Real investment activity in the Philippines risks shrinking during periods of global disruption, especially in scenarios where the United States (US) dollar swings wildly and uncertainty surrounding the American economy intensifies.

“Investment declines most sharply when dollar strength and volatility rise simultaneously, and when uncertainty in world trade and US economic policy heighten,” the Bangko Sentral ng Pilipinas (BSP) wrote in a discussion paper published last Monday, April 27.

This external risk emerged as one of the major factors that could trigger large investment pullbacks or a scale-back in capital spending. The BSP said these effects on investment can be felt even in the long run, based on two decades of macroeconomic and firm-level data.

Firm-level analysis showed that the impact is not uniform across sectors. “Manufacturing firms and exporters are vulnerable to dollar volatility because of their large foreign exchange (forex) debt exposures,” the BSP said.

Importers and domestic firms with high foreign-currency debt also face pressure, the study noted. They “experience significant investment contractions, especially when dollar appreciation coincides with heightened dollar volatility.”

As of writing, the greenback has been on a winning streak against other currencies, including the Philippine peso, which tumbled to another record low on April 28 due to the domestic economy’s vulnerability to imported shocks.

The peso plunged beyond the ₱61-level as a resurgent US dollar and a broad exodus from emerging-market (EM) assets overwhelmed the BSP’s recent efforts to shore up the currency through tighter monetary policy.

Overall, the BSP stressed that “global shocks have the potential to lower real investments, with the largest impact on forex-indebted and import-dependent firms.”

It added that during periods when the US dollar appreciates and becomes more volatile, financial pressures become more concerning than trade effects because borrowing becomes more expensive and businesses face greater uncertainty.

Further, the BSP cautioned that having forex revenues does not fully shield firms. “Forex revenues alone do not fully insulate firms from global shocks,” the BSP said, pointing to persistent vulnerabilities even among dollar-earning companies.

Meanwhile, “text-based indicators of global uncertainty were found to have only a modest effect” on firms’ capital spending growth, suggesting that financial factors, rather than sentiment or news-based indicators, are the main channels through which global shocks affect investment.

To cushion the financial sector and the broader economy, the BSP called for stronger forex risk-monitoring systems, even for firms with dollar earnings, as well as “robust macrofinancial buffers” to prevent external shocks from triggering large investment pullbacks.

Targeted liquidity support could also be rolled out for import-dependent firms during periods of dollar stress to help cushion the impact of sudden forex swings on business activity.