THE Bangko Sentral ng Pilipinas (BSP) is prepared to use other tools to manage the peso’s volatility, which is contributing to inflation.
BSP Senior Assistant Governor Iluminada T. Sicat said the central bank’s approach “has been to smooth out excess daily volatility rather than defend a specific level or trend of the peso.”
The local unit closed at P58.94 per dollar on Thursday, barely changed from its P58.945 finish on Wednesday, based on Bankers Association of the Philippines data. It has weakened so far by 13.5% or P7.94 from its P51 close on Dec. 31, 2021.
“The BSP responded by raising interest rates aggressively while also participating in the foreign exchange market, although at a lesser extent than some of the major economies,” Ms. Sicat said during a Senate hearing on Wednesday.
“The BSP is also prepared to utilize other tools to respond to fluctuations in the exchange rate and to ensure that legitimate demand for foreign currency is satisfied,” she added.
Ms. Sicat identified the BSP’s liquidity-enhancing and management tools such as the US dollar repo facility, the exporters’ dollar and yen rediscount facility, and the enhanced currency rate risk protection program.
She said the BSP has access to its international financial arrangements that can provide insurance against crisis and has “pre-deployed non-monetary measures to respond to challenges, augmenting in financial stability.”
The BSP also has a bilateral swap arrangement with the Bank of Japan, and is part of the Association of Southeast Asian Nations (ASEAN) Swap Arrangement for $2-billion short foreign exchange liquidity support.
“Looking ahead, the Philippine peso is expected to be supported by sustained foreign exchange inflows that could help counterbalance the pressures on the currency,” Ms. Sicat said, citing gross international reserves, remittances and foreign direct investments.
“(These) can help provide insulation against the spillovers from the policy normalization in advanced economies as well as the geopolitical conflict between Russia and Ukraine,” she added.
Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the BSP’s tools and measures have been used in the aftermath of the Asian Financial Crisis.
“Partly as a result of all or a combination of these measures, local authorities have a good track record of stabilizing the peso for 18 years or from 2004 to Sept. 1, 2022 when the record high was maintained at P56.45,” he said.
“These measures help stabilize both the peso exchange rate and overall inflation, as well as inflation expectations. All of these measures would help prevent any speculative attack on the peso,” he added.
John Paolo R. Rivera, an economist at the Asian Institute of Management, said these measures can help temper inflation and manage the volatility in the foreign exchange market.
“However, it can also be reinforced by non-monetary means such as fiscal prudence as excessive government spending triggers inflation that triggers forex depreciation,” he said.
“A whole of government approach is key since monetary tools can only do so much. Sound economic leadership is also key,” he added.
BOOST LOCAL INDUSTRIES
Meanwhile, economists said the Philippines must boost the productivity of local industries and diversify its exports if it wants to take advantage of the strong dollar.
“In the past, we thought that all we needed to do was to depreciate the peso and exports would surge. We’ve now come to realize that it would take more than just a weaker currency to boost exports,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in a Viber message.
In theory, a weaker local currency against the dollar should be more beneficial for local producers who export.
Exports grew by 4.4% year on year to $51.155 billion in the first eight months of the year, amid sluggish global demand. Imports climbed by 26% to $92.966 billion, as the peso continued to weaken.
Year to date, the trade balance ballooned to a $41.811-billion deficit, wider than the $24.77-billion trade gap in the comparable eight months last year.
University of Asia and the Pacific Senior Economist Cid L. Terosa said that the country’s export growth is still below the 7% full-year target amid slowing global demand and rising inflation.
“Weak global demand (is) due to recessionary conditions has constrained demand for cheaper exports from the Philippines. Depressed commodity prices in world markets have limited opportunities for exporters to gain from a weaker peso since Filipino exporters are price takers,” he said in an e-mail.
“Finally, cheaper exports from the Philippines have not resulted in greater demand for them because of their nature. Many of our exports are semi-processed or don’t have considerable value-added.”
Jefferson A. Arapoc, who teaches Economics at the University of the Philippines Los Baños, said the country is heavily reliant on imports, “which is further amplified by our supply issues with some key agricultural commodities.”
“The government must devise a way to increase our domestic production capacity,” Mr. Arapoc said in a Messenger chat.
On Twitter, former Socioeconomic Planning secretary and economist Solita C. Monsod said this is the best time to make “exports more attractive and imports less attractive” to “get the benefit of the strong dollar.”
ING’s Mr. Mapa said the country needs to diversify its exports.
“We need to support our export sector to diversify our products to insulate us from episodes such as this where the bulk of our exports are from only one sector,” he said, citing the electronics sub-sector, which is the Philippines’ top export.
In August, exports of electronic products fell by 1.6% to $3.66 billion. It accounted for 69% of manufactured goods and 57.1% of total exports during the period.
Mr. Mapa noted the Philippines could follow Indonesia’s example, as it shifted from raw material exports to exports of electric vehicle batteries and electric vehicles.
Mr. Terosa said that the country can also look into service-related exports instead of products.
“We can diversify export markets to reduce the impact of weak demand from a few markets. Since export in goods may not yield beneficial outcomes given weak global markets, the development of more exports in services can be pursued,” he said.
“Also, we can maximize benefits from free trade agreements and similar trade arrangements to ward off the negative impact of unstable global markets,” he added.
In the short term, Ibon Foundation Research Head Rosario J. Guzman said the government can implement policies that will facilitate the use of local materials in infrastructure projects and reschedule debt servicing.
Outstanding debt rose to a record-high P13.02 trillion at the end of August due to additional domestic borrowings and a weak peso.
For the eight-month period, the debt service bill dropped 24.91% year on year to P682.85 billion, with around 50.2% going towards interest payments, and the rest to amortization.
Ms. Guzman also proposed the regulations on foreign corporations’ use of foreign exchange amid the peso depreciation. The peso depreciation raises the cost of dollar-denominated loans. — Keisha B. Ta-asan, Luisa Maria Jacinta C. Jocson and Kyle Aristophere T. Atienza