You win some, you lose some in the peso battle

By means of Aaron Michael C. Sy, News reporter

The steady decline of the Philippine peso against the dollar – a record low in almost two years – is no longer a black-and-white story in which exporters and other dollar earners gain and big corporate borrowers suffer big losses.

The same can be said about the Bangko Sentral ng Pilipinas (BSP) steady move towards monetary easing in the coming months for the first time since November 2020, raising the question of who will win and who will lose once the rate cuts are finally implemented. Delivered.

Take the case of Mega Prime Foods, Inc., a leading brand of sardines and other canned seafood products that is now forced to manage costs and investments more intensively because its packaging, raw materials, finished products and other key capital expenditures are denominated in foreign currencies.

“We are unhedged in terms of our revenues and expenses,” CEO Michelle Tiu Lim-Chan said in a Viber message. “On the other hand, it is better for our export activities, but our main source of income is the domestic market.”

Tricia Anna Enriquez, a 25-year-old freelancer based in Manila, is earning P1,000 ($17) more every week as the peso, which has lost more than P3 against the dollar this year, continues to depreciate.

“The dollar is strong, so I’m making a lot more now,” she said Business. “My usual income of €15,000 per week is now €16,000.”

The peso closed at P58.305 per dollar on Thursday, up 1.5 centavos from P58.32 per dollar on Wednesday. This was the peso’s strongest finish in more than a month or since its close of P57.97 on May 28.

Since May, it has traded at the P58 dollar level, a weakness that the Philippine central bank has attributed to demand for the dollar as a safe haven amid geopolitical tensions and hawkish signals from the US Federal Reserve.

John Paolo R. Rivera, president and chief economist at Oikonomia Advisory & Research, blames the dollar’s strength on the Fed, which has kept interest rates high for two decades amid stubborn inflation.

“This will benefit exporters and Overseas Filipino Workers (OFWs) and those who earn foreign exchange as their dollar earnings now have more value in pesos,” he said in a Viber message.

The BSP’s signals of early policy easing ahead of the Fed have led to further depreciation of the peso, Leonardo A. Lanzona, an economics professor at Ateneo de Manila University, said in an email.

“Indeed, the value of the dollar has strengthened, but the immediate effect of a future rate cut here, even before the Fed has cut rates, appears to have done more damage,” he said.

The BSP would likely cut its policy rate after the U.S. Federal Reserve indicated that rates might not start easing until December, Treasury Secretary Ralph G. Recto said earlier.

Mr Recto, a member of the BSP’s policy-setting Monetary Council, expects as much as 150 basis points (bps) in cuts over the next two years.

On the other hand, BSP Governor Eli M. Remolona Jr. already announced a rate cut in August – possibly before an easing by the Fed. Total rate cuts could reach 50 basis points this year, he said.

The Monetary Board has kept its benchmark interest rate steady at a 17-year high of 6.5% since October 2023, following 450 basis point rate hikes to dampen prices.

Jonathan L. Ravelas, senior advisor at Reyes Tacandong & Co., said rising maritime tensions between the Philippines and China are adding to peso jitters.

Local importers are clearly hurt by the weaker peso because their purchases are largely denominated in dollars, while exporters benefit because their products are now worth more, he pointed out.

TWO-EDGED SWORD
While this is true, the benefits for exporters are far from equal.

“Exporters that generate more local value-added are expected to reap greater benefits,” Trade Undersecretary Jose Edgardo G. Sunico said in a Viber message.

These include commodity and service exporters, such as companies in the information technology, business process management and tourism sectors, he added.

“The impact of a weaker Philippine peso on exports varies from sector to sector,” Sunico said.

Exports should benefit as Philippine goods and services become more price competitive, but goods and services that rely heavily on imported raw materials and inputs would benefit less, he added.

“Business prospects will be affected by these market dynamics, with exporters remaining optimistic about growth while import-dependent industries are more cautious about the economic challenges posed by a weaker peso,” Mr Sunico said.

While importers are likely to be hit by the devaluing peso, they are far from helpless, Sergio Ortiz-Luis Jr., president of the Philippine Exporters Confederation, Inc., said by phone.

Philippine importers, especially in the agricultural sector, are now trying to use local commodity substitutes to soften the blow from the strong dollar, he said.

“So their consumables will be imported less [components]” he said in mixed English and Filipino.

The persistent weakness of the peso could also be a double-edged sword for Filipino families who rely on a relative working abroad.

A strong dollar means more value in the remittances sent by OFWs, Ellene A. Sana, executive director of the Center for Migrant Advocacy, said by phone.

But they could also end up sending fewer dollars, given the higher peso value of these transfers, Mr. Ravelas said.

OFWs’ remittances rose 3.1% year-on-year to $2.562 billion in April – the fastest since December but the lowest in 11 months, according to BSP data. Month on month, remittances fell by 6.4%.

The peso devalued by P1.52 against the dollar that month.

OFW families, like most Filipinos, are clearly experiencing rising prices, including food.

“Inflation is rising faster compared to the weakening of the peso, so the impact on OFWs could still be negative,” Ms Sana said.

“If you send the same amount of dollars, the peso value may be higher, but it produces less goods,” she said.

Despite optimism about remittances due to the strength of the dollar, OFWs are still wary of persistent inflation, Ms Sana said.

Inflation fell from 3.9% in May to 3.7% in June, still within the BSP’s annual target of 2-4%. In the first half this averaged 3.5%.

“You have to connect it to the end user of the money. Your end user, who is in the Philippines, finds inflation problematic,” Ms. Sana said.

Mr Lanzona said local businesses are more exposed to the weak peso.

“This group has been among the most active providers and borrowers of dollar-pegged instruments over the past decade, either by choice due to lower costs or by necessity given the [limited] size of domestic financing sources,” he said.

While companies in other Southeast Asian countries are resisting the dollar, local companies large and small are facing difficulties in expanding production or exports and are failing to benefit from the depreciation, he added.

The peso would likely continue its free fall in the coming months due to inflation and weakening demand for domestic funds, which could force the BSP to intervene in the foreign exchange market, the economist said.

It could also keep interest rates high, which could slow economic growth, which should be 6-7% this year, he pointed out. The Philippine economy grew 5.7% in the first quarter, slower than expected.

Mr. Ravelas expects continued peso weakness until the Fed finally begins its easing cycle.

The peso was likely to end the year at P58 as it is boosted by remittances during the Christmas holidays – still weaker than the P55 to P56 levels reached at the start of the year.