See More on Facebook

Economics, Opinion

Falling peso, rising economy?

The depreciation of the Peso is not necessarily a cause for concern.


Written by

Updated: June 22, 2018


Is the falling value of the peso a sign of bad management of the economy? Does it signal a worsening economy ahead, and worse conditions for our people, especially the poor?

In the past, the peso-dollar exchange rate would jump when larger-than-usual dollar outflows would result from lumpy foreign payments, as when our oil companies imports. A more steady rise in the exchange rate would be traced to sustained dollar outflows, as when capital exited the country because of push (domestic political trouble) or pull (better yields elsewhere) forces.

So when I started writing my last piece on the history of the falling peso, I sent a message to Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo, a London School of Economics-trained economist, asking which of the above might be behind the latest trends. Given his busy schedule, I would have been happy with a one-liner reply, but even while on an overseas trip, he obliged me with a copious response, which I paraphrase below.

It need not unduly alarm us that the peso is depreciating, he wrote. The latest currency movement simply reflects the fundamentals of our growing economy. The stronger outflow of foreign exchange at this time actually reflects three positive trends.

First, imports continue to surge, feeding the input requirements of our fast-growing economy, including the massive “Build, Build, Build” infrastructure push of the government. Second, Filipinos’ investments abroad are on the rise. Companies like Jollibee and Manila Water, for example, continue to expand their reach overseas, cashing in on moneymaking opportunities in the growing global economy. Third, much of the country’s foreign loans are deliberately being prepaid to avoid rising interest rates.

All these are now exerting additional demand and pressure on the local currency. We should be more scared, he pointed out, when these fundamental forces are not reflected in the movements of the peso (such as if the BSP intervenes too heavily in the market by buying or selling large amounts of dollar reserves). If the exchange rate is artificially insulated from such natural market forces, we run the risk of building up too much pressure to the point of getting large, discrete and destabilizing movements on the rate.

Reading reports of the BSP’s falling (but still very high) levels of foreign reserves, I could tell that it is selling dollars to smoothen currency movements, but not preventing it from following the natural direction dictated by the forces just cited. The bad news, as I’ve written before, is that we’ve been unable to grow our exports like our neighbors are doing; this could otherwise help arrest a longer-term depreciation trend.

Deputy Governor Guinigundo also pointed out that, in assessing the peso situation, the time frame of analysis matters. If we look at recent weekly movements, the peso indeed appears to have bucked the trend of most currencies in the region. But a five-year comparison shows us to be in step with the overall depreciation of regional currencies.

An even more meaningful assessment would consider the real effective exchange rate, tracking the peso’s movement relative to a basket of currencies of our most important trading partners, adjusted for inflation differentials. Based on this measure, he pointed out, the peso has been broadly stable because its nominal depreciation has been coupled with lower inflation in the last few years, thus keeping our exports competitive.

Finally, Mr. Guinigundo said that the pass-through effect of the exchange rate to inflation is now weaker, based on BSP tracking since it shifted to inflation targeting (vs. exchange rate targeting in the 1990s) in 2002. This means that the economy has become more efficient and competitive, thereby moderating the exchange rate movements’ impact on domestic price levels. Thus, while the falling peso helps exporters and their workers, along with families dependent on remittances from abroad, it would not hurt the rest of us as much as it would have before, via higher inflation.

Fear not, then: The falling peso doesn’t mean the economy is falling, too.



Enjoyed this story? Share it.


Philippine Daily Inquirer
About the Author: The Philippine Daily Inquirer is one the country’s most credible and influential newspapers with over 500 awards and citations.

Eastern Briefings

All you need to know about Asia


Our Eastern Briefings Newsletter presents curated stories from 22 Asian newspapers from South, Southeast and Northeast Asia.

Sign up and stay updated with the latest news.



By providing us with your email address, you agree to our Privacy Policy and Terms of Service.

