THE BANGKO SENTRAL ng Pilipinas (BSP) has space to allow the peso to depreciate and provide much-needed support to exports and investment flows.
“A more competitive peso benefits both exports and foreign direct investment,” HSBC economist for ASEAN Aris D. Dacanay and Global FX Strategist Lenny Jin said. “Hence, there is room for the BSP to shift towards a less defensive FX (foreign exchange) policy.”
“Relatedly, the Philippines is not under any strong scrutiny from the US administration regarding trade relationships or currency practices. This gives the BSP room to trim PHP overvaluation by accumulating reserves when USD-PHP falls.”
The peso closed at P57.93 a dollar on Tuesday, weakening by 12.2 centavos from its P57.808 finish on Monday.
HSBC said there are benefits “to letting the Fed go and allowing the peso to depreciate.”
“As trade and investment uncertainties take a toll on growth, a weaker and more competitive currency can help alleviate some of the pains by boosting the economy’s booming services exports,” it added.
HSBC expects the BSP to soon “shift its focus from mitigating the risk of FX volatility to boosting growth.”
“This can be done by becoming more laissez-faire and allowing its policy rate differential with the Fed to narrow,” it added.
However, HSBC said this transition is unlikely to happen in the first half of the year.
“We expect such a shift to happen in the second half. Rates and FX policies will likely coordinate. As a narrower PH-US policy rate buffer pushes USD-PHP up, the BSP may soften its USD-selling intervention.”
BSP Governor Eli M. Remolona, Jr. has said while they are also monitoring the US Federal Reserve’s moves, there is no need to fall in step with the US central bank.
At its January meeting, the Fed kept interest rates steady after slashing a full basis point in 2024. It began its easing cycle in September, a month after the BSP cut rates in August.
HSBC said a weaker currency could boost the economy’s trade competitiveness. A more competitive peso could bring “much-needed support” to exports.
“If, say, the peso depreciates, the goods that the Philippines exports then become cheaper to importers or, potentially, more competitive versus competing exporters,” it said.
Latest data from the local statistics authority showed that the Philippines’ trade-in-goods deficit widened by 3.1% to $54.21 billion 2024, its largest trade gap in over two years.
This as merchandise exports slipped by 0.5% to $73.21 billion, missing the 4% growth assumption by the Development Budget Coordination Committee (DBCC) for the year.
“A competitive currency can help develop one’s ability to manufacture. Manufacturers are the producers of goods, and related to the previous fact, a competitive currency can help manufacturers expand their markets abroad,” it said.
It noted that electronics exports have been deteriorating both volume and value-wise.
In 2024, electronic products, which accounted for more than half of all exports, slumped by 6.7% to $39.08 billion. Semiconductors also fell by 13.5% to $29.16 billion.
“Furthermore, service exports have plateaued. Despite BPO-related exports maintaining their uptrend, tourism exports have failed to sustain above its pre-coronavirus disease 2019 levels. The Philippines needs to not only attract more tourists but also encourage more spending per capita.”
HSBC noted that an uncompetitive currency “can be a hindrance for manufacturing to blast off.”
While there are benefits to narrowing the policy rate differential between the BSP and Fed, the timing will be crucial, it added.
“Though the BSP, like the Fed, treaded carefully and paused its easing cycle in February, the BSP may eventually mull the possibility of going to the unknown, and allow the BSP-Fed policy rate differential to narrow to 50-75 basis points (bps) even amidst a sharp repricing of Fed rates.”
“We think 2025 and 2026 will be a crucial time for this. Apart from fourth-quarter growth undershooting expectations, growth in 2025 appears to be challenging.”
Growth could be dampened by tepid investments amid global trade uncertainties.
“But there is an art to narrowing one’s policy rate differential with the Fed or mitigating volatility in the currency. Slow and gradual is key,” HSBC said.
“In contrast, letting the monetary rein completely loose will stoke too much volatility in the currency, which could then lead to other complications. For instance, too much volatility could stoke FX-induced inflation and, perhaps, stoke financial jitters as balance sheets of firms get stretched.”
However, HSBC said the Philippine economy could also manage any inflationary pressures stemming from peso volatility.
“That being said, we think there is room for the Philippine economy to absorb some volatility in the currency, it’s just a matter of timing,” it said.
Since core inflation remains within target, the BSP has some room when it comes to allowing some FX-induced inflation to occur.
“Though a more hawkish Fed poses an upside risk to our forecasts, the BSP may, eventually, become more tolerant to FX volatility. This means the Fed will likely matter less and less for the BSP in the quarters ahead, with the BSP easing monetary policy even if the Fed doesn’t.”
HSBC expects the BSP to cut rates by a total of 75 bps this year, bringing the key rate to 5% by yearend.
It sees a 25-bp cut each in the second quarter, third quarter, and fourth quarter.
“Though this may lead to some volatility in the peso, growth concerns may eventually outweigh the risks embedded in a volatile currency,” it added. — Luisa Maria Jacinta C. Jocson
