The local currency is not likely to breach the P53:$1 level even with US Federal rate normalization by 2023, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.
The BSP does not release any forecasts for the exchange rate, but for the purpose of setting the National Government budget, the government and the BSP has a peso-dollar rate assumption of P48 to P53 until 2024. On Thursday, the peso was traded at P49.92 from P50.11 the day before.
When asked if the exchange rate will keep to below the P53 level despite some expected depreciation pressures from the US Fed funds rate lift-off, Diokno said the peso will remain within the government assumption range.
“The short answer is yes,” said Diokno, that the peso will not break P53.
He said the Fed taper’s potential impact on emerging economies “is expected to be uneven” but for the peso, it will have support from the hefty $107 billion reserves and structural foreign exchange flows such as remittances and foreign direct investments.
“(These structural flows) would temper any large peso depreciation pressures in the near term,” said Diokno.
Diokno reiterated that the P48 to P53 exchange rate assumption is not a peso forecast. “As a matter of policy, the BSP does not target a specific level of the exchange rate in keeping with the objective of allowing the peso to be market-determined,” he said.
But, he added, “the eventual policy normalization by the US Fed and subsequent rise in foreign interest rates would pose a risk to emerging markets including the Philippines through rebalancing of portfolio holdings in favor of the US and thus trigger depreciation pressures for peso.”
The last time the peso depreciated past the P53 level and almost reached P54 was in 2018. It recovered to the P50-level in 2019 and to a strong position of P48 by end-2020.
During Wednesday’s Development Budget Coordination Committee budget hearing at the Senate, Diokno said they “expect the peso exchange rate to be within the P48 to P53 per $1 rate” but that “some depreciation pressures on the peso from the eventual US Federal rate adjustment” is also expected.
Diokno said the recent peso depreciation is due to “broad dollar strength” driven by risk-off sentiment over the spread of the Delta COVID-19 variant.
He also attributed the peso weakness to “markets’ perceived shift to a hawkish tone by the US Federal Reserve” and a pick-up in corporate dollar demand as the economy gradually re-opens.