“The weakness in the Philippine peso stems largely from the large twin–fiscal and current account–deficits the economy is running, combined with the elevated inflation that the central bank, the BSP, is trying to tackle,” said Philip McNicholas, Asia sovereign strategist at Robeco Singapore.
The Oil Crisis: Dagger
Middle Eastern conflict, which has been waged since February this year, has caused gas prices to skyrocket in nearly all countries—especially those dependent on the supply coming from the Strait of Hormuz. The conflict has crucially constricted the passage of oil ship and tankers exporting fuel from the region; leading to prices as high as nearly 100 pesos per liter of diesel (as of the time of writing); electricity costs rising; and cost of goods costs’ increasing by 7 percent.
The Oil Crisis has not just affected the direct recipient (the motorist at the pump). The crisis has, in effect, increased logistical costs, which has trickled down to the Filipinos’ cost of living. The rising cost of living has affected the economy, as one, imported goods are more expensive; and another, the average Filipino will see meat, fish, vegetables, and so on, as more expensive. This leads to a retraction in the market seen in the cost of living rising. And so, inflation has seen a spike of nearly 6% this year. Couple this with the strengthening dollar, and the Peso lags behind. The Peso is now 7.6% weaker than it was a year ago.
U.S. Policy, and Tethering to its Performance
“The Philippine peso fell to another record low on Friday, capping a bruising week for the currency as concerns over rising inflation at home threatened to prolong its slide ahead of the US Federal Reserve’s (Fed) next policy meeting.”
As the dollar strengthens and navigates the waters of war, volatility and economic shocks, it only serves to strengthen in comparison to the Philippine Peso. As the imports we introduce to our country are mostly pegged to the U.S. dollar, the condition of the dollar is in inverse correlation with the performance of the Peso. With the Federal Reserve’s proactive approach in maintaining the strength of the U.S. dollar, the Philippines has to catch up in current policy—especially with the Bangko Sentral ng Pilipinas, and the Treasury department, in order to leapfrog from the stagnation that we have faced.
Comparing the Peso to its Peers in Asia
According to Al Jazeera, “The Philippines’ inflation rate stood at 6.1 percent in August, well above regional peers and double the central bank’s target of about 3 percent.”. This shows a structural weakness in the Philippine economy that it is vulnerable to shocks from the external geopolitical landscape. For example, we have lower oil reserves than comparative nations in the ASEAN region—and thus, our reliance on Middle Eastern oil has affected us greater. Our reliance on importation using the dollar has only served to weaken the peso.
According to the Association of Southeast Asian Nations (ASEAN), one of the ways the country can escape its weaking currency is through intra-nation cooperation, strengthening manufacturing, and innovating current industries. This is, in effect, a “de-dollarization” of the country. The Philippines have made big strides towards that; therefore, it could be said that the efforts have cushioned the impact—rather than let it fall, or worse, strike at the very heart of the Philippine Peso.
Remittances as a Cushion
“Remittances, which account for roughly 8 to 9 percent of GDP, provide a powerful stabilizer for the peso and help cushion external shocks. However, they are not a complete shield,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management. Remittances are currently at an all-time high despite the conflicts waging on. Statistics show that remittances have increased, in fact, in the previous months.
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