The Phl macro-economic picture (part 2)

According to the Institute for Development and Econometric Analysis, Inc. (IDEA) latest Economic Monitor, end-2012 marked the Philippine peso’s strongest finish in the last five years, closing at 41.005 or climbing 6.5 percent against the US dollar year-on-year. Continued strength spilled into early 2013, with the exchange rate at Php40.800:$1 as of March 28. This trend is backed by an improving economy, investor confidence in the Aquino administration, strong overseas remittances and outsourcing revenues, and the great global monetary easing.

Likewise, according to Bloomberg, the bullish peso outperformed the yen by 16.6 percent, appreciated 6.5 percent against the US dollar, 5.5 percent against the yuan, and 4.6 percent against the euro. The peso gained in value against all Asian currencies, except for the Korean won. Note, that the peso beat the Indian rupee by 9.5 percent in 2012 and by a total of 30 percent the past two years.

Per same published report, the International Monetary Fund (IMF) said that the peso’s real effective exchange rate—or the local currency’s exchange rate adjusted for inflation—has been appreciating since 2003. The IMF’s Philippine representative Shanaka Peiris said that the appreciation of the peso was largely due to the huge inflow of remittances. The IMF supports the foreign exchange policy of the Bangko Sentral ng Pilipinas (BSP), she added, which was to allow market forces to determine the peso value, affirming that the central bank should intervene only when risks of excessive volatility become “significant.”

The robust appreciation of the peso had been costly for the central bank, noting that in the first 11 months of 2012, the central bank incurred about P86 billion losses because of its gargantuan dollar purchases and if not for the BSP’s intervention, the peso could have been stronger. Still, exporters want the central bank to do even more to rein in the peso’s appreciation.

In a broader view, the continued appreciation of the currency is not unique to the Philippines. Asia as a whole is seen by investors as a better place to park their portfolios. Consequently, the BSP alongside other central banks have pulled out their tools to manage the phenomenon. In 2012 December 26, BSP Governor Amado M. Tetangco, Jr. announced the imposition of caps on non-deliverable currency forwards (NDF) transactions of local banks at 20% of capital and at 100% of capital for foreign entities.

In January 24 of this year, the BSP trimmed the rate on $44 billion worth of special deposit accounts to 3% to help ensure that liquidity remains sufficient to meet the requirements of the economy. In March 5, the Philippines announced plans to further loosen forex rules in order to manage capital flows by encouraging forex outflows, according to IDEA.

Economic Monitor is a monthly publication of the Institute for Development and Econometric Analysis. It provides a summary of monitored news and indicators of the economy released in the preceding month.

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