THE peso’s slide toward P62:$1 is putting investor confidence in the Philippines to the test but does not represent a crisis, a former central bank official said.
“It would be an overstatement to call P62 a crisis level,” GlobalSource Partners economist and former Bangko Sentral ng Pilipinas (BSP) deputy governor Diwa Guinigundo said in a commentary.
The peso came close to hitting P62 to the dollar last Wednesday, hitting a new intraday record low of P61.995:$1 before ending the day three centavos weaker at P61.815:$1.
Guinigundo said the sell-off should be viewed in the broader context of renewed geopolitical tensions, elevated oil prices and a shift in global investor risk appetite, rather than as evidence that the Philippines is facing an imminent currency crisis.
“The more meaningful question is whether the peso can stabilize without a sustained deterioration in inflation, the external position, reserves and investor confidence,” he said.
Guinigundo said the immediate trigger for the peso’s latest weakness was the combination of higher oil prices, renewed uncertainty surrounding the US-Iran situation and disruptions around the Strait of Hormuz.
Brent crude rose to around $91.62 a barrel amid renewed geopolitical tensions.
For the Philippines, which relies heavily on imported energy, a sustained increase in global oil prices would directly raise the import bill and increase demand for dollars to pay imported commodities.
“The return of geopolitical risk prompted investors to seek safer assets and reduce exposure to emerging markets,” said Guinigundo.
The episode is not also simply a story of a stronger dollar, he added, with the dollar index actually declining by about 0.21 percent and suggesting that the peso’s weakness was more specifically linked to the Philippines’ exposure to the oil shock and broader deterioration in global risk sentiment.
“This distinction is important,” Guinigundo said, noting that the oil and geopolitical shock explain why the peso weakened sharply but do not fully explain why markets were able to push the currency so close to P62.
He said the country continued to have important buffers that would help absorb external shocks, including substantial gross international reserves, steady remittance inflows, business-process outsourcing earnings and tourism receipts.
“These are reasons not to equate P62 with a currency crisis,” Guinigundo said.
Central bank data released last week showed that gross international reserves (GIR) dropped to $103.4 billion in July from $104.7 billion a month earlier.
Despite the decline, the BSP said GIR was enough to cover up to 6.7 months of merchandise imports and payments of services and primary income, and was also sufficient to cover 3.6 times the country’s short-term external debt.
The peso’s weakness, however, presents a difficult policy challenge for the BSP, Guinigundo said.
The central bank, which has raised key interest rates twice so far this year to address rising inflation, will hold its next policy meeting this Thursday.
Guinigundo said monetary policy alone would not resolve an exchange-rate shock that was largely being driven by external factors.
“Using monetary policy too aggressively to defend the peso could come at the cost of weaker domestic demand,” he said.
“But allowing the depreciation to feed too strongly into fuel, transport and electricity prices could reignite inflation and eventually require tighter monetary policy anyway,” he added.
