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The Case of a Weaker Peso

by Tony Dumlao
31 Jul 2017 | 2:10 PM

News of financial markets going haywire have been printed on newspapers the world over.

When Federal Reserve Chairman Ben Bernanke said the US central bank might ease economic stimulus on stronger signs of US recovery, a lot of foreign investors started betting on higher interest rates in the land of milk and honey.

Foreign dollar-denominated funds flocking emerging markets (like the Philippines) for better yields since the 2008 financial were withdrawn and were put back in US instruments.

As such, regional stock markets plummeted and emerging currencies including the peso weakened against the greenback.

From being one the best performing currencies in the region, the peso erased annual gains and sank to the 43 per dollar level from the 41 territory earlier this year.

The peso's weakness can largely be attributed to the law of supply and demand. When rates in the US fell, investors turned to emerging markets like our,s flushing the financial system with dollars and making the greenback cheaper in peso terms.

But with dollar withdrawals prospects of increasing rates in the US, less dollars in the system means it is more expensive to buy it in peso terms.

Peso outlook: boon or bane?
 

Most of us may ask is the outlook for the peso still rosy? Would a trip overseas cost you more in peso terms next year than it did a year ago? Will my dollar account finally earn in pesos terms? What should I expect?

Most bank analysts now forecast the peso to be weaker than last year (Read: they think you now need more pesos to buy dollars).

The best example for this paradigm shift is Goldman Sachs, a top US-based global financial institution.

Goldman Sachs, which had one of the strongest forecasts for the peso at 37.50 per dollar by year-end, now sees PHP-USD the exchange rate at 42.5.

The peso appreciated by over 6 percent to cap 2012 at 41.05 to a dollar. With most banks' projections falling between BPI and Goldman Sachs' forecasts, it is safe to assume that the peso could end up being weaker this year compared to last year.
Now, will the peso's weakness bode well for you? It depends, really.
If you've booked a one week vacation overseas, you may have to shell out more pesos for your pocket money now than what you planned when you booked the plane tickets. But it could also mean that your dollars in the bank are worth more in pesos now.   
While the weaker peso means more expensive imported goods, spending power of families of overseas Filipinos also see an increase.

Maybe you're asking, is there a possibility for the peso to strengthen?

The answer is yes. Bank analysts still think the country's economic fundamentals can provide support for the peso in the long run. 

We're in the best position we've ever been in. British bank HSBC has called us the nation "on fire."

Global financial institutions marked the Philippines as one of the Asian countries to watch out for. The country has the fastest growth potential, healthiest reserves and a well-managed financial sector.

When the volatility caused by the US' easing of stimulus has waned, bank officials and the government forecast foreign funds should be rushing back to the Philippines. They're confident that the country and, in turn, the peso have arrived.

Take this as a clue: The government has recently revised its USD-PHP outlook for next year to 41 to 43 from an earlier 42 to 45.