debt instruments more attractive.
Foreign fund managers naturally dumped or sold their investments in the emerging markets and fled to the US to purchase the more attractive US treasuries or bonds. The shift in investment caused the outflow of dollars from the Philippines and other Asian markets and weakened the value of the peso in the process.
Another factor leading to a weak peso is the country’s widening trade deficit following the demand created by the growing economy and the massive infrastructure program of the Duterte administration. The trade gap widened 171 percent in July to $3.55 billion from a shortfall of $1.31 billion a year ago, as imports jumped 31.6 percent while exports barely grew 0.3 percent. The July figure increased the trade deficit in the first seven months to $22.49 billion, significantly higher than $13.055 billion registered in the same period last year. The swelling deficit implies that more dollars are leaving the Philippines to finance imports of goods than those coming in by way of exports.
Adding to the selling pressure on the peso is the global market volatility stemming from the worsening trade tension between the US and China over import tariffs. Foreign fund managers in times of uncertainties will prefer the US dollar as their investment haven over other currencies.
The weak peso, meanwhile, raises the cost of manufacturing, especially those with heavy import components. It raises domestic pump prices and eventually the cost of transportation. Increased transportation cost, in turn, raises commuters’ fare and the retail prices of vegetables, meat and fish products, and other goods that must be moved from the countryside to the urban market.