Peso continues slide but market optimistic

“We can easily conclude that a vast majority of Filipino families benefit from the higher peso-dollar exchange rate.”

The Philippine peso continued its downward spiral on Tuesday, finishing the day’s trade at 53.47 against the US dollar or three centavos lower than Monday’s finish at 53.44.

The peso opened the day at 53.43 and traded between 53.35 and 53.50.

The main-share Philippine Stock Exchange index (PSEi) rose slightly by 0.29 percent, or 20.33 points, to close at 7,007.21 points.

Meanwhile, First Metro, the investment banking arm of the Metrobank Group, said that while the weakness of the peso may seem negative, its impact in both the short and medium terms is positive.

When the peso-dollar exchange rate crossed the P53/dollar on June 11 a lot of people including foreign analysts raised their “worried” flag. The days thereafter, the peso slid further to some 5.8%, higher than the P50.40/dollar average in 2017. This posts the question, should we worry?

“If we take a longer view, the peso has actually appreciated by only 4.6% from 2004 to June 13, 2018, while our neighbours Indonesia and Vietnam had large cumulative depreciations in excess of 40% during the same period. Malaysia also shows net depreciation during the period,” explained First Metro and University of Asia & the Pacific (UA&P).

It said the US dollar has been strengthening since end of the first quarter of 2018 due to several reasons.The IMF projects the US economic growth to accelerate to 2.9% this year compared to 2.3% in 2017. Apart from the growth momentum, the effects of Trump’s tax cuts will be felt by individuals and corporations starting the second quarter of 2018.

The same tax reform tries to attract back to the US some $2 trillion of cash held by US multinationals abroad. Even if only half of that returns to the US, that would add significant demand for the greenback. With the Fed raising policy rates to 1.75%, the 6-month T-bills yield is 2.06%, while in Germany the 6-month T-bills yield is -0.63% on June 13. As a result, it’s now more attractive for German institutions to invest in US Treasuries.

“There are about 10 million OFW, and with an average family size of 4.6, the peso slide benefits some 46 million Filipinos. Add to that the number of families dependent on exports, which account for 30% of GDP, plus those that supply raw materials to exporters, we can easily conclude that a vast majority of Filipino families benefit from the higher peso-dollar exchange rate,” according to First Metro and UA&P.

They added that foreign stock and bond investors are selling off their peso-denominated financial assets as they stand to lose with the peso depreciation. Foreigners have been net sellers in the local stock market by a total of P52 billion ($1 billion) from February to May this year.

The Philippines’ trade deficit has been deteriorating and has reached a record $3.6 billion in April this year. For the first four months, this amounted to $12.2 billion, which if multiplied by three (simple annualization) yields $36.6 billion — over 20% higher than a year ago.