Where to Philippine peso?

PHILIPPINES - In Brief 10 Jul 2020 by Romeo Bernardo

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During Wednesday’s pre-State of the Nation Address (SONA) that focused on the Duterte administration’s economic achievements this past year, one chart in particular caught our attention. Presented by BSP Governor Benjamin Diokno, the bar chart shows the Philippine peso alongside eight other east and southeast Asian currencies, with the peso standing out as one of only two currencies that has appreciated against the dollar this year. (Chart 1) Moreover, it topped the other currency, the Japanese yen, in terms of the rate of appreciation. Close competing currencies like the Indonesian rupiah, the Thai baht and the Malaysian ringgit have all depreciated by around 4%. Why is the peso relatively stronger despite the more aggressive policy rate cuts by the BSP so far this year? (Table 1)Governor Diokno provided one of the reasons, which is the Philippine’s comparatively robust external position. Gross international reserves at the end of May shot up to $93 billion from below $88 billion at the end of 2019. The latter amount per IMF assessment is over twice what the country needed to cover short-term foreign exchange needs, including for trade and debt repayments, and is among the highest in the region. (Chart 2)Expectations about the country’s current account balance have changed. At the start of the year, the consensus forecast was that the current account will remain in deficit of around $9 billion (2.2% of GDP); this forecast has now turned positive or a current account surplus of $0.7 billion (0.2% of GDP). The shift is mainly driven by improved outlooks on the trade in goods deficit, with forecast double-digit contraction in imports outpacing projected fall in exports. ...