Protecting Our Purchasing Power
I understand where the government’s economic managers are coming from when they underscored the need to “defend the peso.” The Philippine currency has already shed about 15 percent of its value against the US dollar since the start of the year.
The concern on peso boils down to our purchasing power that has a major impact on consumer spending. Consumption accounts for about two-thirds of our gross domestic product and could singlehandedly lift or bring down economic growth in the Philippines.
Coupled with a high inflation rate that peaked so far this year to 6.9 percent in September, the rapid peso depreciation could negate major gains we have achieved over the years. So, it is in the best interest of the country and the Filipino consumers to have a stable peso-dollar exchange rate.
President Ferdinand Marcos Jr. said in a Twitter message that “we may have to defend the peso in the coming months” and use “interest rates” to mitigate the effects of high inflation. While interest-rate setting is within the purview of the Bangko Sentral ng Pilipinas, the President’s pronouncement conveys the government’s preference for a stable market.
By the way, it is not only the Philippine peso that has weakened against the greenback this year. Most currencies have lost their value to the dollar in reaction to the US Federal Reserve’s aggressive interest rate hikes to tame inflation. It is therefore accurate to say that the peso is weak, because the dollar is strong, although there are many other factors at play —including the strong imports that are now double our exports.
The higher imports are reflected by the widening of the balance of payments deficit to $7.8 billion in the first nine months of 2022 from just $665 million in the same period last year.
As we have mentioned in this column a number of times, a wide swing in foreign exchange rate could be disruptive, as it affects business plans and even household spending, considering that we are a net importing country. Most of the imported raw materials, capital goods, food, vehicles and electronics we buy are quoted in US dollar and other foreign currencies. Converted into peso, the prices of these imported products suddenly become prohibitive.
The BSP, which oversees the foreign exchange and interest rate setting, has actually done a good job of managing money supply and foreign exchange that supports economic growth without resulting in runaway inflation. Although the 6.9-percent inflation in September looked worrisome, it was still lower than the double-digit price increase seen by some Asian and European countries in 2022.
Other Southeast Asian economies such as Thailand, Singapore, Indonesia and Malaysia also saw their inflation rates accelerate this year.
The US, the world’s largest economy, registered an annual inflation of 8.2 percent in September, prompting the Fed to hint at more interest adjustments in November. This has rattled many markets, including the Philippines.
BSP Governor Felipe Medalla was quoted as saying the local benchmark interest rate should be more than 100 basis points above the US rate to have a steady exchange rate. The Federal Fund’s rates hovered between 3 percent and 3.25 percent as of end-September, while the BSP’s overnight borrowing rate stood at 4.25 percent. The Fed, however, signaled plans to lift rates by another 1.25 basis points to bring them to 4.25 percent to 4.50 percent in November or December.
If we fail to adjust local rates on time, many investors and moneyed individuals might dump the peso in favor of the dollar and exacerbate the situation.
In all fairness to the BSP, the monetary authority is doing its part and seems to be using the gross international reserves to intervene in the foreign exchange market to prevent the peso from sliding beyond the 59-to-a-dollar mark. As a result, the GIR declined to $93 billion in September from $97.4 billion in August and $106.60 billion a year earlier. The BSP also committed to tempering the large peso-dollar movements, which is a cue of its readiness to be active in the forex market.
President Marcos himself said his administration’s top priority today is taming inflation as he encouraged monetary authorities to raise interest rates to keep prices in check. Although we operate in a deregulated market, the government can intervene to make sure prices would not go out of control. Hyperinflation is the last thing we need if we really intend to be an upper-middle-income economy in 2023 or 2024.
But I am confident we will overcome the challenges of higher inflation and peso devaluation. We have solid macroeconomic fundamentals that allowed us to post GDP growth of 7.8 percent in the first half of 2022, above the government’s target range of 6.5 percent to 7.5 percent for the whole year.
Ours is a solid and strong economy, one that is far from teetering on recession.