JUST IN TIME for the holidays, Filipinos working overseas will be sending their hard-earned money back home to their families. Given a “weaker” peso at this time, overseas Filipino workers (OFWs) would be able to convert more pesos for every dollar value that are sent home.

The same could be said of business process outsourcing companies (BPOs) and exporters that, since they earn in foreign currency, would benefit more under a weaker peso environment.

Data from the Bangko Sentral ng Pilipinas (BSP) showed remittances being up by 3.8% as of September despite thousands of OFWs who were sent home due to the continued repatriation from Saudi Arabia which started last March.

Meanwhile, exports are showing signs of recovery, increasing 12.2% for the first nine months of the year — way above the government’s official 5% target for this year.

For other economic agents, however, 2017 was the annus horribilis as far as the Philippine peso is concerned.

Despite the country registering consecutive economic growth in the past 19 years, the local currency crossed the P51-per-dollar levels in August, its lowest in 11 years according to BSP data.

In fact, the peso has been weakening since 2013. In particular, the local currency’s weighted average was P42.2288 per US dollar in 2012. From January to October this year, its weighted average stood at P50.3412.

PESO VOLATILITY
The volatility of the peso this year has been brought about by a mix of external and internal developments, according to BSP Deputy Governor Diwa C. Guinigundo.

Externally, the policy normalization in the US is widely expected until the end of the year after the US Federal Reserve signaled another interest rate hike in December with the central bank trimming its $4.5-trillion balance sheet.

The BSP official also noted that other central banks such as the Bank of England and the European Central Bank have adopted similar stances, which “have also contributed to pressures on the [peso].”

Other factors at play are geopolitical risks brought forth by the call for independence in the Catalonian region in Spain and the nuclear missile threats from North Korea.

Meanwhile, on the domestic front, the import growth in capital goods in anticipation of the government’s massive infrastructure program, along with the “political noise” brought about by the current administration, figured in the peso’s weak performance this year.

Sharing their views, Antonio V. Paner, Bank of the Philippine Islands’ (BPI) executive vice-president and segment head of BPI Global Markets, and Emilio S. Neri, Jr., the bank’s lead economist, cited the growth in imports, which significantly exceeded the amount of the US dollar inflows from exports, remittances and earnings from the BPO companies, as the causes largely for the peso’s depreciation.

“The depreciation also appears to be driven by anticipation for sizeable growth in imports from the government to fulfill its ‘Build, Build, Build’ plan in the next five years,” they said.

Capital goods, which accounted for 32.3% of total imports during the first nine months to September, grew by 2.5% to $21.532 billion during the period from $21.002 billion last year, according to the latest trade data.

The January-to-September period also showed a narrower trade deficit of $18.942 billion compared to a $19.520-billion deficit in the nine-month period.

‘NEUTRAL’ FOR BANKS
That said, how does a depreciating peso affect the banks?

Not significantly, they said.

“An orderly and limited peso depreciation should have a neutral effect on the banking sector,” BDO Unibank, Inc. (BDO) said. This view was shared by BPI’s Messrs. Paner and Neri, who said that at best, the effect would be “slightly positive” on banks.

“The more competitive peso has improved the purchasing power of the relatives of OFWs, helping consumer demand to remain brisk, thereby boosting the working capital requirements of BPI’s clients,” they said.

“Unlike before, the negative impact of the depreciation has been muted as regulations on foreign currency exposure had been tightened while banks and corporation have learned their lessons from past currency crisis episodes.”

For his part, East West Banking Corp. (EastWest Bank) President and Deputy Chief Executive Officer Jesus Roberto S. Reyes said: “I think it’s not a big factor, but it’s definitely good for some sectors.”

“I’d say it’s marginally beneficial,” he added.

AFFECTED BUSINESSES
Fortunately, the banks’ exposure to foreign exchange risk is limited, thanks to stringent guidelines provided by the BSP with the central bank liberalizing its foreign exchange rules since 2007.

In December last year, the BSP unveiled a tenth wave of easing that put in place an “express provision” to facilitate capital infusion of foreign banks for branches operating in the Philippines.

Last month, it plans to lift by yearend the requirement for banks and companies to register foreign exchange transactions, aimed to improve ease of doing business in the country.

BPI’s Messrs. Paner and Neri said that the peso’s depreciation and the easing of regulations on foreign exchange has also given banks the opportunity to help clients hedge their exposures, take advantage of business opportunities in global trade, and enhance personal investments.

“The bank’s corporate lending business has been affected by the currency swings as foreign exchange liberalization has allowed clients to hedge their transactions amidst currency fluctuations,” they said.

