The peso on Monday sank to a new 11-year low against the US dollar, on widening trade deficit and external developments particularly the tension between the US and North Korea.
The local currency lost P0.10 to close at 51.08 against the greenback Monday from 50.98 Friday. It was the peso’s lowest finish in nearly 11 years, or since it settled at 51.21 a dollar on Aug. 28, 2006.
Trading volume thinned to $291.5 million Monday from $690 million Friday.
Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. said despite the local currency’s weakness, the peso was not expected to have a “free fall,” as the country’s macroeconomic fundamentals remained solid and strong.
“It is natural for it to show volatility as it adjusts to market conditions and all the short-term uncertainties such as increased tension in North Korea. We don’t expect it to do a free fall because our economic fundamentals now, unlike before, are solid and very strong,” he said.
Espenilla said this strength was reflected in the country’s investment grade rating. The Philippines currently enjoys investment grade ratings from credit watchers Moody’s Investors Service, S&P Global Ratings and Fitch Ratings.
Espenilla said the peso was capable of correcting itself as the market calmed down and digested the relevant information that had been affecting it.
“Moreover, the BSP will always be there strategically if volatility is considered excessive. We have a huge pile of FX [foreign exchange] reserves to play an effective stabilizing role,” Espenilla said.
He said the Philippines is an emerging market economy that needs to catch up on high-quality investments especially infrastructure. With imports exceeding exports by $2 billion a month, trade deficit in the first half widened to $13.2 billion from $13 billion a year earlier. This is expected to push the current account position to a deficit this year.
“It is natural for it to run moderate current account deficits. In fact, it is sub-optimal for it to be persistently running current account surpluses,” Espenilla said.
Espenilla also mentioned the recent observation of the International Monetary Fund that the Philippine economy was not overheating and was actually doing well.
“Let us calm down. We are on the right track,” Espenilla said.
Espenilla said the regulator was constantly monitoring the movement of the peso for excessive short-term volatility not consistent with underlying economic fundamentals.
He said Bangko Sentral was ready to “take appropriate action when necessary.”
Johanna Chua, Citi managing director and head of Asia-Pacific Economic and Market Analysis Research, said in a briefing in Makati City that the peso was one of the “worst performers among currencies in the region.”
She said it was natural for the foreign exchange to adjust if there was some volatility, adding any weakness was good for the exporters, overseas Filipino workers and their families, as well as the business process outsourcing industry.
“We, however, do not see it as a source of fundamental concern because the Philippines is now in a favorable economic environment,” Chua said. She said the local currency’s movement was also a result of increasing imports amid the expanding economy.
Chua predicted that the peso would close at 51.1 a dollar by yearend, down from 49.72 a dollar on the last trading day of 2016.
University of Asia & the Pacific economist Victor Abola said in a previous news briefing the expected stronger imports in the third quarter could further put pressure on the local currency.
Business Monitor International, a unit of Fitch Group, said the peso might close the year at 50.50 per greenback
The Cabinet-level Development Budget Coordination Committeekept the peso-dollar exchange rate target this year at 48 to 50 a dollar. The peso hit an all-time low of 56.39 a dollar in October 2004.