View Today's Newsletter Here

Economics, Opinion

In Indonesia, a nation of voters won’t be swayed

Change no longer the rallying cry in Indonesia. When Joko Widodo first ran for president in 2014, Indonesia was in the mood for change. Everything about Mr Joko then was about hope and change: his path to power, his man-of-the-people image, his focus on services. A businessman selling furniture in Solo, he was not part of the Jakarta political elite and triumphed at the polls as an outsider candidate. Leaving aside whether Mr Joko has delivered on his promises or what one might think about his opponent Prabowo Subianto, what is striking today is that change is the furthest thing from voters’ minds. If the projections from the pollsters hold up, then the results of 


By The Straits Times
April 18, 2019

Economics, Opinion

IMF to visit Pakistan in April

IMF says its mission will visit Pakistan ‘before end of April to continue constructive discussions’. The International Monetary Fund (IMF) on Monday said that it held “constructive discussions” with Pakistani authorities during last week’s spring meetings in Washington and that its mission will be visiting Pakistan “before the end of April to continue the discussions” on a bailout package. The announcement was made by the Office of the Resident Representative of the IMF in a press release following reports that the IMF mission’s visit of Pakistan for finalising the package may be delayed as both sides are still engaged in an intense discussion. “The Pakistani authorities and IMF staff held constructi


By Dawn
April 16, 2019

Economics, Opinion

Malaysia avoids termination fee by renegotiating rail deal

The Chinese-Malaysian venture will go ahead. The government decided to go back to the negotiation table on the East Coast Rail Link (ECRL) project because its termination would cost RM21.78bil with “nothing to show for it”, says Prime Minister Dr Mahathir Mohamad. Dr Mahathir said in renegotiating the project, the government called for a more equitable deal, where the needs of Malaysians would be prioritised. He explained that the Pakatan Harapan government’s main objection to the ECRL project was based on the way and speed at which the original contract was negotiated and signed in 2016. “It was unjustified, a hefty lump sum price which lacked clarity in terms of technical specifications, price, and, by extension, economic justification.


By The Star
April 16, 2019

Economics, Opinion

China and Central European countries agree to boost ties

China and the Central and Eastern European Countries (CEECs) on Friday agreed to enhance connectivity to achieve more development. The agreement was part of the Dubrovnik Guidelines for Cooperation between China and the CEECs, which was released after the eighth China-CEEC leaders’ meeting in the Croatian city of Dubrovnik. According to the guidelines, China and the CEECs are willing to promote railway projects cooperation in line with respective laws and regulations and through consultations, in particular by strengthening exchanges and cooperation on railway planning, railway organization development, management, technology development, logistics and freight terminal construction. China and the CEECs will jointly explore utilization and construction of logistics hubs, said the guidelines, adding that China is welcome to participate in joint development of new freight lines in connecting markets


By China Daily
April 15, 2019

Economics, Opinion

Seoul calls on Washington for auto tariff exclusion

Finance minister meets with US counterpart over trade, FX agendas. South Korea’s Deputy Prime Minister and Finance Minister Hong Nam-ki has asked the US government for an exemption from a new tariff on imported vehicles, the Ministry of Economy and Finance said Sunday. He also met with representatives of major credit ratings agencies, to persuade them to reflect the peninsula’s eased geopolitical risk in their upcoming sovereign rating adjustments. The fiscal chief met US Treasury Secretary Steven Mnuchin on Saturday, on the sidelines of the Group of 20 finance ministers and central bank governors meeting in Washington last week. This was the first face-to-face encounter between the two since Hong took office in December. “I sat with Secretary Mnuchin in a 30-minute, close-door meeting without any attendees,” Hong told reporters.


By The Korea Herald
April 15, 2019

Economics, Opinion

Managing Pakistan’s slowing economy

The government will find it challenging to keep Pakistan afloat. In case you’ve missed it, there have recently been a slew of forecasts that say the economy is likely to slow to less than 3.5 per cent GDP growth this year (from 5.8pc last year), and next year will be even more difficult as it is expected to contract further to 2.5pc or thereabouts. The World Bank has put these projections out most recently, but the State Bank agrees (though they have not put out any projection for next year at this stage), and the data that the government and the IMF are dealing with during their talks says more or less the same thing. Meanwhile, inflation is set to rise further for a few months, crossing 13pc, as per the World Bank, before it stabilises. The IMF and government projections show inflation to be elevated all thr


By Dawn
April 12, 2019