Manila: The Philippine peso weakened further against the US dollar on Friday, November 15, 2024, closing at 58.81 pesos vs the greenback.
It’s the lowest level since October 2022, when it hit a record low of 59 pesos, according to the latest data from the Bangko Sentral ng Pilipinas (BSP).
While a weaker peso means overseas Filipino workers (OFWs) can send home more pesos for the same amount of dollars, benefiting their families with higher remittances, it also leads to rising costs for imported goods and services, making everyday items more expensive for local consumers.
In July, economist Shi Cheng Low, a country risk analyst at BMI Country Risk & Industry Research, predicted that the Philippine peso could weaken to Php60:$1 if the Bangko Sentral ng Pilipinas (BSP) decided to cut borrowing costs.
The forecast came ahead of the BSP's August meeting, where the central bank opted to lower interest rates.
When Php59:$1 threshold was hit in 2022, the BSP defended the local currency aggressively through active intervention.
The peso is seen potentially sliding to 60:$1 following the easing of policy rates, which often comes at the expense of currency stability.
Rate cuts
The BSP announced a 25-basis-point rate cut on August 15, 2024, expressing concerns that the current high interest rate environment might excessively dampen demand, leading to an "unnecessary" loss in economic output.
The BSP's August rate cut signals a shift in priorities, favouring economic growth. On October 16, 2024 the BSP's Monetary Board cut interest rates on overnight deposit and lending facilities further to 5.50 percent and 6.50 percent, respectively. The decision was based on the board's assessment that inflation pressures remain "manageable".
Undervalued?
While this move could stimulate investments in the fourth quarter, aiding the economy, it also introduces added depreciation pressure on the peso, already one of the weakest-performing currencies in the region.
While the actual exchange rate is 58.81 pesos per dollar, it indicates the peso is undervalued by about 49 per cent. As of July 2024, the price of a Big Mac in the US is $5.69; in the Philippines, it costs Php161. This price difference implies an exchange rate of around 29 pesos per US dollar.
The Economist’s "Big Mac Index" uses this comparison based on the theory of purchasing power parity (PPP). According to PPP, exchange rates should eventually adjust so that the same basket of goods and services costs the same across different countries.
This index provides a lighthearted yet insightful way to gauge whether a currency is overvalued or undervalued relative to the US dollar.
