THE PESO is currently experiencing a bumpy road, with turbulent market conditions playing a major part in its recent depreciation vis-a-vis the US dollar.
Regional and global economic developments, especially the looming trade war between the United States and its European allies and China, are fueling negative sentiments in the financial markets. There are wild swings in the global stock and currency markets because of fears that a trade war among the major economies will eventually result in the contraction of the world economy.
Nobody wins in a trade war because trade protectionism through retaliatory tariffs will eventually curb both global exports and imports. Reduced trade, in turn, will result in a downturn in manufacturing output and ultimately the loss of jobs.
The peso is also understandably under pressure because of the demands of the growing Philippine economy and has sunk below P53 to $1. Consumer demand in the Philippines is rising as explained by the relatively high inflation rate.
In addition, the imports of raw materials as well as of capital equipment are increasing significantly because of the Build, Build, Build program of the Duterte administration, while exports are slowing down.
The Philippines’ trade deficit as a result has swollen to a cumulative $12.2 billion in the first four months of 2018 after imports rose 10.5 percent while exports fell 6.2 percent. The balance of trade position implies that the Philippines shelled more dollars than it earned from exports during the four-month period, weakening the peso in the process.
But the ordinary entrepreneur and consumer should not be alarmed by the peso’s temporary weakness. The Bangko Sentral ng Pilipinas (BSP) still has about $80 billion in gross international reserves, which I consider ample. The reserves are being replenished by remittances from Filipinos working overseas, tourism receipts and earnings from the business process outsourcing sector.
The country’s economic fundamentals have not changed and, in fact, are getting stronger. The peso’s movement is not a cause for panic — it is gradually depreciating at the moment and there is no abrupt change in its value so far. What we do not want to see are sharp movements in the peso-dollar rate because these movements could mean speculators are trying to manipulate the local currency.
The BSP, of course, is in control of the situation. It may tighten the domestic liquidity by way of increasing the interest rates to make the peso more attractive to foreign fund managers. The peso may weaken further after the US Federal Reserve Board said it would likely raise US interest rates twice more this year and four times in 2019.
I still believe, however, that the current market turmoil that is negatively affecting the peso and the local stock market will not last. Fund managers and currency traders will soon realize that the Philippine economy has strong fundamentals that can weather the storm and the panic in the global markets.
The Philippine economy is still expected to grow by about seven percent this year. The World Bank in a recent report sees the Philippines outperforming China and other major Asian economies this year and next. The bank sees the Philippines expanding 6.7 percent in 2018 and another 6.7 percent in 2019.
It said the country would likely continue to outperform some of the major economies in Asia, such as Indonesia (5.2 percent in 2018 and 5.3 percent in 2019), Malaysia (5.4 percent, 5.1 percent), Thailand (4.1 percent, 3.8 percent) and China (6.5 percent, 6.3 percent).
Only Vietnam and Cambodia are expected to grow faster than the Philippines this year at 6.8 percent and 6.9 percent, respectively.
With strong fundamentals, the Philippines and the peso, for that matter, are expected to survive the current market turbulence. Our team of economic managers, led by Finance Secretary Carlos “Sonny” Dominguez III, is more than capable to drive economic growth, while President Duterte’s popularity rating remains high. We should stay calm and chillax, and wait for the storm to pass away.
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This piece first came out in Business Mirror on July 2, 2018 under the column “The Entrepreneur.” For comments/feedback e-mail to: mbv.secretariat@gmail.com or visitwww.mannyvillar.com.ph./PN
