PH seen facing bigger currency pressure from hawkish Fed
Asian economies that run wide current-account deficits and have yet to benefit significantly from the artificial intelligence (AI) boom, such as the Philippines, could be more sensitive to expectations of higher US interest rates, the Australia and New Zealand Banking Group (ANZ) said.
In a note on Friday, Khoon Goh, head of Asia research at ANZ Research, said the Philippines, Indonesia and India could face currency pressures as the US Federal Reserve (Fed) embarks on a rate-hiking cycle, as these economies have lagged in the AI-driven trade cycle and continued to grapple with trade imbalances.
“The currencies of these three economies are also the worst-performing ones year to date, as high oil prices raised the import bill while higher US interest rates made it more challenging to attract portfolio inflows to fund external deficits,” Goh said.
Meanwhile, Goh said other Asian economies that have benefited from strong demand for AI-related products have seen their exports increase, strengthening their external positions and supporting their currencies.
The gains have extended beyond electronics, with nonelectronic exports also picking up across Asia, Goh said. The region’s current account, which tracks trade and income flows with the rest of the world, recorded surpluses of $1.4 trillion in the second quarter, double the level in the fourth quarter of 2024.
“Asia’s resilience to higher US interest rates and elevated oil prices has rested heavily on the strength of AI-related investment,” Goh said.
Currency woes
The Fed this week raised its benchmark interest rate by 25 basis points to a range of 3.75 percent to 4 percent, marking its first increase under new Chair Kevin Warsh as the US central bank seeks to bring inflation back under control.
The increase was widely expected by markets but came after a period of intense volatility.
The peso, already under pressure from elevated oil prices, weakened toward 63 to the dollar as expectations of higher US yields increased the appeal of dollar-denominated assets. That happened even as the Bangko Sentral ng Pilipinas has raised its benchmark rate by a cumulative 75 basis points since April to 5 percent, seeking to contain inflation above its 3-percent target.
But while AI has helped many of the Philippines’ Asian neighbors weather higher US interest rates, ANZ warned that the region’s heavy exposure to the AI boom could also leave it vulnerable to a reversal.
“Given Asia’s central role in the global semiconductor supply chain, any pullback in AI spending would quickly feed through to exports and onto growth,” Goh said. “For now, these are risks and not the baseline scenario.”
