Strong macro-economic fundamentals, as confirmed by international credit rating agencies, will support the value of the peso in the coming months despite the recent weakness caused by speculations on the next US Federal Reserve’s move.
Bangko Sentral ng Pilipinas Governor Benjamin Diokno downplayed the weakness of the peso against the US dollar in recent weeks. He said while short-run fluctuations were affected by market sentiment, the local currency’s medium- to long-term movements would be largely supported by economic fundamentals as indicated by the relative stability in the movement of the real effective exchange rate.
“Looking ahead, the BSP expects the peso to be supported by structural FX flows such as overseas Filipino remittances, business process outsourcing receipts and eventually by earnings from tourism activities,” he said.
Diokno said foreign exchange inflows related to foreign direct investments were also expected to help shore up the currency. He said the peso depreciated recently amid broad US dollar strength driven by sentiments due to the potential spread of the more contagious Delta COVID-19 variant and the markets’ perceived shift to a hawkish tone by the Federal Reserve.
He said the observed pick-up in corporate dollar demand with the gradual re-opening of the economy added pressure on the peso. “Recent movements of the peso are reflective of shifts in demand and supply conditions in the foreign exchange market as well as emerging external and domestic developments,” he said.
Diokno said the peso was not the lone currency to depreciate against dollar as the peso-dollar trend continued to be broadly in line with regional peers. Most regional currencies similarly depreciated against the greenback, weighed down by prospects of earlier US monetary policy normalization and uncertainties in their growth outlook due to the ongoing health crisis.
Diokno said the BSP remains committed to a flexible exchange rate system. At the same time, the BSP will continue to rely on a set of measures to cushion the impact of sharp peso movements such as maintaining a healthy level of FX reserves as a buffer, reviewing and calibrating existing macro-prudential measures.
Credit rating
In a sea of downgrades of sovereign credit ratings around the world amid the pandemic, S&P Global Ratings in May 2021 kept the Philippines’ investment-grade of “BBB+” with a stable outlook. The country’s highest in history.
In explaining its move, S&P said the Philippines would continue to have good economic recovery prospects once the COVID-19 pandemic was contained, and that the government’s fiscal performance would strengthen accordingly.
“The stable outlook reflects our expectation that the Philippines economy will recover to healthy rates of growth as the COVID-19 pandemic is better contained, and that the government’s fiscal performance will materially improve,” S&P said in a statement.
It said the country’s fiscal deficits were expected to decline significantly over the next two to three years.
The Philippines’ “BBB+” rating with S&P is the highest among its ratings with international debt watchers. The country is rated one notch lower at “BBB” by Fitch Ratings and its equivalent “Baa2” by Moody’s Investors Service.
It is also a step away from the minimum rating within the stellar “A” territory. The “stable” outlook indicates the absence of factors that could trigger an upward or downward adjustment in the rating over the short term.
Finance Secretary Carlos Dominguez III said solid financial buffers and prudent fiscal management placed the Philippines in a relatively strong position to generate the needed funds for COVID-19 response without touching off a worrisome debt situation down the road.
From 34.1 percent in 2019, the Philippines’ general government debt as a percent of GDP, per S&P’s estimates, increased to 48.8 percent in 2020. This is much lower than S&P’s estimate for Malaysia’s (A-) at 74.6 percent, and comparable with Thailand’s (BBB+) 48.1 percent and Indonesia’s (BBB) 38.6 percent.
Diokno said the move of S&P to keep the country’s BBB+ credit rating echoes his view that the impact of the COVID-19 crisis on the economy would be transitory and that the Philippines continues to enjoy bright medium-term growth prospects.
S&P said the Philippine economy was beginning to recover, and growth should accelerate further in 2022 as the pace of COVID-19 vaccinations picks up and the pandemic becomes more contained.
It said while the country’s debt and fiscal metrics weakened amid the severe pandemic-driven downturn, “we expect stabilization and improvement on these fronts as the economy recovers.”
S&P expects the GDP per capita in the country to rise to almost $3,640 in 2021 (including nonresident nationals in population data) and the real GDP per capita growth to average 6 percent per year over 2021 to 2024.
