MANILA, Philippines - The peso is losing its competitiveness as a currency with its steady rise, adversely affecting the dollar earnings of the export and business process outsourcing (BPO) sectors, an investment bank said.
The real effective exchange rate takes into account the effect of inflation on trimming the value – in effect, the purchasing power – of the currency.
“Accordingly, this also constitutes an erosion of competitiveness. The performance of the export sector in the coming quarters will bear watching,” DBS economist Eugene Leow said in the report.
Tagged as Asia’s second best-performing currency last year, the peso has appreciated by 6.8 percent against the greenback in 2012, data from the Bangko Sentral ng Pilipinas (BSP) showed. The local unit also started this year with a bang, achieving a 58-month high of 40.77 last Thursday.
In a speech late last week, BSP Governor Amando Tetangco Jr. reiterated that the peso, which closed at 40.91 versus the dollar on Friday, remained competitive despite saying that the central bank will continue buying more dollars to temper its strength.
“We are looking at what is happening on exchange rates of other countries… Based on that, the peso has remained within the middle of the range of currencies in the region,” Tetangco said.
Leow agreed with this, but warned that the continued currency strength beyond current levels may prove to hurt export and BPO sectors. A strong peso also slashes the value of dollar remittances from overseas Filipinos.
“Broadly speaking, I think the Philippine economy is still competitive. But further strength from these levels may place strains on sectors such as the BPO and manufacturing,” Leow said in an e-mail.
“BSP’s recent moves are considered to be relatively mild, more stringent forms may be required if inflows persist,” he said, pertaining to central bank regulations unveiled last year targeted at tempering capital inflows.
Leow cited some of those measures in his report: the ban on foreign funds in special deposit accounts (SDA), the succeeding lowering of SDA interest rates, both in July; and the cap on non-deliverable forwards for banks announced last month but will only take effect in March.
“These measures come on top of the accumulation of foreign reserves and foreign reserves forwards over the past year,” he pointed out. Dollars bought by BSP normally pile up in the country’s foreign reserves.
“All these reflect increasing concerns on the strength of the peso from a competitiveness perspective,” he added.
In the e-mail, Leow said: “Peso strength can help to mitigate inflationary pressures. However, this has got to be balanced against competitiveness.”