Bad news for the peso

Amelia HC Ylagan

President Rodrigo Duterte’s first year in office was unfortunately marked by a devalued peso, which fell by 7.33% to P50.53 to the US dollar as of Friday June 30, from P47.08 on June 30, 2016 (, 07.01.2017).

When the peso declined five percent in September 2015 following China’s devaluation of the yuan, the Bangko Sentral/National Treasury “adopted a managed float that swung through changes in investor sentiments, rather than a dollar peg that is harder to defend in times of distress (The Philippine Star 09.15.2015).” The entire Association of Southeast Asian Nations (Asean) has learned their lessons from the Asian financial crisis of 1997/1998 and the global financial crisis of 2008/2009 as they watched debt service and maturities vis-à-vis foreign exchange reserves, and diluted the effects of currency depreciations (Ibid.).

The exchange to the dollar had been below P48 for many years in the peso’s managed float (from 1993 to present) as it maintained price stability to sustain economic growth while keeping the peso convertible in a changing and increasingly interdependent world economy (The Philippine Star, 10.31.2016). But even a weak peso has both positive and negative effects on the Philippine economy, according to BSP Deputy Governor Diwa C. Guinigundo (, 09.09.2015). While certain sectors, such as exporters, overseas Filipino workers (OFWs), and the business process outsourcing (BPO) sector, would benefit from a cheaper peso, it would at the same time make imported fuel, raw materials, and other imported goods more expensive (Ibid.).

Leonor Briones, former National Treasurer and at that time back-to economics professor at the University of the Philippines (now incumbent Secretary of the Department of Education under President Duterte) said that the depreciation of the peso is “double-bladed” for the reasons cited by Guinigundo, adding that the government would need more funds to pay for the servicing of the country’s foreign debts which are denominated in US dollars (Ibid.). That September in 2015, the peso plunged to P46.93 pesos to the US dollar, its lowest level in more than five years (Ibid.)

But after just more than a year, the peso broke the critical level of P48/$1 and dived to a seven-year low. The peso was the worst performing currency in Asia vs. the US dollar, which was strengthen ing with the prospects of Fed rate hikes in December. The September depreciation of 4.1% was the worst monthly performance since October 2000, at the height of the political crisis during former President Joseph Estrada’s term. The peso was at its weakest in 16 years. (The Philippine Star, 10.31.2016).

Columnist Wilson Sy analyzed whether the peso is weak on its own or a victim of the US dollar’s strength. He concluded that “contrary to popular notion, the peso’s drop in September was not due to a strong dollar. In fact, the peso was a victim of its own weakness (Ibid.).” Foreign funds became jittery due to negative headlines, and pulled out. The peso weakness caused stock prices to fall, bond yields to go up and credit default swaps to rise. Foreign funds flying out and Philippine asset prices plunging across the board prompted investors to reduce their exposure to the Philippines even more, causing the currency to depreciate further (Ibid.). It was barely three months into President Duterte’s incumbency.

Foreign media was more vocal than local media in tying up the depreciation of the peso to Duterte. “The firebrand Duterte, who is often compared with Trump, has sparked concerns in markets not just for his erratic outbursts, which have included threatening China with a ‘bloody’ confrontation over disputes in the South China Sea (note: Duterte position pivoted 180 degrees as he now avoids clashing with China), but also for pursuing a ‘law-and-order’ agenda that has been blamed for a surge in extrajudicial killings. Murders allegedly have been ordered by the Philippine president during his tenure as mayor of Davao city (CNBC 09.27.2016.).”

Ratings agency Standard & Poor’s affirmed its BBB long-term rating on the country but made a significant inclusion: “We believe this could undermine respect for the rule of law and human rights, through the direct challenges it presents to the legitimacy of the judiciary, media, and other democratic institutions. When combined with the president’s policy pronouncements elsewhere on foreign policy and national security, we believe that the stability and predictability of policy making has diminished somewhat (Ibid.).”

The ratings agency’s warning spooked markets, Joey Cuyegkeng, senior economist for Asia at ING, said: “To make such concern an ‘official concern’ reinforced market’s guarded disposition (Ibid.).” Duterte (reportedly) responded with a profanity-laden speech complaining about ratings agencies and promising to create alliances with China and Russia (Ibid.).

And so on June 30, at the close of Duterte’s one year in office, the peso tumbled to around P50.5, threatening to go to P51 (, 07.01.2017). It must have been seen coming, as core inflation rate increased 2.90% in May 2017 over the same month in the previous year, from a record low of 1.40% in September of 2015. Was all the monetary/economic upheaval some market risk-reaction to the declaration of martial law in Mindanao on May 23, and the reported growing numbers of killed, the estimated massive property, and moral damage to the country and to the people?

Outgoing BSP Governor Amando Tetangco said in May that it (martial law) was a “decisive move” for Duterte. “The main objective is to improve security as well as peace and order situation which should lead to even greater confidence down the road,” Tetangco told reporters (ABS-CBN News 05.24.2017).

Good news bears for the Philippine peso? So we pray.