Peso sinks to ₱57 vs. Dollar, a new record low | The Final Word

Summary

The Philippine peso recently fell to its lowest value ever, closing at 57 pesos per US dollar. Domini Velasquez, chief economist of China Bank, explains that this is due to a growing current account deficit and a strong US dollar. While the weaker peso benefits overseas Filipino workers and exporters, it raises import costs for food and oil, contributing to inflation. The peso is expected to further depreciate, possibly reaching 58 pesos or more. Inflation may continue to rise, peaking in the fourth quarter of 2024.

Takeaways

• 📉 The Philippine peso has dropped to its lowest level ever, closing at 57 pesos against the US dollar.
• 💡 One reason for the peso's depreciation is the growing current account deficit, driven by more imports than exports.
• 📊 In 2021, the current account deficit was $6.9 billion, but for 2022, it is projected to reach $20 billion.
• 💪 The US dollar has been particularly strong in 2022, its highest level since 2002, affecting not just the Philippine peso but other currencies as well.
• 📉 Despite aggressive rate hikes by the BSP (Philippine Central Bank), the peso continues to depreciate, with expectations for further declines.
• 📈 The US Federal Reserve has been more aggressive than the BSP in raising interest rates, further strengthening the dollar and weakening the peso.
• 🌍 Overseas Filipino Workers (OFWs) benefit from a weak peso, as their remittances in US dollars are worth more when converted to pesos.
• ⚖️ Exporters also benefit from the weak peso, as they earn more in pesos when selling goods and services priced in US dollars.
• 💵 However, the weak peso increases inflation, particularly for imported goods like food and oil, putting pressure on consumers.
• 🔮 The BSP and economists expect further depreciation of the peso and rising inflation through the rest of 2022, with inflation possibly peaking in the fourth quarter.

Q & A

Why has the Philippine peso depreciated to historical lows against the US dollar?

The peso has depreciated due to two main factors: a higher current account deficit, which means the Philippines is importing more than it exports, and the strength of the US dollar, which is the strongest it has been since 2002.

What is the current account deficit, and how has it affected the Philippine peso?

The current account deficit refers to the difference between a country's imports and exports. In 2021, the deficit was around $6.9 billion, but it is expected to rise to $20 billion in 2022, requiring more US dollars to finance the imports, thus putting pressure on the peso.

Why is the US dollar so strong compared to other currencies, including the Philippine peso?

The US dollar is strong due to the US Federal Reserve's aggressive monetary tightening, including significant interest rate hikes, which has made the dollar more attractive to investors. This has affected many currencies, including the Philippine peso.

How has the Bangko Sentral ng Pilipinas (BSP) responded to the peso's depreciation?

The BSP has been relatively aggressive in raising interest rates, hiking rates by 175 basis points since May 2022. However, its actions are not as aggressive as the US Federal Reserve, which has raised rates by 225 basis points.

Is the Philippine peso likely to continue depreciating against the US dollar?

Yes, the peso is expected to continue depreciating, especially with another 75 basis points hike by the US Federal Reserve anticipated in September. However, the exact level of depreciation is uncertain.

What are the potential benefits of a weak peso for overseas Filipino workers (OFWs) and exporters?

A weaker peso benefits OFWs and their families because they receive more pesos for each dollar they remit. Exporters also benefit as they earn more in pesos when they sell goods and services in US dollars.

How does a weak peso negatively impact consumers in the Philippines?

A weak peso increases the cost of imports, such as food and oil, leading to higher prices for consumers. This contributes to inflation and reduces the purchasing power of Filipinos.

Why is volatility in the peso's value a concern for businesses and consumers?

Volatility in the peso makes it difficult for businesses and consumers to predict future costs and prices, leading to uncertainty and potential speculative activities, which can harm the economy.

What has been the impact of the BSP's recent interest rate hikes on inflation?

The BSP's interest rate hikes have helped temper some volatility in the peso and inflation, but inflation remains high at 6.3% as of August 2022. The BSP expects inflation to continue rising, potentially peaking in the fourth quarter of 2022.

What is China Bank's outlook for the peso and inflation by the end of 2022?

China Bank expects the peso to continue depreciating, potentially testing the 58 pesos per US dollar level. For inflation, they expect it to average around 5.5% for the year.