Philippine Peso in Distress; Nears 12-Year Low on Record Trade Deficit, Lower Reserve Requirements

Posted Feb 20, 2018

It could hardly have been a worse start to 2018 for the Philippine peso.

On Monday, the peso traded at 52.5 per dollar for the first time since the summer of 2006, and year-to-date values show it bettering only the Argentine peso in the list of the world’s worst performing currencies. The peso has lost nearly 5% of its value against the dollar since January 1st.

Further to its losses against the dollar, the peso has tumbled to long-term lows against a host of other currencies, including the euro and yen, against which it is showing year-to-date losses of 8.5 percent and 11 percent respectively. When last seen, the euro was fetching a little more than 65 pesos and the yen bought 0.49 pesos.

The latest catalyst for peso short-selling came last week after the Philippine central bank, Bangko Sentral ng Pilipinas, surprisingly cut the reserve ratio requirement (RRR) for the country’s lenders, albeit by only 1 percentage point to 19 percent – a move which should free up capital, thereby injecting liquidity into the economy.

“The reduction in reserve requirements will help mobilize liquidity in support of economic activity as well as capital market development over the medium term,” a BSP statement said.

The BSP described the decision to trim the reserve requirement as “a more market-based implementation of monetary policy.”

Trade is also weighing on the peso. Earlier in February, the government of the Philippines announced the largest full-year trade deficit on record, at $29.8 billion for 2017, up from 2016’s deficit of $26.7 billion.

The deterioration in the country’s balance of trade has been driven by a surge in imports, say analysts, which are necessary to complete President Duterte’s ambitious infrastructure projects.

The silver lining here, if one can call it that, is that the peso hasn’t disappointed versus expectations. Entering 2018, FX forecasters were predicting rough times ahead for the currency, and this is what they appear to be getting. A Bloomberg survey of analysts in December produced a median year-end estimate for USD/PHP of 51; however, the most bearish forecast came in at 56. Collectively, respondents to the survey believed that the Philippine peso would be Asia’s worst performing currency this year. With this in mind, we can at least say that many FX traders have made decent profits from the peso’s plight.

Looking ahead, there’s not much that will be changing for the peso, thinks ING’s Joey Cuyegkeng.

“The record high trade deficit in December supports the view that PHP’s weakness will also be the norm as the trade deficit widens further,” the Manila-based economist said.

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