Government tweaks forex assumption to P45-48 to $1

By Lawrence Agcaoili (The Philippine Star), Dec. 19, 2016

MANILA, Philippines – Economic managers tweaked the government’s P45-48 to $1 foreign exchange assumption amid the weakening of regional currencies against the greenback due to the much anticipated rate hike by the US Federal Reserve.

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said the government has adopted a more conservative assumption.

“Given the year to date average of the peso against the US dollar we have to be more conservative than the past assumption on exchange rate,” he said.

The inter-agency Development Budget Coordination Committee (DBCC) has projected the peso at P45-48 against the dollar from this year until 2018. The body sets macroeconomic assumptions for budgeting purposes.

Latest data from the central bank showed the peso has depreciated by 4.1 percent averaging P47.38 to $1 between Jan. 4 and Dec. 16.

Guinigundo said the revised foreign exchange assumption would be announced after the DBCC tomorrow.

A weaker peso improves the competitiveness of exporters as well as increases the value of remittances sent home by overseas Filipinos to their loved ones in the Philippines.

However, it negates the impact of falling crude oil prices abroad and could translate to higher pump prices of petroleum products, resulting to higher transport fares and electricity rates.

A weak peso also fuels inflation due to increases in the price of imported commodities including milk, wheat and oil. It also translates to higher debt servicing by the national government as it increases the peso equivalent of foreign liabilities and the amount of pesos needed to buy the foreign exchange required to settle maturing obligations.

The peso briefly touched the P50 to $1 level before recovering to a fresh eight year low to close at P49.95 to $1 last Nov. 23 as the impending interest rate hike by the US Fed in December continued to weigh on the local currency.

The US Fed finally delivered a second rate hike in a decade, raising interest rates by another 25 basis points to between 0.50 and 0.75 percent last Dec. 15. It also sounded hawkish with respect to hikes in interest rates in the near future after it penned three quarter-point increases next year instead of two as of September.

The series of rate increases would be followed by three more rate increase in 2018 and 2019.

The peso, however, strengthened by four centavos to close at P49.92 to $1 last Friday from P49.96 to $1 last Thursday as markets have already priced in the impact of the rate hike.

BSP Governor Amando Tetangco Jr. earlier said market reactions to the US Fed rate hike were not unexpected.

“What will be spoken of more today is the Fed dot plot, which shows a more hawkish Fed than market first expected. But even then market would likely not dwell too much on that because market also knows that those dots do change over time,” he said.