Peso slump spreads pain from markets to households

By Norman P. Aquino, Special Reports Editor and Aaron Michael C. Sy, Reporter

CHRISTOPHER ANGELO O. LIM, a 26-year-old construction business owner in Manila, has been watching the peso’s slide with growing concern. His company imports hotel locks and other building materials, and every move in the exchange rate feeds directly into his costs.

“The dollar peaking past P60 has made it more difficult for many businesses across all industries,” he said. “This has forced many of us to increase prices to ensure we stay profitable… With the current state of the economy and rising prices, the peso should be more resilient in tough times.”

For Mr. Lim and many others, the peso’s breach of the P60-a-dollar level is more than symbolic. It marks a turning point that is beginning to ripple through pricing decisions, investment plans, and household budgets across the Philippine economy.

The currency’s decline is driven by global pressures — higher oil prices, a stronger US dollar and skittish investors — rather than problems at home. Still, the effects are immediate and far-reaching.

“The move is largely externally driven, with global energy shocks and broad dollar strength doing most of the damage,” Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, said in a Viber message.

Domestic factors, he added, mainly amplify the impact, particularly the Philippines’ reliance on imported fuel.

For an oil-importing country like the Philippines, higher crude prices increase demand for dollars to pay for imports, widening the trade deficit and putting downward pressure on the currency. This dynamic has been magnified by the recent surge in global energy prices due to the Iran war.

Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., compared the situation to the period following Russia’s invasion of Ukraine in 2022, when oil prices approached $100 per barrel.

High fuel costs, he said, tend to cascade through the economy, raising transport fares, wages and the prices of goods and services. “These could lead to faster inflation and higher inflation expectations,” he told BusinessWorld via Viber.

On Thursday, the local unit slipped by 13 centavos to close at P60.23 against the greenback from its P60.10 finish on Wednesday, data from the Bankers Association of the Philippines showed. It hit a record low of P60.30 versus the US dollar on March 23.

The peso’s slide is closely tied to inflation concerns, which in turn are shaping expectations for monetary policy.

The Bangko Sentral ng Pilipinas (BSP) kept its policy rate at 4.25% during a surprise off-cycle meeting on Thursday, saying that inflation required sustained vigilance.

However, analysts said that a rate hike is not the base case, but it is increasingly on the table.

“A rate hike becomes more likely if oil-driven inflation proves persistent,” Mr. Asuncion said, noting that the BSP’s flexible exchange rate policy is designed to absorb shocks rather than defend a specific level.

Mr. Ricafort added that tightening might be necessary “to curb inflationary pressures at the bud,” even if it comes at the cost of slower economic growth.

At the same time, policymakers are weighing fiscal responses. Previous administrations have relied on targeted subsidies for vulnerable sectors, such as transport workers, farmers, and fisherfolk, to cushion the impact of rising fuel prices without widening budget deficits excessively.

WINNERS AND LOSERS
The peso’s weakness is creating uneven effects across sectors.

Import-dependent industries such as construction, manufacturing, logistics and retail are among the hardest hit. Higher costs for fuel, raw materials, and equipment are squeezing margins and forcing businesses to raise prices or absorb losses.

“Fuel-intensive sectors such as transport, power, manufacturing and food are most exposed,” Mr. Asuncion said.

Micro, small and medium enterprises (MSME) are particularly vulnerable. With limited pricing power and thinner financial buffers, many are adjusting by cutting costs, renegotiating supplier contracts or selectively increasing prices.

“MSMEs will likely face margin pressure and cash flow strain,” John Paolo R. Rivera, a senior research fellow at the Philippine Institute for Development Studies, said in a Viber message.

Exporters, meanwhile, may benefit from a weaker peso, as it boosts the local currency value of foreign revenues. However, the gains are often offset by higher input costs, especially for companies that rely on imported components.

The Federation of Philippine Industries (FPI) noted that while exporters might gain in the short term, “reliance on imported inputs limits the upside,” highlighting the structural constraints of the economy.

“At the same time, sustained cost pressures on import-dependent sectors could weigh on consumption and investment, albeit temporarily,” FPI Chairperson Elizabeth H. Lee told BusinessWorld via Viber.

Financial markets have also responded to the peso’s decline.

Currency volatility has led companies to increase hedging through forward contracts and to front-load dollar purchases. Investors, meanwhile, are adopting more defensive positions, particularly in emerging markets exposed to oil shocks.

A weaker peso can also weigh on investor sentiment.

“It raises concerns about profitability, consumer demand, and policy direction,” Mr. Rivera said. “Equity markets tend to become more cautious and volatile.”

Bond markets are already reflecting these concerns. Persistent currency weakness and rising inflation risks could push yields higher as investors demand greater compensation, tightening financial conditions across the economy.

Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., said the peso’s breach of P60 is “largely a global story,” but warned that its effects could still ripple through local markets.

“If peso weakness starts feeding into fuel and transport prices, that’s when policy tightening comes into play,” he said via Viber.

Beyond markets and businesses, the peso’s decline has implications for households.

Higher fuel costs typically translate into increased transportation fares and delivery charges, though President Ferdinand R. Marcos, Jr. has halted bus and jeepney fare increases to shield consumers from spiraling prices.

Fare increases could push up the prices of goods and services, eroding purchasing power and strain budgets especially of lower-income households.

Economist Jose Enrique “Sonny” A. Africa warned that the combination of a weak peso and high oil prices could significantly worsen inflation, potentially affecting millions of Filipino families.

While remittances from overseas Filipino workers provide some buffer — boosting the peso value of dollar inflows — the gains may be offset by rising domestic prices.

There are also risks to external flows. Disruptions in the Middle East could affect employment and deployment of overseas workers, potentially reducing remittances over time.

VOLATILITY AHEAD
Analysts expect the peso to remain volatile, with risks tilted toward further weakness.

Mr. Ravelas sees the currency moving within a broad range of P59 to P61 over the next few months, driven largely by global developments. Key factors include oil prices, geopolitical tensions, US monetary policy and domestic inflation trends.

Mr. Rivera said a sustained recovery below P60 would require easing oil prices, improved global risk sentiment and stable inflation expectations — conditions that remain uncertain in the near term.

For businesses, the focus is shifting from prediction to preparation.

“The best response isn’t guessing the peso, but managing risk, avoiding unhedged dollar exposure and improving efficiency,” Mr. Ravelas said.

Businesses should focus on cash flow management, selective hedging and pricing discipline, Mr. Rivera said.

“Consumers should monitor fuel, transport, food and electricity prices, as these will be the first to reflect sustained pressure,” he said. “Preparation is less about predicting the exact exchange rate and more about managing uncertainty.”

For Mr. Lim, the construction businessman, that adjustment is already underway.

“We have to increase prices just to stay afloat,” he said. “It’s not just about profit; it’s about making sure we can keep operating and support our workers.”