Fragile peso could draw strength from remittances
Things look rough for the peso after it tumbled to a new record low, but the currency may recover some ground on the back of seasonal remittance inflows and as authorities’ efforts to deepen the local capital market begin to show greater payoff.
On Thursday, the peso appreciated by 17 centavos to close at 59 against the US dollar, recovering from the record low of 59.17 set in the previous session.
Michael Wan, a senior currency analyst at MUFG Global Markets Research, said in a note that the peso’s weakness has been driven by foreign investors’ retreat from Philippine equities and waning confidence in local assets amid a widening corruption probe that has already weighed on economic growth.
Even so, Wan said the US dollar appears slightly overvalued against the peso at current levels, suggesting room for the local currency to appreciate later on.
Factors that could strengthen the peso, he noted, include the usual surge in remittances during the holiday season, as well as the Philippines’ potential inclusion in a key debt gauge for emerging markets. The lagged impact of the central bank’s previous rate cuts should also help stem the peso’s weakness.
“We think at current levels USD/PHP looks a little bit rich even as we acknowledge uncertainty surrounding how the impact of the graft scandals could play out,” Wan said, adding that past experience suggests the economic turmoil from such scandals could persist for 15 months or longer.
A weak peso cuts both ways for the Philippines. It can lift remittance inflows from migrant Filipino workers, fueling purchasing power in the consumption-reliant economy.
But it also risks fanning import costs and reigniting inflation. Prolonged currency weakness, meanwhile, could inflate the peso value of foreign debts held by both the government and private companies.
The Bangko Sentral ng Pilipinas (BSP) has signaled it would let market forces largely determine the exchange rate, intervening in the foreign exchange market only if a prolonged depreciation threatens to fuel imported inflation, rather than smoothing out daily volatility.
Jason Tuvey, deputy chief emerging markets economist at Capital Economics in London, said the Philippines’ wide trade deficit has left the peso vulnerable, while the country’s traditional sources of dollar inflows may not be as strong as in the past.
Still, Tuvey said the broader external position offers some reassurance, pointing to the Philippines’ robust dollar reserves, which the central bank could use to defend the peso from speculative attacks.
“Even if the currency does come under pressure, we doubt that there would be a sharp adjustment,” he said. “What’s more, the central bank could step in to prevent excessive volatility.”
