Philippine peso recovery depends on stronger fundamentals, not rate hikes

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Philippine peso recovery

Highlights

The peso fell to a record low of P64.17 per dollar on Oct. 27 despite the Bangko Sentral ng Pilipinas raising its policy rate to 5.5%.
GlobalSource Partners emphasized attracting more dollar inflows, productive investment, and improving public investment, agriculture, and manufacturing to strengthen peso fundamentals.
Gross international reserves fell to a three-year low of $99.997 billion in September, highlighting limits on currency intervention to defend the peso.

Policy stance and structural remedies

As reported by BusinessWorld Online, GlobalSource Partners said in a commentary on Tuesday that the peso’s recovery should rest on stronger economic fundamentals and the country’s external position rather than on tighter monetary policy alone.

Country Analyst Diwa C. Guinigundo said a weaker peso raises the domestic cost of imported fuel, food, raw materials, machinery and intermediate inputs, creating legitimate monetary policy concerns through production costs, consumer prices and inflation expectations. Still, he said it does not follow that every depreciation requires an interest rate increase, or that every rate hike should produce an immediate appreciation of the currency.

The think tank said the government should instead address domestic structural weaknesses and attract more dollar inflows and investment. Guinigundo said this includes improving the efficiency of public investment, strengthening agriculture and manufacturing, reducing logistics and energy costs, and building more competitive exports with higher domestic value added.

He also said capital flows should be managed more intelligently, including possible initiatives that encourage overseas Filipino workers and business process outsourcing firms to retain and invest more of their foreign-currency earnings domestically, provided these offer commercially attractive returns and credible safeguards.

External pressures and policy implications

The peso breached the P64-per-dollar level for the first time in October, falling to a record low of P64.17 on Oct. 27. The currency weakened even after the Bangko Sentral ng Pilipinas delivered its fourth straight rate increase on Oct. 22, raising its policy rate by 50 basis points to 5.5%.

GlobalSource Partners said the local currency remains exposed to multiple external forces, including global dollar strength, foreign interest rates, geopolitical uncertainty, capital flows, risk appetite and the country’s economic outlook. Guinigundo said investors weigh expected returns against currency and country risks, not interest rate differentials alone.

BSP Governor Eli M. Remolona, Jr. has said the central bank does not tighten policy to support the peso, with intervention aimed at smoothing sharp inflationary swings rather than defending a specific exchange rate. He has also said earlier this year that aggressive foreign exchange intervention during a period of broad dollar strength could prove futile and risk depleting reserves.

The BSP uses its gross international reserves to intervene in the spot market by selling dollars to curb peso weakness. Those reserves stood at a three-year low of $99.997 billion as of September, underscoring the constraints on relying too heavily on intervention.

Guinigundo said monetary and fiscal policy should be aligned to rebuild confidence in the peso. He said a stronger currency must be earned through stronger economic fundamentals, sustainable foreign exchange earnings, productive investment and institutional credibility, rather than through higher rates or repeated intervention.

Our earlier article on planned Philippine sovereign bond reforms and index inclusion explained how financial-market modernization could broaden the investor base and improve liquidity, but won’t automatically translate into stronger productive investment or exports. It emphasized that outcomes still hinge on fiscal credibility, deeper domestic capital markets, and wider structural improvements—from infrastructure and governance to lower operating costs—that ultimately shape confidence and capital inflows.

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