Holiday remittances unlikely to bring peso back to P55 level

By Luisa Maria Jacinta C. Jocson, Reporter

THE EXPECTED INFLOWS of remittances ahead of the holidays may help support the peso against the US dollar, but unlikely to drive it back to the P55-per-dollar level, economists said.

Finance Secretary Benjamin E. Diokno told Bloomberg last week that the government will “act aggressively” and “spend more” to defend the peso from further weakening against the US dollar. The peso will eventually strengthen to P55 by yearend, he added.

“The inflow of remittances during the holidays will help stabilize the peso at a level lower than the P60 mark. The inflow of remittances during the holidays, however, may not be enough to push the peso below the P55 mark,” University of Asia and the Pacific Senior Economist Cid L. Terosa said in an e-mail.

Remittances typically surge before yearend as overseas Filipinos send more money to their relatives in the Philippines.

Cash remittances rose 3% to $20.985 billion in the January to August period. The Bangko Sentral ng Pilipinas (BSP) projects that remittances will grow by 4% this year.

“Remittances are going to support the peso during the holidays and conceivably $10 billion to prop up the country’s gross international reserves (GIR). But this is transitory and is not expected to cover all our foreign currency needs in the future. More importantly, this only creates a continued overreliance on remittances to the detriment of our industry,” Ateneo de Manila University Economics Professor Leonardo A. Lanzona said in an e-mail.

Mr. Lanzona said this may offer “some temporary reprieve,” but the government will have to come up with a domestic policy that “addresses the weaknesses in the real sector and to develop a viable stimulus program that can generate foreign earnings, reduce import-dependency and stabilize the economy.”

On Friday, the local currency ended at P58.75 against the dollar, slightly higher by P0.19 from the previous trading day. For the year so far, the peso has weakened by 15.2% or P7.75 from its P51 close on Dec. 31, 2021.

According to Mr. Diokno, the government will use $10 billion from the expected $15.8 billion in inflows from overseas Filipinos’ remittances and call center receipts to defend the peso.

“I believe the first order of action is to withstand pressures that can weaken the peso further. One effective way to do that is to use our dollar reserves to defend the peso. We still have enough GIR to buy imports for more than 6 months even if we use $10 billion to defend the peso,” Mr. Terosa said in an e-mail.

The latest BSP data showed GIR stood at $93 billion as of end-September, the lowest in two years.

“If the country decreases its foreign reserves and does not change its domestic policies in a way that decreases its demand for foreign currency or increases its supply, then it runs the risk of losing its foreign currency further,” Mr. Lanzona said.

“More importantly, it signals that the government does not have a credible fixed foreign rate. One way to reverse the excess demand for foreign currency is to increase the borrowing rates by raising the demand for the peso, but this is a very difficult policy that can cause the economy to weaken, leading to higher unemployment rates,” he added.

The BSP has raised benchmark rates by 225 basis points (bps) since May in an effort to tame inflation. Its next rate-setting meeting is on Nov. 17.

Security Bank Corp. Chief Economist Robert Dan J. Roces said that further tightening by the local central bank will help keep in step with the US Federal Reserve.

“It will be tough to counter a strong US dollar, even more so with the Fed poised to continue with outsized hikes. But this is the strongest message yet from the government, and it is a sound strategy to intervene more aggressively now, as the dollar will likely peak in the near to medium term and with the inflows from remittances and some slight recovery in exports for the holidays helping shore up the currency,” he said in an e-mail.

Mr. Diokno also mentioned the possibility that the BSP will raise rates by another 100 bps at the last two meetings.

For Mr. Terosa, aggressive rate hikes are a step in the right direction as most central banks are also doing the same to combat inflation.

“If policy rates are not increased, the outflow of dollars may pose more problems for the Philippines in the future. I think the market can still cope with these rising rates because there is still enough growth momentum that can cushion their effects,” he added.

The Federal Reserve is set to approve another large interest rate increase in its November policy meeting, Reuters reported.

Investors are anticipating the US central bank to raise its overnight interest rate to a range of 3.75% to 4%. Since March, the Fed has raised key rates by 300 bps.

Mr. Roces said that the Fed will likely reach its peak rate in the first quarter next year, which will help ease the pressure on the peso.

“The strategy as espoused by Mr. Diokno should buy the central bank some time and help slow the depreciation if not stabilize the peso,” he added.

Meanwhile, Calixto V. Chikiamco, Foundation for Economic Freedom president, cautioned that increasing interest rates to keep up with the Fed can “destroy domestic demand at a time when the economy is still recovering from the pandemic.”

Analysts said there is a need to deploy other measures aside from monetary tightening to push down the peso.

“I believe that there should be forms of intervention in the foreign exchange markets so that monetary policy isn’t held hostage to short-term capital movements. The BSP can apply many tools short of strict capital controls,” Mr. Chikiamko said in a Viber message.

He cited administrative requirements on overseas remittances, regulating the overbought positions of banks, selling dollars in the open market, and a form of turnover tax as some examples.

“The source of inflation in the Philippines isn’t excess demand but supply shortages, particularly in food. Higher interest rates won’t address this supply shortage…what the government should do is to liberalize food importation instead of trying to weaken demand through higher interest rates,” Mr. Chikiamco added.

Another strategy to taking advantage of the weak peso is by ramping up high-quality exports, Mr. Terosa said.

“Aside from raising interest rates to attract dollar inflows, we should continue to fight inflationary pressures to make exports more competitive and to pursue productivity-enhancing supply-side policies to increase long-term competitiveness. The task of making the Philippines more attractive to foreign investors and foreign visitors should be relentlessly pursued,” he added.

Security Bank’s Mr. Roces said the government should also promote international tourism to add to inflows.

“Our tourism sites remain competitive and the peso will benefit from revenge travel consumption from international tourists,” he added.

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