Peso at P54 remains competitive – Diokno

Published June 21, 2022, 4:08 PM

by Lee C. Chipongian

Outgoing Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno is not at all worried about the depreciating peso vis-à-vis the US dollar after hitting a 44-month low at P54 on Monday, and fast approaching P54.50 mid-day Tuesday.

Diokno said the peso versus the strong greenback is still “doing well” and that the local economy which is in recovery mode, is resilient enough to withstand key external challenges. These external shocks could also include speculative attacks in the exchange rate spot market. However, the BSP’s free-floating exchange rate policy protects the peso against speculative hits.

BSP Governor Benjamin E. Diokno

“Best way to look at the peso devaluation is how is it in relation to the other currencies in the region. And, compared with the other currencies in the region, we’re doing well,” he said in a press chat on Tuesday, June 21, after the public delivery of his “Statement on the State of Financial Stability” as BSP chief and chairperson of the inter-agency Financial Stability Coordination Council (FSCC).

Diokno, an economist, is referring to the peso’s competitiveness based on the nominal and real effective exchange rates or EER which is an index that measures the average nominal and real value of the peso or any other currency across the currencies of its major trading partners taken together.

“Economists call it the one-one measure competitiveness of the peso (which) is the real effective exchange rate and on the basis of that, we’re doing well,” he said.

The EER is an indication of the net direction of a country’s exchange rate against major trading partners, according to the BSP. A decrease in the EER means an overall depreciation of a currency relative to a basket of currencies. For now, the BSP has an arsenal of monetary policy tools to absorb any short-term volatility in the exchange rate.

Meantime, in assessing the domestic economy’s condition, Diokno and the FSCC members which include the Department of Finance and the Securities and Exchange Commission, has affirmed the economy’s continued resilience which is strong enough to provide cushion against external shocks from rising interest rates and high global inflation.

Diokno said the growth path, which registered an 8.3 percent GDP expansion in the first quarter, is boosted by the consumer purchasing power and economic-enhancing investments. These ensures the country’s position of strength in facing fast-evolving shocks in the global market, he added.

BSP Assistant Governor Johnny Noe E. Ravalo of the Office of Systemic Risk Management​, who presented in more detail the FSCC’s financial stability report, said the local currency’s weakness relative to the purchasing power is not only an issue in the Philippines.

“The movement on the exchange rate is not a Philippine phenomenon, it is happening worldwide right now, as the balance of risks are weighed against the rates or premiums that are attached to the various agency. When we talk about purchasing power, it is really the ability of individuals to buy. So, it is really money in the pocket,” he said Tuesday.

Ravalo further said that money in the pocket is “driven by a broader, deeper sense” of employment and that participation rates are improving. “You got higher employment rates and the fact that on a seasonally-adjusted basis, per capita consumption is actually higher. It bodes very well for the Philippine economy,” he said, adding that the “purchasing power looks strong, not just on a one quarter basis but on a trend over the last eight quarters you’ve actually seen improvement from March 2020.”

Both Diokno and Ravalo noted that FSCC continued to improve its capability to identify, assess and pre-emptively manage emerging systemic risks.

They cited the FSCC’s just-released Systemic Risk Crisis Management (SRCM) Framework which Diokno said is useful – “not because an immediate crisis is upon us but rather because it gives our stakeholders a transparent view of how we continuously manage systemic risks, regardless of the state of stability.”

“Our view on the state of stability will evolve as market stakeholders adapt and adopt to changing market conditions,” said Diokno.

The finance department-bound BSP chief said the FSCC expects spillovers from the advanced economies through cost-push pressures and higher risk premiums. “These are not independent shocks but are interconnected at many levels, creating complex, non-stationary and interlinked cause-and-effect relationships,” said Diokno.

The FSCC also identifies repricing risks and developments in the oil market as the two key external challenges. These risks have far-reaching consequences because they may affect leverage, liquidity, the macroeconomy, and the country’s climate change initiatives, the group said.

The rising inflation in advanced economies, meantime, has led central banks including the BSP to raise policy rates to temper economic activity. This is not the situation in many emerging markets, but the rate increases are expected to spillover to the rest of the world, said FSCC.

“Rising interest rates benefit savers and those who wish to invest in financial instruments, but this gain will be met by higher costs for borrowers, covering households, businesses, and the government. Those holding marketable assets will also experience a revaluation loss,” said the FSCC.

“Oil is another challenge, and its effects are evident in rising pump prices,” it added. “While this is raising domestic inflation, the issue is not typically addressed by monetary tools,” said the FSCC.

The FSCC is chaired by the BSP governor, and besides the DOF and SEC, also includes the Insurance Commission and Philippine Deposit Insurance Corp. The FSCC is a powerful inter-agency body for financial market regulators to identify, monitor, manage, and mitigate the build-up of systemic risks in the Philippine financial system.