Economists are not worried too much about the rapid depreciation of the peso vis-à-vis the US dollar as they think the central bank has more than enough reserves to cushion the local currency’s current weakness.

In a virtual forum hosted by Ayala Group and University of the Philippines’ School of Economics (UPSE), views on the peso which displayed a fast decline in June where it lost ground 3x from P53 to P55 and then further weakened to P56 in the first week of July, showed some variations but for the most part, the sentiment was cautious.

“Should we be worried? I think we have enough arsenal to arrest further deterioration of the peso,” said Dr. Joseph J. Capuno of UPSE during the economic forum. “The falling of the peso is inevitable (but) a drastic, unforseen, or sudden drop in the peso? I don’t think we’re likely to be vulnerable to that. I think we have enough in our arsenal to arrest or reduce that possibility,” he said.

Capuno said the Bangko Sentral ng Pilipinas (BSP) has ample foreign exchange (FX) buffers to intervene in the FX market and protect the peso which has depreciated to 17-year lows this month. The BSP, populated by economists from UPSE, has accumulated a gross international reserves (GIR) of $101.98 billion as of end-June.

“If anything, I have confidence in the BSP, these are economists. They have maturity after the Marcos time (former president Ferdinand E. Marcos Sr.). They saw how difficult it is if you have a deteriorating peso and you don’t have foreign reserves. That was very, very painful for us,” Capuno said. “BSP now has ample foreign reserves and they can arrest a sudden deterioration in the peso. That’s a lesson very well taken to heart by (BSP’s) senior economists now,” he added. Marcos Sr. was president from 1965 until 1986. In the 1980s, based on data from multilateral funding agencies, the country was beset by a huge public debt, a helpless central bank, and depreciating peso.

As of end-June, BSP’s hoard of US dollars have declined to $101.98 billion or $1.66 billion lower from end-May’s $103.65 billion because the government used the foreign currency to pay past debts. Based on data from the BSP, the GIR lost $3.78 billion or 3.6 percent from same period last year of $105.76 billion. The highest GIR level was recorded in December 2020 of $110 billion.

Bank of the Philippine Islands (BPI) lead economist, Jun Neri was more cautious about the state of the peso. As of mid-day Friday, July 15, the peso was at a low of P56.39 versus Thursday’s close of P56.15.

Neri said if the environment were not so problematic in terms of inflation, a depreciating peso is viewed as favorable by some. Overseas Filipinos who sent home regular remittances will be earning more while exporters will also have larger bottomline income. Local manufacturers that compete with imports will also benefit from a weaker peso.

“But, the circumstances are a little bit different now, it will probably require a little bit more aggressive reaction from the central bank to make us feel more secure about the situation,” said Neri during the forum.

Neri reiterated his past commentaries that if high oil prices continue for too long, the country’s GIR “could shrink quite sharply”. The end-June GIR will cover only 8.5 months worth of imports, much lower than previous years’ 10 to 12 months, he pointed out.

“If that happens too quickly because everything is so expensive even wheat and corn – and the central bank doesn’t hike interest rates -- it will be the reserves which will get depleted. When we run out of reserves, we get into a lot of other unmanageable issues like very high, long-term interest rates which will make it more difficult for our agriculture sector to gain access to credit,” said Neri.

On Thursday, the BSP made a surprise move to raise the benchmark rates by 75 basis points (bps), the largest policy rate hike implemented by the central bank and it was an off-cycle decision. It brought the key interest rate to 3.25 percent from 2.5 percent. The BSP has previously increased the policy rate by 25 bps each on May 19 and June 23.

BSP Governor Felipe M. Medalla said the Monetary Board, BSP’s policy-making arm which he chairs, needed to increase the key rate ahead of its Aug. 18 meeting to re-anchor inflation expectations.

The BSP also signalled that, depending on the outcome of the second quarter GDP and July inflation, they could still decide to move benchmark rates next month. Some market analysts expect the BSP will close the year with four percent policy rate, which means another 75 bps rate hike might be coming in the next months to control inflation.

“For BSP, they are rightfully more concerned about inflation but that two are related so we do have to be somewhat concerned about the peso depreciation,” said Dr. Renato E. Reside Jr. of UPSE during the forum.

The demand-side pressures to inflation have caused the peso to depreciate fast in just four weeks. It breached P53 level on June 10, P54 on June 17, P55 on June 29 and P56 on July 7.