There is a drama being played out these days in the foreign exchange market. It is not an insignificant drama and it is keeping the leadership of the BSP (Bangko Sentral ng Pilipinas) on its toes – and probably losing sleep. I refer to the sustained weakening of the peso.
On Feb. 17, 2017 the peso-US dollar exchange rate breached the sensitive P50 per dollar mark. That’s the lowest level that that key exchange rate has touched since Sept. 26, 2006. For several weeks, this country’s currency has been stuck at the around P50 level and there seems to be no immediate solution to its downward drift. Some analysts, for reasons of their own – to please their friends in the government, to please clients and to make a contribution toward the calming of the foreign exchange market – have been forecasting that the peso will stay close to its present level, even become slightly stronger. Other analyses are less sanguine.
Generally, there are four key players in a country’s foreign exchange market. In the current Philippine situation those players – not in order of importance – are the perceived stability of the government, the level of the nation’s external reserves, the central bank’s competence in dealing with the foreign exchange market’s movements and the strength of this country’s balance of payments.
In 2016, the Philippines incurred a $420-million deficit in its BOP. This was caused principally by the outflow of foreign funds in anticipation of, and immediately after, the US Federal Reserve Board’s long-awaited raising of its key interest rate and by the deficit in the trade account of the BOP. Set against the size of the BSP’s gross international reserve, $420 million was absorbable. But a country obviously cannot incur a string of large BOP deficits without reducing its foreign exchange management capability.
At end-2016 the BSP’s GIR stood at close to $86 billion. Such a reserve is capable of financing nine months’ worth of imports. And the inflow of foreign exchange remittances by the OFW (overseas Filipino workers) has remained, so far, defiantly strong; in January the Bagong Bayani community remitted $2.6 billion to their Motherland. While they may be at high level, the GIR should not be dissipated in a protracted effort to keep the peso strong and stable; the BSP has to think of rainy days. And let us not forget that the BSP has been known to bleed badly in its market-intervention operations.
Overall, the BSP has displayed competence and dexterity in its management of the nation’s external resources. It has managed to keep the peso’s value within economically tolerable limits over the last few months; after almost 70 years of Philippine central banking in this country it should be able to hold the fort in the time immediately ahead.
But the most important factor in the effort to prevent a further weakening of the peso is the perceived stability of the government. Put very bluntly, it is President Duterte’s mouth. The presidential mouth is the peso’s worst enemy. Not all the best efforts of the BSP’s management, not the torrent of remittances by the OFW community, not all the strivings of this country’s exporters and BPO folk, will be able to keep the peso steady and strong if Mr. Duterte keeps on saying the things that he does and doing the things that he says. A change in Mr. Duterte’s vocabulary and in his concept of what is best for this country would work wonders for the peso.
Back to the title of this column. How much weaker is the peso likely to get? In my view the peso is likely to continue losing strength in the weeks and months ahead. How much loss, it is difficult to say because the foreign exchange market, like almost all markets, is to a large extent driven by sentiment. In the case of the Philippine foreign exchange market, that sentiment is largely formed by President Duterte’s mouth.
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