Philippine peso continues to fall, with fears of more interest rate hikes to come

The Philippine peso – one of the worst performing currencies in Asia this year – depreciated against the US dollar for a third consecutive trading day on Monday (Sep 5) to reach a new all-time low.

But even though the currency is already at an 18-year low against the greenback, the country’s central bank maintains that the peso is still among the least depreciated currencies in the region.

The peso lost 22 cents on Monday to close at a record low of 56.99 to the US dollar, after briefly touching 57 intraday. Before last Friday, the previous all-time low was 56.45 in September 2004.

Michael Ricaforte, chief economist of the Rizal Commercial Banking Corporation, attributed the peso’s depreciation to “hawkish signals” from the US Federal Reserve in recent weeks, adding that Washington has been “trying to bring down elevated inflation”.

The yield on 10-year US Treasury bonds has reached a 2-month high of 3.25 per cent, while the recent strength of the greenback has been offset by global crude oil prices that are near 7-month lows, said Ricaforte.

Robert Dan Roces, the chief economist of Security Bank, echoed a similar sentiment, noting that the US dollar’s strength and local demand have contributed the most to the peso’s weakness.

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“We have to be cautious of the peso’s weakness because in the medium term, this could stoke further inflationary pressures (in the Philippines),” he said.

Sonny Africa, the executive director of the think-tank Ibon Foundation, concurred. He opined that US fiscal adjustments are affecting the peso as interest rates have gone up to their highest in the last 2 decades.

The Bangko Sentral ng Pilipinas (BSP) has been echoing these moves with among the biggest rate hikes in the region. Analysts are expecting the country’s central bank to raise rates again this month, around the time that the US Federal Open Market Committee meets again on Sep 20-21.

According to Africa, the peso’s depreciation could be part of the government’s overall fiscal strategy to encourage more exports, which would make the economy healthier in the long run.

But he also believes that higher US interest rates are also affecting remittances from Filipinos based overseas.

“Remittances have been an important source of our foreign exchange for decades, but the protracted global slowdown seems to have had an effect,” he said.

According to latest available figures, remittance growth has slowed to 2.9 per cent in the first 6 months of 2022, from 5.1 per cent over the same period in 2021. Exports also slowed to just 7.1 per cent growth, from 12.4 per cent last year.

Said Africa: “In the case of the Philippines today, however, the falling peso definitely belies the government’s claims of a well-performing economy.”

In an attempt to allay any worries in the short term, Finance Secretary Benjamin Diokno expressed optimism that the peso would rebound significantly by the end of the year. He attributed that mostly to the expected annual spike in remittances from overseas Filipinos.

“There is usually an influx of overseas Filipino remittances towards the fourth quarter. The peso has actually stabilised and, in fact, it is strengthening. My bet is it will be around 55 (to the greenback) by year-end,” he said.

Roces agrees that the holiday season will help with the depreciation but cautioned that the Fed’s “aggressive rhetoric” will still invite volatility in the near-term.

Africa also criticised the BSP’s large rate hikes in the last few months, which have “failed to substantially moderate the depreciation because of deeper economic problems such as weakening remittances and exports, excessive import-dependence from decades of misguided globalisation, and bloated debt”.

The BSP has raised interest rates by a combined 175 basis points in 2022 so far, with the benchmark overnight reverse repurchase facility rate now at 3.75 per cent. Inflation in the Philippines has averaged 4.7 per cent in the January to July period, well above the central bank’s 2-4 per cent target for the year.