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Resilient remittances and dollar inflows from higher exports are likely to support the Philippine peso in the months ahead. Image Credit: Reuters

Dubai: The Philippine peso dropped to its lowest level in a year last week and faces continued pressure amid a spike in imports and oil prices, but the currency is likely to rebound as exports pick up.

Peso is facing rising pressures for increase in import driven demand for dollars. The currency sank 0.4 per cent on Friday against the dollar from the previous day to cap the week at P50.08.

Against the UAE dirham the unit traded at 13.68 on Friday, the lowest in a year offering favourable exchange rates for Filipino expatriates.

The peso’s weakness against the dirham is the result of the UAE currency is peg against the dollar.

The peso opened on Friday at P50.1 a dollar before falling to an intra-day low of P50.17 against the greenback.

The Philippine currency has lost 4.2 per cent since the beginning of this year making it the worst performing Asia currency.

Higher imports following the easing of COVID-related curbs has sent the demand for dollar soaring. The widening trade gaps are likely to result in further weakness of the currency.

Additionally, rising crude oil prices, a major component of the country’s imports and strengthening of the dollar are also resulting in downward trajectory of the currency.

Inflation threat

Rising commodity prices, especially oil is likely to push up domestic inflation that will be a major worry for the Bangko Sentral ng Pilipinas (BSP), the country's central bank in the months ahead.

The BSP is likely to face a monetary policy dilemma on whether to continue a loose monetary policy to support the pandemic-impacted local economy or target the rising inflationary threat. A weakening peso is also likely to inflate the foreign debts of the government and exacerbate the currency weakness, that could force the central bank to act.

Resilient remittances

The silver lining in the peso’s weakness is that it is likely to boost remittances of Filipino expatriates as they take advantage of the favaourable exchange rates, adding to the forex reserves of the country.

Cash remittances from Filipinos working overseas was unaffected by the pandemic with the inflows totaling $29.9 billion last year. A marginal fall of 0.8 per cent year on year beat all forecasts including that of the Asian Development Bank, which had projected a fall of up to 20.2 per cent. The Philippine central bank initially projected a 5 per cent decline, before tempering it to a 2 per cent contraction.

The central bank data showed, in 2020, remittances from the US, which comprised nearly 40 per cent of the total, as well as from Singapore, Canada, Hong Kong, Qatar, South Korea and Taiwan grew while those from Saudi Arabia, Japan, the UK, UAE, Germany and Kuwait dropped, according to the central bank.

The central bank expects that combined with the resilient remittances, dollar flows into the Philippines from overseas will post a bigger surplus this year than initially expected as exports start to recover.

BSP revised their latest estimated balance of payments (BOP) surplus for 2021 to $7.1 billion or 1.8 per cent of gross domestic product (GDP). This is higher than the full -year projection of $6.2 billion set by the Monetary Board last March, but substantially lower than the record high $16-billion BOP surplus for the whole of last year, when the economic slump crimped imports and investments.