Peso-dirham rate headed to Php15

Investors are pulling out of the Philippines and putting their money in the US, which gives higher interest rate. Consequently, the peso depreciates against the dollar.

DUBAI: The peso-dirham exchange rate, which has continuously been moving up since last year and hovering at Ph14.60 as of press time, is headed to Ph15, UAE remittance companies told The Filipino Times, citing factors foremost of which is the US move to hike interests resulting to a struggling peso.

“It is not going to happen overnight…hindi ganuon kabilis (not that fast); maybe early next year if not by the end of this year,” said Edwin Punzalan, Banco de Oro assistant vice president for remittance in the UAE, whose pronouncements in May that the rate will be around Php14.40 to Php14.70 in the next two to three months hit its mark.

“Pwedeng mag-Ph15. It’s highly likely… hindi naman biglaan (not sudden),” said Mo Purple Juachon, Al Rostamani Exchange senior relationship officer.

For his part, Matthew Boast, chief business officer at Wall Street Exchange, said they “expect to see some weakness in the peso in the coming weeks and months,” “However,” he added, “the next significant threshold of Ph14.70 (USD 54) may take some time, maybe until the end of the year.”

The dirham is tied to the dollar. Peso-dollar rate is currently pegged at Ph53.41.

Boast said it all depends on how the Philippine Central Bank reacts to the increased US Federal Reserves interest rate when it convenes on Aug. 9.

“If they take aggressive action, then the picture may change. With this in mind, the current rate still represents great value for home remittances,” Boast said.

The Federal Reserve raised the target range for the federal funds rate by a quarter of a percentage point to a range of between 1.75 percent and 2 percent during its June meeting, said Trading Economics, an online platform providing economic data of some 196 countries.

It added that policymakers have projected two additional hikes by the end of this year.

So, what does the peso have to do with an increase in Feds rate?

Punzalan explained: “Foreign short-term investors pull out of the Philippines and put their money in the US where it will exponentially grow in just a matter of months due to the high interest rate.”

Consequently, he said, “The peso (and other currencies) depreciates against the dollar (which is precisely made stronger by the increased Feds rate).”

This, in turn, depresses the market, Punzalan said.

Another factor, cited by Juachon, is that aside from investors taking their dollars out, the Philippines itself is draining its dollars paying for imports on materials needed for its “Build, Build, Build” infrastructure program.

“Dere-deretso ang import ng Pilipinas. Mas malaki ang lumalabas na dollars pambayad sa imports. Hindi kaya i-sustain ng OFW remittances yung expenses,” Juachon said. (Importation is in full gear back in the Philippines. The amount of dollar being spent on the imports is bigger than that coming in through OFW remittances.)

According to the Philippine Statistics Authority (PSA), the country spent $8.7 billion in April this year for its imports, a figure that was a 22.2 percent year-on-year increase. Remittances, on the other hand, was at $9.3 billion, also according to PSA.

Juachon also said the Philippines has actually yet to secure the soft loans pledged by China, amounting to $7.34 billion. “Agreements pa lang. wala pang finalized,” he said.

Depreciation

Still another factor pointing to a Php15 exchange rate to the dirham are the Philippine economic indicators itself.

According to the World Bank, the Philippine economy is “projected to continue on its expansionary path and grow at an annual rate of 6.7 percent in 2018 and 2019.” But, it said, “inflationary pressure is expected to intensify in 2018 due to domestic and external factors.”

“The Philippine economy is… at risk of overheating,” The World Bank said in an April 2018 report.

This at hand, Budget Secretary Benjamin Diokno recently said the government has adjusted its inflation forecast for the year from 2 to 4 percent to 4 to 4.5 percent, citing findings by the inter-agency Development Budget Coordination Committee (DBCC) which said inflation would likely accelerate faster than earlier expected this year given the rate registered in the first five months.

Second worst performing currency

Signs of overheating have been apparent.

The Department of Finance (DoF) said the Philippine peso was the second worst performing currency among emerging economies in the region during the first half of 2018.

Finance Undersecretary and chief economist Gil S. Beltran has told Philippine media that as of June 28, the peso depreciated by 7.42 percent year-to-date against the US dollar.

This figure, he said, was just a hairline next to the 7.46-percent depreciation of the Indian rupee. The rupee-dollar rate was at INR 68.62 as of press time.

He also hinted that the trade war between the US and several countries among them China, Canada and the European Union, is working to the disadvantage of developing economies like the Philippines.

“The Philippine peso is moving in tandem with global currencies in the ongoing turbulence in financial markets arising from the intensifying trade war (and) the rise in US interest rates,” Philippine media quoted Beltran as saying.

Stock market woes

Exacerbating the situation are the stock market woes being experienced in the Philippines.

Bloomberg said the Philippine Stock Exchange, which it described as “the world’s worst performer this year,” fell to its lowest in April, sending shock waves as

over $20 billion was lost in market value for the country’s benchmark index since the start of the year.