Double-edged sword: Weak peso good for economy but may upset dollar earners

CEBU, Philippines - A weaker peso will be good for the Philippine economy in general, a central bank official said, but it also has a negative impact on some sectors particularly the imports.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said a cheaper peso is generally good for exporters, the BPO (business process outsourcing) sector and other dollar earners.

A weak local currency also means more money for families dependent on overseas Filipino workers (OFW). OFW dependents get more pesos from dollar remittances, boosting the economy through spending. A weaker peso gives them more buying power.

On Tuesday, the peso recovered against the dollar from a five-year low level it recorded on Monday amid continuing concerns over China's economy. The peso gained 20.5 centavos on Tuesday to close at P46.61 per dollar from P46.815 closing rate on Monday. As of yesterday morning, the local currency traded at P46.79 intraday level against the dollar.

But while exporters, OFWs and the BPO sector are benefiting, Guinigundo pointed out that cheaper peso also makes imports more expensive.

“We’re still relying on imported energy, raw materials and other imported goods. This will become more expensive. It’s possible that it would depress, to some extent, the demand for imports,” Guinigundo told reporters on Tuesday in Cebu City at the sidelines of the recognition of BSP stakeholders in Central Visayas.

The BSP official noted the exchange rate is market-driven. "The volatilities in the market make everything uncertain."

He said the country is a "small open economy" and that the BSP allows market forces to affect the peso. "Therefore if that's the case all these volatilities are bound to affect us."

Yuan devaluation

Guinigundo also explained that China’s devaluation of its currency, the yuan, has imposed a “collateral impact” on other regional currencies including the Philippine peso.

“There was literally a bloodbath in the foreign exchange and in the equities market. It’s a generalized adverse impact on the market,” Guinigundo said. He was referring to the fall in the Philippine Stock Exchange index (PSEi) on Monday as concerns over China’s economy resulted in a region-wide bloodbath, triggering slumps in stock exchanges in the region including the PSE.

However on Tuesday, the PSEi rebounded and regained 39.33 points or 0.57%, closing at 6,830.34 on Tuesday trading.

Global markets including the Philippines have been falling since few weeks ago when China has cut the value of its currency, underscoring concern on its weakening economy, reports said. 

Guinigundo said China is a big economic player and that developments there can affect the rest of the world.

Guinigundo said that if these external factors continue, a “darker prospect” for the global economy particularly in Asian region may be expected.

“Anything can happen between now and end of third quarter this year,” the official said. "Market sentiment is negative currently."

Guinigundo further added that what is also affecting the local financial markets is the drop in commodity prices including oil and coal.

"Many of the countries in the region are commodity exporters. If price of commodity is down talo din sila," he said.

The price movements of oil and other commodities and the US Federal Reserve's pending plan to raise interest rates continue to pose concerns in financial markets, he said.

But the deputy governor believes the BSP’s monetary policy remains appropriate at this point amid the prevalence of these external factors. 

“But the BSP continues to monitor the developments and we will always watch out for risk. We have an early warning system that allows us to undertake preemptive action,” he said.

“But we are open to any action that is warranted by the evolving macroeconomic and financial developments around the region and global markets," he added. (FREEMAN)