Peso slide deepens on oil shock, trade gap

The peso's renewed slide to record lows is being driven by heightened geopolitical and oil-market risks, while a widening trade deficit is adding to underlying pressure on the currency.

Elizabeth H. Lee, chairperson of the Federation of Philippine Industries (FPI), said renewed fighting involving Iran and fresh tensions around the Strait of Hormuz have pushed oil prices higher, adding pressure to economies such as the Philippines that rely heavily on imports.

“The immediate trigger is geopolitical — the Iran conflict is flaring up again, kicking up oil prices again this week after new strikes near the Strait of Hormuz,” Lee said.

“But the reason we're more exposed than our neighbors is structural. Our imports are growing faster than our exports, and the BSP has been clear: it won’t burn through reserves just to hold the peso at a fixed level,” she added.

The peso closed at P62.625 against the US dollar on Sept. 8, marking another record-low finish this year. The Bangko Sentral ng Pilipinas' reference rate stood at P62.698 per dollar on the same day.

Lee pointed to the country's widening trade gap as another source of pressure on the currency.

Philippine Statistics Authority (PSA) data showed that the trade deficit expanded 29.2 percent to $37.34 billion in the first seven months of the year. Imports increased 18.9 percent to $92.26 billion, outpacing the 12.9-percent growth in exports to $54.92 billion.

“This is itself feeding the peso's weakness, not just a symptom of it because a widening trade deficit does not just reflect peso weakness; it actively feeds it. More imports mean more demand for foreign currency, which puts downward pressure on the peso,” Lee said.

The weaker currency can benefit exporters by making Philippine products cheaper overseas, but it can also raise costs for businesses that depend on imported raw materials, equipment and components.

“A weak peso is supposed to be a reward for exporters. At the same time though, it's also a tax on anyone who still has to import to produce,” Lee said.

She said reducing the country's reliance on imported inputs would help limit the impact of currency volatility on businesses and consumers.

“Our situation highlights the urgency of industrialization — producing more components locally reduces import dependence and helps cushion our economy against currency swings,” Lee said.