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Central bank seeks to calm nerves frayed by peso weakness, says no ‘free fall’ in sight

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THE RECENT WEAKNESS of the peso should not cause alarm among investors, the country’s central bank chief said over the weekend, pointing out that the monetary authority is armed with ample funds to stabilize the currency as it hovers near an 11-year low.

Espenilla
Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr.

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. sought to temper pessimism towards the peso after it breached the P51-to-a-dollar level during Friday’s trading before closing P50.98 against the greenback, its weakest value since a P51.05 finish on Aug. 29, 2006.

“The peso is market-determined. It’s natural for it to show volatility as it adjusts to market conditions and all the short-term uncertainties such as increased tension in North Korea,” Mr. Espenilla said in a text message to reporters on Sunday.

“We don’t expect it to do a free fall because our economic fundamentals now — unlike before — are solid and very strong.”

Traders last week attributed the peso’s depreciation largely to worsening tensions between the United States and North Korea that have sent investors scampering for cover away from most Asian currencies, except the yen.

Last week, US President Donald J. Trump threatened North Korea with “fire and fury” after Pyongyang announced it planned to lob missiles over Japan at waters around Guam.

Ms. Espenilla signaled confidence that the currency’s weakness is temporary, pointing out that the central bank can manage sharp exchange rate swings.

“The peso is capable of correcting itself as the market calms down and digests the relevant information,” Mr. Espenilla said.

“Moreover, BSP will always be there strategically if volatility is considered excessive,” the central bank chief added, explaining: “We have a huge pile of foreign currency reserves to play an effective stabilizing role.”

The country’s dollar reserves totaled about $80.787 billion in July — the smallest amount in seven months but still enough to cover 8.6 months’ worth of import payments, well above the three-month global standard.

The central bank sometimes uses reserve funds to influence daily peso-dollar trading by buying more of the local currency in order to temper steep movements.

‘NOT OVERHEATED’
Mr. Espenilla also addressed mounting concerns over the Philippines’ widening current account deficit which analysts said has been putting pressure on the local currency, attributing the gap to the acquisition of more capital equipment related to business expansion and the government’s infrastructure push.

“It’s natural for it to run moderate current account deficits. In fact, it’s sub-optimal for it to be persistently running current account surpluses. That’s like the equivalent of deploying our own savings to the world instead of using those internally to finance our own investment needs,” the BSP chief explained.

Saying that the economy is “doing well and… is not overheated”, Mr. Espenilla said the central bank remains “vigilant”.

“Let’s calm down. We’re on the right track.”

The country’s economic managers expect the peso to range between P48 and P50 to a dollar this year and in 2018.

The peso averaged P50.0263 against the greenback in the seven months to July, according to central bank data.

The country posted a $318-million current account deficit in the first quarter, equivalent to 0.4% of gross domestic product.

That compares to a $600-million deficit expected by the central bank for the full year, reversing from 2016’s $601-million surplus.

WEAKNESS EXPECTED TO PERSIST
In a research note on Friday, analysts at the Singapore-based DBS Bank said the central bank’s decision to keep its monetary policy stance unchanged last week “indicated its tolerance of a softer currency,” as it realized that strong import demand will be sustained.

“While the peso has been the worst performing unit in the region, the BSP expects the depreciation trend to continue,” DBS said.

“As it is, there was no strong suggestion that the BSP is about to hike rates anytime soon in a bid to slow down the depreciation of the peso.”

The central bank’s policy-setting Monetary Board maintained benchmark interest rates and banks’ reserve requirement steady on Thursday last week in the face of firm domestic demand and manageable inflation, with price increases seen to remain within the 2-4% target band annually until 2019. — Melissa Luz T. Lopez

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