Analysis: The case for a weak peso

MANILA, Philippines - The peso sank to the 43-level territory versus the greenback on Tuesday, the first time it did so in more than a year, with further weakness ahead welcomed and at the same time, monitored by both regulators and industry players.

The local unit ended trading at 43.20 to a dollar, losing 42 centavos from its one-year low close of 42.78 last Monday. This was the peso’s weakest performance since it hit 43.27 last June 8, 2012. 

As of Tuesday, the peso, Asia’s second best performer last year, lost more than 5 percent of its value since it last trading session last year.

The Bangko Sentral ng Pilipinas (BSP) was quick to calm the market, which it said is reeling from positive news in the United States, which could trigger the scaling down of cheap stimulus money.

“Just like other currencies in the region, the peso's movement today has been driven largely by news from Japan and over the weekend from the US,” BSP Governor Amando Tetangco, Jr. said in a text message to reporters. 

On the other end of the spectrum, private sector analysts and industry players have instead welcomed the development, saying the peso’s weakness is making the Philippines more competitive.

Sergio Ortiz-Luis, Jr., president of the Philippine Exporters Confederation, said the country’s exports, which plummeted 12.8 percent in April, could become more attractive to buyers abroad at cheaper price.

“This is good news for us,” Ortiz-Luis said in a phone interview. 

The export industry was the sole drag to the already fast first-quarter economic growth of 7.8 percent, according to data from the National Statistics Office. Exports of goods and services contracted 6.6 percent during the period.

To help the exporters, the peso should move at its current level versus the dollar “for at least 60 days” which is the lag between the order and delivery of products, Ortiz-Luis pointed out. 

The peso started weakening last May and has lost 2.3 percent since June 7, its biggest two-day drop since August 2007.

For his part, Jonathan Ravelas, chief market strategist at BDO Unibank Inc., said a weak currency adds value to remittances from overseas Filipino workers (OFWs).

This, in effect, could give families more purchasing power, driving consumption and investments to support growth. As of the first quarter, remittances grew 5.6 percent to $5.112 billion, BSP data showed. 

Emilio Neri, Jr., an economist at the Bank of the Philippine Islands, said a five percent depreciation of the peso is additional five percent value for remittances, “which could not be taken for granted.”

At the same time, Ravelas said business process outsourcing (BPO) companies, projected to become $16-billion industry that employs 720,000 people this year, are also likely to benefit. 

“Those who are cutting work hours before could now take advantage to hire more people,” Ravelas said in a phone interview.

Neri agreed, “There were BPO companies that earlier this year shelved plans to establish offices here. That could be reconsidered now.” 

Investments could also pour in, Ravelas said, as the peso’s decline came side by side with stock market correction. Yesterday, the local bourse plummeted 4.64 percent to 6,556.65. 

“Your valuations are becoming cheaper and your peso is becoming more competitive, I don’t see how is that not beneficial to us,” he said.

On the flipside though, a weak peso could make imports more expensive, triggering possible inflationary pressures in the long run. Tetangco however was confident consumer prices will remain manageable. 

Inflation fell below the year-end goal for two months in a row and bringing the year-to-date average to three percent, or the low-end of the BSP’s target. 

“Daily moves won’t significantly impact the inflation forecast, but a sustained move in either direction would,” Tetangco said.