The Philippine peso has seen its value depreciate against the US dollar (USD) during the past months. After reaching a record-low of P56.77 to $1 on Sept. 2, the local currency hit several record-lows subsequently plunging to a historic low of P59 per US dollar during the week of Oct. 10 through 17. The weakness of the peso is due to the United States Federal Reserve’s aggressive interest rates increases to combat inflation.
“Aggressive interest rate hikes by US Federal Reserve coupled with a widening current account deficit of the Philippines have contributed to the 15.7% depreciation of the Philippine peso this year,” said Frederico Rafael “Fritz” D. Ocampo, BDO Unibank’s chief investment officer and senior vice-president of its Trust and Investment Group.
How then does the plummet of the Philippine peso impact Filipinos?
A weaker peso against the dollar may seem to pose an advantage to the overseas Filipino market, but it also has a negative effect back home with imported inflation.
“The estimated 50 million beneficiaries of our 10 million OFWs (overseas Filipino workers) are the clear winners in the peso’s steep depreciation this year,” Mr. Ocampo said.
Cash remittances that OFWs sent back home reached an all-time high in 2021, amounting to $31.418 billion. The total personal remittances from OFWs recorded a new high of $34.884 billion, which represents 8.9% of the country’s gross domestic product, according to the Bangko Sentral ng Pilipinas (BSP). The United States was the top country source of cash remittances accounting for a share of 40.5% of total inward remittances in 2021 (https://www.bsp.gov.ph/SitePages/MediaAndResearch/MediaDisp.aspx?ItemId=6164).
With the higher value of the US dollar to the Philippine peso, the OFWs’ cash remittances that are in dollars would be worth more in pesos and, thus, would be an advantage for their beneficiaries back home. Exports likewise would be more competitive to consumers in the United States and Europe.
“[On] Dec. 30, 2021, a $100 inward remittance could purchase P5,100 worth of goods in the supermarket. In October 2022, a $100 inflow could buy P5,900 worth of goods in the supermarket,” Mr. Ocampo explained.
But the downside of the peso’s fall in value was the higher inflation in the country, especially seen in the rising prices of imported goods.
“The weak peso also results in imported inflation since we import oil and coal which we use for our power plants. We also import rice, food, raw materials, and capital equipment. These goods have become more expensive with the peso weakness,” Mr. Ocampo said.
As to whether this negative impact of the weaker peso outweighs the benefit, he said that “it depends [on] how fast the cost of goods in the market is rising.”
Headline inflation in the country accelerated to 7.7% in October from September’s 6.9%, according to the Philippine Statistics Authority. This is the quickest pace of inflation since the 7.8% in December 2008 during the global financial crisis (https://psa.gov.ph/price-indices/cpi-ir/title/Summary%20Inflation%20Report%20Consumer%20Price%20Index%20%282018%3D100%29%3A%20October%202022; https://www.bworldonline.com/top-stories/2022/11/04/485065/inflation-surges-to-near-14-year-high-in-october/).
Amid the weakened peso, Mr. Ocampo said that OFW beneficiaries could take advantage by slowly selling their US dollars.
Meanwhile, for investors, they could look at peso instruments with higher interest rates such as 5- to 10-year government securities and corporate bonds currently at 6.5% to 7.5%.
“Peso interest rates have increased by over 2% with time deposit rates rising from 2.0% to 4.5%. Yields on 10-year government securities likewise are higher by 2.7% from 4.8% at end of 2021 to 7.5% in mid-November 2022. While investors may suddenly be interested in buying US dollar, peso instruments with higher interest rates are also available in the market,” he said.
“BDO, being the largest Philippine bank and the number one in inward remittances, is well-positioned to offer both peso and USD instruments to our investors,” he assured. “We also have peso and USD UITFs (Unit Investment Trust Funds) and feeder funds.”
The peso’s weakness is likely to continue as the US Federal Reserve announced more interest rate increases in increments of 0.50%-0.75% until yearend, and at the same time, the Philippine current account and balance of payment deficit widens, said Mr. Ocampo.
But towards the end of the year, the peso can be expected to strengthen as corporate demand tapers off and more remittances come in.
“The third quarter is usually weak for the peso because it is the country’s import season in preparation for the Christmas season. In contrast, the demand for the US dollar eases while OFW remittances increase as we end the year. Hence, there is reason to expect the peso to strengthen towards yearend,” he said.
Despite that weak peso and inflationary pressures could put up headwinds in the second half of 2022, Mr. Ocampo still believed the household spending could improve.
“The reopening of the economy, face-to-face classes, and resumption of global tourism could boost household spending,” he said. “Corporate earnings are also recovering to pre-COVID levels. This recovery could boost capex as the business sector expands capacity to take advantage of the so-called revenge spending.”
Mr. Ocampo expected the country’s economy to grow by 7.3% this year.
Philippine economic output expanded 7.6% during the third quarter of 2022. Corporate earnings likewise increased 44% during the same period. With a 7.7% average economic growth in the first three quarters of the year, Finance Secretary Benjamin E. Diokno said the country’s economy is ‘on track to achieving’ the Development Budget Coordination Committee’s 6.5%-7.5% growth target for 2022 (https://www.dof.gov.ph/ph-economy-grows-by-7-6-in-q3-2022-on-track-to-achieving-growth-assumption-of-6-5-to-7-5-for-2022/).
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