Peso seen to remain strong due to hefty forex reserves

Published August 15, 2020, 10:00 PM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the country’s hefty foreign currency reserves aresupporting the peso in recent days, keeping its hold as the region’s best-performing currency.

Diokno said the peso is “very strong” and “it is the most appreciated currency in Asia right now”. He sees it continuing this trend. At P48.76:$1 (data from the Bankers Association of the Philippines) closing on Friday, the peso is performing better than the Japanese yen and the Taiwan dollar.

 In Filipino, Diokno said Thursday during his virtual “GBED Talks” that the first reason why the local currency is appreciating is because of the continued inflow of US dollars into the financial system.

 The second reason why the peso is strong – with fund inflows – is that the gross international reserves or GIR is rising for some time. “That’s (the GIR) more than eight months of our requirements for imports and payment of services (when the benchmark is that three months is enough),” said Diokno, again citing the strong US dollar flows for the hefty GIR. As of end-June this year, the GIR stood at a record-high of $93.469 billion, up by $8.538 billion from same time last year of $84.931 billion. The current GIR is sufficient cover for 8.4 months’ worth of imports of goods and payments for services and primary income.

 “The third reason for the strong peso is international confidence,” said Diokno. He reiterated that international rating agencies S&P Global, Fitch and Moody’s have all affirmed that the Philippines have the macroeconomic fundamentals to withstand the COVID-19 pandemic.

 All three credit watchdogs have given the Philippines “stable” credit outlook and this has cemented foreign investors’ continued confidence in the peso, said Diokno.

 “In the past, when we have a (financial) crisis, we ran out of US dollars. Because of this, the peso has depreciated. This always happens. But not today, that’s not happening today,” he said in Filipino. “In past crises, our interest rates is going up but today, our interest rates are low and our GIR is increasing and it is not being eroded, in fact it is being supported (by inflows).”

Diokno also said the peso has been “broadly stable, supported by the strong external payments position.” He thinks the peso could continue to “buck the trend as most regional currencies have depreciated against the US dollar.”

ING Bank economist Nicholas Mapa, in the meantime, said the peso will remain on the strong side with a current account surplus. This is despite low remittances numbers on account of the pandemic.

 “With economic momentum slowing considerably while the virus spreads, we may not foresee a quick return to pre-pandemic demand for imports. Thus, the peso may retain its appreciation bias with the current account remaining in surplus,” said Mapa in a recent commentary.

He also noted that near term pressure for the peso will remain as it continues to appreciate. “(The) only things that can break trend are: large scale BSP participation; and resumption of import demand, with only government’s BBB as possibility.”

The government has revised its peso-US dollar exchange rate assumption to P50 to P52 against the greenback for 2020, while keeping its previous assumption of P50 to P54 for 2021 and 2022. The assumptions were changed on the day the government reported that the second quarter GDP contracted by 16.5 percent, officially entering the recession period due to the pandemic.