Peso sheds 6% in 2021

MANILA, Philippines — After emerging as one of the best performing currencies in the region in 2020, the peso depreciated close to the 51 to $1 level in 2021 amid the Philippines’ strong demand for the dollar as the economy gradually recovers from the impact of the pandemic.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp. (RCBC), said the peso weakened by P2.976, or 6.2 percent, to close at 50.999 in end-2021 from 48.023 to $1 in end- 2020.

From the 4.5-year intraday high of 47.61 on June 1, 2021 the peso depreciated by P3.39 or 7.1 percent in more than six months due to the reopening of the economy from strict COVID-19 lockdowns, resulting in higher import demand.

The peso ended 2021 on a stronger note, closing 50.999 to $1 on the last trading day of 2021 from Wednesday’s 51 to $1 -- the peso’s weakest level since closing at 51.07 to $1 in March 26, 2020.

Ricafort said monthly imports and trade deficit data are already back to pre-COVID levels on a monthly basis despite the emergence of the new Omicron variant.

Latest data from the Philippine Statistics Authority (PSA) showed the country’s trade deficit swelled by 66 percent to $33.21 billion from January to October 2021 compared to $20 billion in the same period in 2020.

This, after imports increased by 29.7 percent to $95.31 billion during the 10-month period of 2021 from $73.48 billion a year ago, while exports went up by 16.1 percent to $62.1 billion from $53.48 billion.

Ricafort said the strengthening of the peso against the dollar was offset by some pick up in the economy as well as in imports in view of the expected acceleration in COVID vaccinations in the coming months which could help better manage new local cases and, in turn, eventually help justify the  further re-opening of the economy.

Ricafort said proceeds of export sales likely picked up in the fourth quarter of 2021.

As consistently seen for many years, Ricafort said the peso appreciated with the widely expected increase in remittances from overseas Filipino workers (OFWs) as well as the conversion to pesos especially during the Christmas and New Year holiday season.

Personal remittances from OFWs went up by 5.4 percent to $28.82 billion from January to October compared to a year-ago level of $27.35 billion as cash remittances coursed through banks increased by 5.6 percent to $23.12 billion from $21.89 billion.

Likewise, the net inflow of foreign direct investments (FDIs) surged by 43.8 percent to $7.29 billion in the first three quarters of 2021 from $5.02 billion in the same period in 2020.

Ricafort said the next important hurdle versus further upside potential is the 51 to 51.50 per $1 levels seen at the early part of the pandemic.

“The overall economy still remains below pre-COVID levels at the moment, reflecting relatively slower recovery on some importation activities, in view of the lockdowns earlier this year and last year

Security Bank chief economist Robert Dan Roces said the local currency may weaken further to 52 to $1 amid the growing demand for the dollar as the economy continues to reopen.

Roces said pain points to watch out for 2022 include the presidential and national elections in May, the series of interest rate hikes by the US Fed, the country’s widening trade deficit as well as rising global commodity prices.

“The foreign exchange space is very hard to predict. We never expected it to hit the 49 levels again this late in the game but it did. So next year, with the hike of the Fed we could be expecting a stronger dollar response. So what that means is for the peso to weaken as well,” Roces said.

According to Roces, the export sector may post a faster growth of eight percent next year from the projected seven percent this year but the sector could still be affected by elevated shipping costs and supply-chain constraints.

Likewise, he said China is facing fading growth potentially affecting external demand for Philippine-made goods including agricultural exports, thereby suppressing export growth potential.

On the other hand, Roces said imports may book a double-digit growth next year from the projected nine percent this year due to rebounding domestic demand.

However, Roces warned the country is still facing high commodity prices because of global demand upsurge, resulting in additional inflationary pressures.

“Importers will have to meet the demand so they will likely look for more dollars to finance their operations, of course they are going to source it locally. So there is going to be higher demand locally for dollars and what that points to is the depreciation of the peso,” Roces said.

According to Roces, oil prices are expected to remain elevated next year as demand may exceed pre-pandemic level on a gradual trajectory.

ANZ Research said the peso weakened in 2021 as the country’s current account position turned unfavorable due to high import bills.

“The improvement in remittances was also inadequate to offset the increase in the trade deficit. Developments in its external position will be key to the peso’s performance in 2022. Rising domestic demand, high oil prices and a ramp up in infrastructure spending will increase imports further,” ANZ said in its Economic Outlook First Quarter 2022 report.

ANZ expects the peso strengthening to 49.90 to $1 in 2022 and further to 49.50 to $1 in 2023 after weakening against the dollar in 2021 as higher OFW remittances as well as higher income from the recovering business process outsourcing sector would help support the current account in 2022.