The Philippines should take action to make the peso more competitive after inflation, New York City Research said, providing monetary authorities with room for maneuver.
“We believe the Philippines should consider more competitive exchange rates. Although this poses risks, the country’s improved external positions and lower structural inflation provide a buffer.”
“The weaker pesos can boost exports, attract investment, and support a growth shift to productivity-led leadership,” it said.
The peso has been trading at the p55 level since the end of April.
ANZ points to previous periods of overvalued PESO in the 1980s and 1990s, which affected manufacturing.
“The tradeable commodity industry is disproportionately affected – exports relying on import inputs (e.g., semiconductors for parliament) perform better than those relying on domestic inputs,” it said.
It added that this led to a sharp decline in the domestic industry as a real appreciation of the currency makes imports cheaper.
“Electronics that rely on import inputs have also suffered losses, but have better performance than traditional manufacturing industries that usually have deeper local connections.”
It also cites the widening of the Philippines’ real effective exchange rate gap relative to its neighbors since 2004, which “signs a persistent loss of relative competitiveness, thereby enhancing the need for a more balanced exchange rate.”
“Plus challenge is an overestimated peso, especially in the case of weak productivity.”
It said that traditional currency fair value models show that the peso has been overvalued since 2019, damaging export competitiveness – especially for industries that rely on domestic input.
ANZ said correcting overvaluation, or even just “pursuing mildly undervaluation when possible” would benefit the economy. ”
“A growth model of consumption and imports relied on labor exports and remittance funding has inhibited the transition to higher productivity over time.”
It added: “Two key drawbacks of pursuing weaker real exchange rates are increased costs of foreign debt and import inflation.”
If Bangko Sentral Ng Pilipinas (BSP) chooses to underestimate PESO, sufficient foreign exchange reserves are needed.
“Nevertheless, further accumulation may not necessarily be excessive. Higher foreign exchange reserves will make it easier for BSPs to stabilize exchange rates in the event of adverse external events.”
International reserves are mainly stable, with more than US$100 billion in trademarks.
“It is not uncommon for emerging market monetary policies to be bound by hawkish development in developed economies,” said ANZ.
“BSPs often have difficulty responding adequately to the domestic business cycle during policy tightening in developed economies. Higher levels of foreign exchange reserves will enhance their ability to focus on the domestic growth inflation mix.” – Luisa Maria Jacinta C. Jocson
