Diokno expects peso to rebound on forex inflows

Bangko Sentral ng Pilipinas Governor Benjamin Diokno on Thursday downplayed the weakness of the peso against the US dollar, saying the country’s solid macroeconomic fundamentals will support the local currency in the months ahead.

“While short-run fluctuations in the peso are affected by market sentiment, its medium- to long-term movements are largely supported by economic fundamentals as indicated by the relative stability in the movement of the real effective exchange rate of the peso,” Diokno said in an online briefing.

“Looking ahead, the BSP expects the peso to be supported by structural FX flows such as overseas Filipino remittances, business process outsourcing receipts, and eventually by earnings from tourism activities,” he said.

Diokno said foreign exchange inflows related to foreign direct investments were expected to help shore up the currency.

The peso depreciated last month amid broad US dollar strength, driven by sentiments due to the potential spread of the more contagious Delta COVID-19 variant and the markets’ perceived shift to a hawkish tone by the US Federal Reserve.

Diokno said the observed pick-up in corporate dollar demand with the gradual re-opening of the economy and Fitch Ratings’ outlook downgrade for the country’s sovereign credit rating also added pressure on the peso.

“Recent movements of the peso are reflective of shifts in demand and supply conditions in the foreign exchange market as well as emerging external and domestic developments,” he said.

Diokno said the peso was not the lone currency to depreciate against dollar as the peso-dollar trend continued to be broadly in line with regional peers. On a year-to-date basis, the peso depreciated against the US dollar by 4.62 percent to close at P50.35 on July 21, 2021 from the end-December 2020 closing of P48.02 a dollar.

Most regional currencies similarly depreciated against the US dollar, as these currencies were weighed down by prospects of earlier US monetary policy normalization and uncertainties in their growth outlook due to the ongoing health crisis.

Diokno said the latest outlook on the external sector for 2021-2022 suggests improvements in the sources of foreign exchange based on the better-than-expected outlook on global economic prospects and the gradual recovery in the domestic economy.

The BSP projections as of the second quarter showed that net FDI inflows could reach $7.5 billion in 2021, higher than actual FDI inflows in 2020. A rebound in other important foreign exchange sources was also expected, with cash remittances predicted to grow by 4 percent in 2021, following the 0.8-percent decline in 2020.

Business process outsourcing receipts are expected to grow by 5 percent this year from the 1.3-percent dip in 2020 while and tourism receipts were projected to grow by 15 percent in 2021, helped by base effects coming from the 79.5-percent dive in 2020.

“The BSP will remain committed to a flexible exchange rate system. At the same time, the BSP will continue to rely on a set of measures to cushion the impact of sharp peso movements such as maintaining a healthy level of FX reserves as a buffer, reviewing and calibrating existing macro-prudential measures,” Diokno said.

He said complementary and targeted measures, which include the BSP’s liquidity-enhancing and management tools such as the US dollar repo facility, exporters’ dollar, and yen rediscounting facilities, and the enhanced Currency Rate Risk Protection Program, would also support the value of the peso. 

Topics: ​Bangko Sentral ng Pilipinas , Benjamin Diokno , US dollar , COVID-19
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