First Metro Investment Corp., the investment banking arm of the Metrobank Group, said Tuesday the peso depreciation will have a positive impact on the economy both in the short and medium terms.
First Metro said in a statement while a lot of people including foreign analysts raised their “worried” flag when the peso fell 53 against the US dollar on June 11, this would actually help exporters and families of Filipinos working overseas.
The peso closed at 53.47 against the greenback Tuesday, down by 7 percent since the start of the year. The local currency averaged 50.4 a dollar in 2017 and closed at 49.93 on Dec. 29.
Economists from First Metro and the University of Asia & the Pacific said there were several factors driving the peso’s weakness.
“First, the US dollar has been strengthening since the 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 that apart from the growth momentum, 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.
They also 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 [simple annualization] 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.
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,” the economists said.
Both the First Metro-UA&P research and that of the Bangko Sentral would show that a 10 percent-peso depreciation adds only around 0.5 percent to inflation, they said.
“If the foreign exchange rate averages 6 percent higher, the resulting additional inflation would only be 0.3 percent. In addition, consumers of imported goods are mostly those that belong to higher income classes. In conclusion, while the current weakness of the peso might seem negative, its impact in both the short and medium term is net positive,” they said.
The peso posted a new 12-year low on June 18 on the lingering possibility that the US Federal Reserve may increase interest rates two more times this year.
The peso closed at 53.48 from 53.27 previously. It was its weakest level in almost 12 years since the 53.55 on June 29, 2006.
Philip Wee, foreign exchange strategist of DBS Group Research, said in a report that Asian currencies were facing depreciation pressures due to monetary policy divergences that have supported the US dollar globally.
“The Fed has affirmed that it will be moving to deliver a total of four, not three, rate hikes this year. The European Central Bank has confirmed that asset purchases will end in December which forced markets to reverse earlier bets for the central bank to bring forward its rate hike into 2019,” Wee said.
“… This should keep the Philippine peso, Indian rupee and Indonesian rupiah weak beyond the key levels of 53, 68, and 14000 respectively,” Wee said.
Wee, however, said that while not immune, these three Asian currencies have been notably more resilient than their emerging market peers.
The US central bank increased interest rates a few days ago 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.
The increase was the second this year and the seventh since the end of the Great Recession and brought the Fed’s benchmark rate to a range of 1.75 to 2 percent. In a report, DBS Bank of Singapore predicted that the peso might depreciate further to 54 per US dollar by the end of the year due to the ballooning trade deficit.
In April alone, the country’s trade-in-goods deficit widened to $3.62 billion from $1.55-billion deficit a year ago as imports surged by 22.2 percent while exports fell by 8.5 percent.
But Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. downplayed the peso’s current level, saying the “FX market is naturally volatile.”
For its part, Australia and New Zealand Banking Group Ltd. said the peso might decline further against the US dollar and may close the year at 53.50 because of the widening current account deficit.
The country’s external position continued to weaken in 2017, with the current account deficit hitting $2.5 billion, surpassing the projection of $100-million deficit for the year.
The deficit was also more than double compared to the $1.2-billion deficit a year ago. The 2017 deficit was the biggest since 1999 when current account shortfall stood at $2.85 billion.
This year, however, Bangko Sentral expects current account deficit to hit $700 million. Current account is one of the main components of the balance of payments.
For the full year 2017, the country’s balance of trade in goods deficit widened to $29.786 billion from $26.702-billion deficit in 2016.
The peso closed 2017 at 49.93, weaker than the 49.72 at the end of 2016. It opened 2018 stronger at 49.81 on Jan. 3. The peso’s all-time low was at 56.45 in August 2004.