Peso depreciation to drive inflation, yet good for Philippine exports

The peso depreciation may be beneficial to Philippine exporters, but an economist said this may spur inflationary pressures and impact on the purchasing power of the public at large.

The Philippine peso closed at P52.95:$1on Monday, its worst showing in 11 years since settling at P52.98:$1 on July 3, 2006.

Expectations of another interest rate increase in the United States, and weak Philippine trade numbers are keeping the peso weak against the dollar, BDO Unibank Inc. chief market strategist Jonathan Ravelas said.

“Prospects of a rate hike in the US this week, and the weaker trade data last week,” Ravelas noted.

The US Federal Open Market Committee is scheduled to meet on June 12 and 13 to discuss policy rates in the world’s largest economy.

The Philippine Statistics Authority has reported that the trade deficit widened by more than 130 percent in April as imports registered a double-digit growth while exports declined.

Year -to-date, the peso has depreciated by P3.14 from P49.810 on January 3, the first trading day of 2018.

Exporters and families of overseas Filipino workers, as well as dollar earners are obviously going to benefit from a weaker peso, said University of Asia and the Pacific (UA&P) School of Economics Dean Cid Terosa.

‘It will be good for those earning and sending dollars to the Philippines. Also, exporters will benefit because their products will be cheaper in the world market,” he said.

Inflationary pressures

Data from the Bangko Sentral ng Pilipinas (BSP) showed that personal remittances by overseas Filipinos reached $7.809 billion in the first quarter of the year, up 1.3 percent from $7.709 billion in the same period in 2017.

Terosa cautioned, however, that a depreciating peso causes inflationary pressures.

“For the general public, the weakening of the peso can translate to higher domestic prices—since prices of imported goods in pesos will move up. This can add to inflationary pressures,” he said.

In a recent forecast, the Bangko Sentral ng Pilipinas (BSP) expected inflation to settle at 4.6 percent this year, faster than the government target of 2 to 4 percent.

Terosa noted the peso depreciation was due mainly to external factors rather than local developments.

“Economic fundamentals have been tested lately by the increase in the inflation rate, but I believe external factors such as geopolitics have contributed more to the depreciation,” he said.

Strategists at DBS Group Research said the local currency could depreciate further in the second half of the year.

“With opinion divided on whether the economy is overheating, the peso is likely to keep its depreciation path towards 54 by end-2018,” according to a research note by foreign exchange strategist Philip Wee and equity strategist Joanne Goh.

“The currency has depreciated 5.8 percent year-to-date, more than the full-year depreciation of 5.4 percent and 4.7 percent seen in 2016 and 2015 respectively, to become the weakest currency in Asia ex Japan,” according to DBS. —VDS, GMA News