The Philippines will act aggressively to prevent the peso from weakening to 60 per dollar, including by deploying billions of dollars more in reserves, according to its finance minister.
The government is trying to prevent the exchange rate from “breaching 60” pesos to the dollar, Finance Secretary Benjamin E. Diokno said in an interview in Bangkok on Friday after the Asia-Pacific Economic Cooperation finance ministers’ meeting. When asked whether the government will do whatever it takes to defend the peso, Mr. Diokno replied: “Oh yes, that’s what the president said.”
Between now and year-end, the nation expects $15.8 billion in inflows from overseas Filipinos’ remittances and call-center receipts and it can use $10 billion of that to defend the peso, Mr. Diokno said, relaying his recent conversation with President Ferdinand R. Marcos, Jr., Dollar reserves, which have fallen more than 12% this year, remain robust at about $95 billion, he said.
“We are willing to spend some more just to defend it,” said Diokno, who ran the central bank before moving to his current role. “Let’s not worry about drawing down reserves,” he said. “That’s the reason why we’re building up our buffers” — for hard times.
Mr. Diokno said he assured Mr. Marcos that the peso slump would have eased by the end of the year as Filipinos abroad send more money home for Christmas and it will eventually strengthen to 55 “where we want it to be.”
Drawing a clear line in the sand for the peso could be a risky strategy for the Marcos administration, given that soaring interest rates in the US have put pressure on currencies around the world. While authorities in Japan, India and beyond have intervened in recent months to support their currencies, few have been willing to defend explicit levels that might be tested by speculators.
“That’s a very strong commitment from Diokno,” said Sophia Ng, a currency analyst at MUFG Bank Ltd. But even with the boost from remittances “we think it will still be tough to counter a strong US dollar” especially with the Federal Reserve rate projected to exceed 5%. “There is basically no change in the fundamental drivers of the peso, hence we think there is still a risk for it to breach 60 and head towards our year-end forecast at 61.”
The peso plummeted to a record low of 59 against the dollar in late September and has held near that level since. The local currency advanced as much as 0.4% on Friday, while most peers declined against the dollar.
Mr. Marcos this week added to the chorus of government’s readiness to intervene in the currency market as the Philippines, among Asia’s fastest-growing economies, is also being squeezed by soaring prices and higher borrowing costs. Inflation at a five-year high and seen persisting through 2023 could reduce gross domestic product by 0.6% next year.
“It’s a good strategy to intervene more aggressively now as the dollar is expected to peak in a few months,” said Qi Gao, a foreign-exchange strategist at Scotiabank in Singapore. “Once the Fed starts to halt hiking rates, the depreciation pressure on EM currencies, including the peso, will be alleviated. So, intervening now will buy BSP more time and help slow the peso drop,” he said, referring to Bangko Sentral ng Pilipinas.
MORE HIKES
Mr. Diokno, who remains a member of the rate-setting monetary board, said the authority will probably consider an additional 100 basis points of policy rate hikes at its last two meetings for 2022. The board has already raised the key rate this year by the most in two decades.
Taking the benchmark rate to 5.25% by year-end from the current 4.25% is “good enough” but not the only measure, said Mr. Diokno. BSP has increased its key rate by 225 basis points this year, among the steepest moves in the region.
The economy can withstand tightened financial conditions and GDP is expected to expand at the low-end of its target, at 6.5% this year, which is “not bad,” said Mr. Diokno.
He sees inflation averaging around 5.6% this year and 4.1% next year, both above the central bank’s 2%–4%. Price gains should cool to 3% by 2024, he said. The government is trying to slow price increases whenever possible, like in transport fares and even wages, said the finance chief.
DOLLAR BONDS
To further cushion the peso, the government plans to sell dollar-denominated bonds targeting overseas Filipinos, said Mr. Diokno. The Philippines plans to market the debt nationwide in December and aims to capture around 10% of remittances or at least $3 billion, Mr. Diokno said.
Earlier this month, the Philippines raised $2 billion from the sale of new dollar-denominated debt. That’s after some local auctions failed as the government rejected bids to prevent its borrowing costs from rising sharply.
Authorities are also watching for any signs of speculation and indications that informal channels for currency transactions are increasing. BSP has talked to market participants to make sure they’re not speculating, said Mr. Diokno.
“If you’re buying dollars for no reason at all, I think that’s speculation,” the finance chief said. To the central bank he has this message: “Don’t be absent in the market on a daily basis, because people might interpret that to mean we are letting go.” — Bloomberg
