The Philippine peso dived to a 12-year low of 53.50 against the US dollar in July 2018. While it pushed consumer prices upward, the peso depreciation supported the competitiveness of the business process outsourcing sector and increased the spending prowess of overseas Filipino workers and their families.
The local currency has been battered by the surging US dollar over the past few months, as financial markets anticipated the US Federal Reserve to further hike interest rates.
Private economists see the peso depreciating to 53.03 in August, as the country’s trade deficit continues to widen. Latest data from the Philippine Statistics Authority showed the trade-in-goods deficit in June 2018 increased to $3.35 billion from a $1.59-billion deficit a year ago, as imports continued to exports.
Merchandise exports declined 0.1 percent from $5.704 billion in June 2017 to $5.700 billion in June 2018. Imports rose 24.2 percent to a record $9.05 billion in June from $7.29 billion a year earlier.
The data brought the trade deficit in the first half of 2018 to $19.10 billion, higher than the $11.75-billion trade gap a year ago.
Economists from First Metro Investment Corp. and University of Asia & the Pacific said the solid upswing in the US economy (with the US recording its lowest unemployment rate in 18 years, adding a monthly average of 200,000 jobs in 2018) provided further strength to the US dollar, while widening Philippine trade deficits added pressure to the peso.
The peso will continue to feel the heat as the US economy [and dollar] roars ahead and as long as the domestic economy manages to whittle down significantly its trade deficit, while inflation concerns should ease, they said.
First Metro said while the peso depreciation might seem negative, its impact in both the short and medium terms was positive.
“First, the US dollar has been strengthening since end of the first quarter of 2018 due to several reasons: The IMF projects the US economic growth to accelerate to 2.9 percent this year compared to 2.3 percent in 2017,” they said.
Apart from the growth momentum, they said the effects of President Donald Trump’s tax cuts would be felt by individuals and corporations starting the second quarter of 2018.
The same tax reform tries to attract back to the US some $2 trillion of cash held by US multinationals abroad. Even if only half of that returns to the US, that would add significant demand for the greenback, they said.
The economists said foreign stock and bond investors were selling off their peso-denominated financial assets as they stand to lose with the peso depreciation. Foreigners have been net sellers in the local stock market by a total of P52 billion from February to May this year.
The economists said the peso actually appreciated 4.6 percent from 2004 to June 13, 2018, while Indonesia and Vietnam had large cumulative depreciations in excess of 40 percent during the same period. Malaysia also showed a net depreciation during the period.
The peso depreciation also has positive effects for the country. The most obvious effect is discouraging imports and producing more exports, thus, reducing the trade deficits over the medium term. And because of the increase in production locally, it will boost employment generation, they said.
The second positive effect is that it will give a boost to the peso income of OFW families, exporters and those that supply raw materials to exporters, they said.
There are about 10 million OFWs and with an average family size of 4.6, the peso slide benefits some 46 million Filipinos. Add to that the number of families dependent on exports, which account for 30 percent of GDP, plus those that supply raw materials to exporters, we can easily conclude that a vast majority of Filipino families benefit from the higher peso-dollar exchange rate, according to First Metro and UA&P.
The peso posted its weakest level this year at 53.53 per greenback on July 19, 2018, a 12-year low since it settled to 53.55 a dollar on June 29, 2006. The peso hit an all-time low of 57 a dollar in August 2004.
Philip Wee, foreign exchange strategist of DBS Group Research, said in a report Asian currencies were facing depreciation pressures because of monetary policy divergences that supported the US dollar globally.
The US Federal Reserve increased interest rates just recently and signaled that more increases were on the way this year, as officials expressed confidence that the world’s largest economy was strong enough for borrowing costs to rise without hindering economic growth.
DBS Bank of Singapore predicted the peso might depreciate further to 54 a dollar by the end of the year given the ballooning trade deficit.
Australia and New Zealand Banking Group Ltd. said the peso might close the year at 53.50 because of the widening current account deficit.
The Bangko Sentral expects the current account deficit this year to hit $700 million. The current account is one of the main components of the balance of payments.
In 2017, the country’s balance of trade in goods deficit widened to $29.786 billion from a $26.702-billion gap in 2016.
The BSP also signaled it was ready to prevent the further slide of the peso, after it increased the benchmark borrowing rate by 50 basis points on Aug. 9.