By Lee C. Chipongian
The peso closed stronger in 2018 than what most market observers thought it would, and most expected it to hit the mid-P53 level to P54 versus the US dollar.
The local currency averaged at P52.77 in December 2018 versus P50.39 same time in 2017. It lost P2.38 or a depreciation of 4.72 percent.
On the last day of 2018’s exchange rate closing, based on Bangko Sentral ng Pilipinas (BSP) data, the peso fell by P2.80 or 5.6 percent year-on-year. The spot market put the closing rate at P52.58 for 2018, ending stronger than in previous weeks.
The peso has gradually gained ground in the last three months of the year as the BSP had anticipated, citing increased inflows from remittances and since it’s the last quarter of the year, there were less imports to drain the dollar reserves.
The peso averaged at a peak of P54 for the month of October before reversing its depreciation trend in November with an average of P52.80 and P52.77 in December.
BSP Governor Nestor A. Espenilla Jr. and Deputy Governor Diwa C. Guinigundo said the peso’s performance in the last year was in line with the depreciation of most Asian currencies.
In a report, the BSP said pressures on the peso of past quarters until end-year was due to: The trade tensions between the US and China which has escalated in past months and the general strengthening of the US dollar amid positive economic indicators and US Federal Reserve recent interest rates’ hike.
Still, the BSP said foreign exchange inflows from remittances, foreign direct investments, receipts from the business process outsourcing and exports’ sectors, and stable – although decreasing – gross international reserves (GIR) have provided the expected support for the local currency.
This is why Espenilla has always maintained that they are not worried about the peso depreciation even as it reached a 13-year low of P54.40 early in October after breaching the P54-level back in September. By this time, the peso has lost almost nine percent or P4.50 year-to-date. The strength of the US dollar comes from the US Federal Reserve’s tightening stance. Aside from the strong greenback, the peso weakness is attributed to the high inflation which vice-versa, may have been affected by the exchange rate volatility and was partly blamed by the elevated inflation expectations.
The BSP was unfazed, mainly because they believe that the peso’s fundamental factors are still solid.
The central bank has a freely floating exchange rate system and that the depreciation is largely driven by fundamentals.
Even at P53-level, the BSP has begun to shore up its reserves. US dollar buying accelerated below this rate. The GIR has declined partly because it was propping up the peso.
Guinigundo has said that the BSP expects to boost its GIR in the last quarter of the year. The GIR however will not reach its $80 billion estimate for 2018, and may only manage $76 billion.
Guinigundo said that while accumulating US dollars is challenging when the peso is depreciating, they will be looking for opportunistic windows starting in October.
As of end-November, the GIR improved to $75.68 billion from $74.71 billion of the previous month due to inflows from the central bank’s foreign exchange operations and its income from its investments abroad. Current level is equivalent to 6.9 months' worth of the country’s imports of goods and payments of services and primary income. It is also equivalent to 5.8 times short-term external debt based on original maturity and 4.1 times based on residual maturity, said the BSP.
In the meantime, the country’s balance of payments deficit is expected to hit $5.5 billion this year and $3.5 billion in 2019. The GIR is expected to reach $77 billion next year. The current account deficit is also see bigger in 2018 at $6.4 billion.
The GIR has been on a decline the weaker the peso becomes. However the BSP has repeatedly assured the financial market that the dollar stock remains adequate in addressing foreign exchange requirements.
The decreasing GIR level only means that the stability of the exchange rate is at the cost of drawing down the country’s reserves, which is sufficient.
“The GIR and the exchange rate – should always be stable,” said Guinigundo earlier. As such, as stated by the BSP, they can use reserve levels to intervene in volatile exchange rate fluctuations.