The Philippine peso fell to an all-time low of 62.71 to the US dollar on Friday, extending a decline of about 6 percent since January. The drop reflects higher oil prices and geopolitical turmoil linked to the war involving Iran, alongside fiscal, trade and inflation pressures at home.
What is driving the decline
The peso has broken several records in recent months. It reached 61.847 to the dollar on July 24, then fell to 62.265 last Friday, closed at 62.565 on Wednesday and weakened further on Friday.
The Philippines imported almost all its oil from the Gulf before the war. When Iran’s shutdown of the Strait of Hormuz disrupted supplies, Manila declared a state of national emergency in March. More expensive oil forces Philippine importers to obtain more dollars to pay for crude priced in US currency, increasing pressure on the peso.
Higher yields on US Treasury bonds have also encouraged international investors to move from developing-economy currencies into dollar-denominated assets. The pressure has been compounded by the Philippines’ strained public finances, large trade deficit and elevated inflation. Philip McNicholas, Asia sovereign strategist at Robeco Singapore, described the currency as vulnerable because of the country’s fiscal and current-account deficits and worsening global risk sentiment.
What the weaker peso means for households
Currency depreciation can help exporters by making their products cheaper abroad, and it can support tourism and raise the local-currency value of income sent from overseas. But it also makes imported goods and production inputs more expensive.
The Philippines’ inflation rate was 6.1 percent in August, above regional peers and twice the central bank’s target of about 3 percent. Masahiko Loo of State Street Investment Management said rapid depreciation is especially difficult for an energy-importing economy because it raises import costs and fuels inflation. For additional context, see “Yen reaches one-month high amid Bank of Japan rate speculation”.
The effect is uneven across households. Fuel, transport, food inputs and manufactured goods are exposed to higher import costs, while families receiving overseas remittances have some protection. Ashwin Binwani of Alpha Binwani Capital said the peso could fall past 63 to the dollar if oil remains above $90 a barrel; he also warned that the damage would be greater if currency weakness continues alongside high oil prices and above-target inflation.
What could cushion the pressure
Remittances from more than two million Filipinos working overseas provide an important source of dollars. Filipinos sent home a record $35.63bn last year, according to the country’s central bank. The flows represent roughly 8 to 9 percent of gross domestic product and can cushion external shocks, although they do not fully shield the currency from them.
President Ferdinand Marcos Jr’s administration has pledged to improve fiscal discipline and said it expects the central bank to intervene as necessary to stabilise the peso.
What happens next
The administration’s stated next steps are improving fiscal discipline and relying on the central bank to intervene as necessary to stabilise the currency.
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