The peso fell to a new 12-year low of 53.515 against the US dollar Wednesday amid concerns over the country’s widening trade deficit.
The local currency lost another 0.1 percent Wednesday from its 53.475 finish Tuesday. It was also its weakest level since July 2006. The all-time low was 56.30 a dollar in October 2004.
The peso, which averaged 52.19 a dollar in May, is expected to depreciate further to 52.91 in July and 53.03 in August, according to economists from First Metro Investment Corp. and University of Asia & the Pacific.
The economists said the solid upswing in the US economy provided further strength to the US dollar while widening Philippine trade deficit added pressure to the peso.
The US recorded its lowest unemployment rate in 18 years, adding a monthly average of 200,000 jobs this year.
“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…,” the economists said.
Citing latest available data, they said the peso averaged P52.19 per dollar in May, representing a 0.2 percent depreciation from April and marking the fifth consecutive month of peso depreciation in 2018.
“The actual peso-dollar rate in May remained above both the 30-day and the 200-day moving averages, suggesting that the peso will remain under pressure in the near and long-term largely explained by the PH’s large trade deficits coupled with the improving economic fundamentals in the US,” the economists said.
First Metro said the peso depreciation would actually have a positive impact both in the short and medium terms.
“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.
They said apart from the US growth momentum, the effects of President Donald Trump’s tax cuts would be felt by individuals and corporations starting in 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.
They said that foreign stock and bond investors were selling off their peso-denominated financial assets as they stood to lose with the peso depreciation. Foreigners were net sellers in the local stock market by a total of P52 billion from February to May this year.
“Third, the Philippines’ trade deficit has been deteriorating and has reached a record $3.6 billion in April this year. For the first four months, this amounted to $12.2 billion, which if multiplied by three yields $36.6 billion”•over 20 percent higher than a year ago,” they said.
“However, this should not be viewed too badly as imports of capital goods [additions to productive capacity] have shown robust growth,” they said.
The economists said the peso actually appreciated by 4.6 percent from 2004 to June 13, 2018, while Indonesia and Vietnam had large cumulative depreciation in excess of 40 percent during the same period. Malaysia also showed net depreciation during the period.
“Peso depreciation also has positive effects for the country. The most obvious effect of this would be to discourage imports and produce 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.