As for its retail banking segment, “[t]he currency swings has provided an opportunity for clients to diversify their portfolio towards foreign currency-denominated deposits and investments. The depreciation has also opened up opportunities to provide overseas Filipinos better access to credit.”

Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines (Landbank), said that the trading segment of the banks is “definitely heavily affected” by currency swings.

“Banks’ hedge their foreign currency liabilities to avoid unrealized losses caused by a weakening local currency. Alternatively, banks may focus more on local currency financing than external funding,” Mr. Dumalagan said.

For BDO, they said that its foreign exchange exposure is quite limited.

“We are guided by the regulatory limit on overbought and oversold foreign exchange position that the Bank may hold,” BDO said, referring to the BSP’s rules on open foreign exchange positions of banks.

According to the BSP’s Manual of Regulations on Foreign Exchange Transactions, an open foreign exchange position refers to the extent that banks’ foreign assets do not match their foreign exchange liabilities.

“An open position may either be ‘positive,’ ‘long,’ or ‘overbought’ (i.e., foreign exchange assets exceed foreign exchange liabilities) or ‘negative,’ ‘short,’ or ‘oversold’ (i.e., foreign exchange liabilities exceed foreign exchange assets),” the manual said.

The manual stipulates that banks’ allowable open foreign exchange position (either overbought or oversold) shall be “lower of 20%” of their unimpaired capital or $50 million. Any excess of the allowable limit shall be settled on a daily basis.

BANKS’ BOTTOM LINES
Interest rates and exchange rates are primarily influenced by external factors, especially the rate hike of the US Fed, Landbank’s Mr. Dumalagan said.

“Since interest rates are the key determinant of banks’ interest income, it follows that external developments indirectly affect the bottom lines of financial institutions. The impact of exchange rates on banks’ profit depends on the split between FX (foreign exchange) sensitive assets and FX sensitive liabilities,” the economist said.

For his part, EastWest Bank’s Mr. Reyes said: “Outside of any FX position a bank may have, a bank with a sizeable FCDU (foreign currency deposit unit) business will show better income in peso terms.”

“Market developments stemming from external environment continue to affect the foreign exchange market although the peso is expected to remain broadly stable on account of country’s strong macroeconomic fundamentals — including robust GDP (gross domestic product) growth, low and stable inflation, favorable external positions, strong and resilient banking system and prudent fiscal position,” the BSP said.

The central bank reiterated that there is order and stability in the foreign exchange market “to the extent that these will not adversely affect the inflation outlook.”

BSP’s Mr. Guinigundo said that the central bank’s participation in the foreign exchange market is limited to tempering sharp fluctuations in the exchange rate.

“When warranted, the BSP also stands ready to provide some liquidity and ensure that legitimate demands for foreign currency are satisfied,” the BSP official said.

He also said that the strong capital position of banks will help them remain resilient to external financial shocks because of the central bank’s enforcement to the universal and commercial banks of the capital adequacy standards under Basel 3.

The central bank maintains a market-determined exchange rate regime, thus does not support a certain level or trend in the foreign exchange rate. The BSP sometimes steps in the foreign exchange market to temper any sharp movements of the peso.

“The BSP believes that the recent depreciation of the peso remains fundamentals-driven as it reflects the country’s robust economic growth as shown by strong demand for imports, residents’ increasing direct and portfolio investments abroad, and debt prepayment by the National Government and private corporations including payments of inter-company loans,” BSP’s Mr. Guinigundo said.

Ildemarc C. Bautista, vice-president and head of research at Metropolitan Bank & Trust Co., expects “some equilibrium point to be reached in the future wherein the peso would have weakened enough to coax more inward dollar flows that are strong enough to offset peso weakness and help the peso from depreciating further, maybe even causing a reversal and peso appreciation at some point.”

“We believe that the Philippine economy would benefit more from a slightly weaker peso as this should allow us to be more competitive in exports, remittances, and BPOs,” EastWest Bank’s Mr. Reyes said.

For Landbank’s Mr. Dumalagan, the local currency might remain relatively weak in the next two years or so, driven primarily by the steady recovery of the US economy.

“While it might not strengthen back to P48:$1 level in the next two years, it may recover slightly amid the government’s promise of an infrastructure-led growth for the country. A weaker peso would mean possibly lower exposure to dollar-denominated debt,” he said.

Union Bank of the Philippines’ chief economist Ruben Carlo O. Asuncion sees a “weakened” peso in the near- to medium-term. With the impending interest rate hike from the US, he said that peso depreciation would lead to competitiveness sector.

“More investors are likely to go into the export sector which leads for possible bank loans. Weaker peso would then support the shift of the banks to loan business,” Mr. Asuncion said. — Mark T. Amoguis and Ranier Olson R. Reusora

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