Broadly speaking, it could hardly have been a worse start to 2018 for the Philippine peso.
On February 19th, the peso traded at 52.5 per dollar for the first time since the summer of 2006 and current year-to-date values (to March 4th) show it bettering only the Argentinian peso in the list of the world’s worst performing currencies.
Despite a modest recovery in the past fortnight and recent consolidation around an exchange rate of 52.0 per dollar, the peso remains 4% lower against the greenback than it was on January 1st, which is difficult to believe given the US currency's own widely-reported struggles this year.
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 6% and 11% respectively. When last seen, the euro was fetching a little less than 64 pesos and the yen bought 0.49 pesos.
The latest catalyst for peso short-selling came in mid-February after the Philippine central bank, Bangko Sentral ng Pilipinas, surprisingly cut the reserve ratio requirement (RRR) for the country’s lenders, albeit by only a single percentage point to 19% – 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. 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 weakness will be the norm as the trade deficit widens further,” the Manila-based economist said.