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Can the Philippines Grow Economically Despite a Weakening Peso?

BSP

Philippine Finance Secretary Ralph Recto recently expressed concerns about the potential delay in reducing interest rates if the Philippine peso declines further than its historic low of 59 against the dollar. Despite this, he maintains a positive outlook for the country’s economic growth, projecting an expansion rate of 6% to 7% for the current year.

Speaking during an interview, where he was attending meetings at the International Monetary Fund and World Bank, Recto shared insights into the economic strategies and challenges facing the Philippines. He emphasized that even if interest rate cuts are postponed, the growth targets remain achievable.

What Impact Will U.S. Rate Decisions Have on the Philippine Economy?

The peso’s recent drop below 57 to the dollar marks a significant event, the first of its kind since 2022. This depreciation occurred amid a global downturn in risk assets, influenced by comments from U.S. Federal Reserve Chair Jerome Powell. On April 16, Powell hinted at possible delays in reducing U.S. interest rates, affecting currencies worldwide.

For those interested in understanding currency markets, this situation illustrates how international monetary policies, especially those from major economies like the U.S., can significantly impact other nations’ currencies.

Central banks globally, including the Philippines’ Bangko Sentral ng Pilipinas (BSP), where Recto serves on the policymaking board, are adopting a cautious approach to monetary easing. They prefer to wait for more definitive signs of decreasing inflation before lowering borrowing costs. This cautious stance aims to ensure economic stability and prevent rapid changes that might destabilize the market.

BSP Governor Eli Remolona has kept a broadly hawkish view on the economic situation, suggesting that further tightening of monetary policy may not be necessary in the near term. He attributes the peso’s weakness primarily to the strong U.S. dollar rather than domestic issues. Nonetheless, Remolona has mentioned that if inflation expectations start to deviate significantly from targets, the central bank may need to consider increasing interest rates to keep the economy on track.

In response to persistent inflation and high interest rates, the Philippine government has adjusted its economic growth forecasts downward for this year and the next. To manage these challenges, it has also increased its fiscal deficit projections to allow for higher government spending.

Will the Philippine Government’s Debt Issuance Strategy Pay Off?

To fund its economic plans and manage the fiscal deficit, the Philippine government intends to tap into the international debt markets this year. Secretary Recto indicated that an offering could occur soon. He noted that about a quarter of the government’s funding needs are met through external sources, including loans from international financial institutions like the World Bank and the Asian Development Bank. These external funding sources are expected to provide around $9 billion in support from now until 2028.

Last year, the Philippines successfully issued international dollar bonds on two occasions;

  1. The first was a substantial $3 billion deal in three parts carried out in January,
  2. and the second was a historic $1 billion Islamic bond in November.

These issuances reflect the government’s strategic efforts to secure necessary funds while diversifying its financial instruments and appealing to a broader range of investors.

With the country holding investment-grade sovereign credit ratings, the Philippines is keen on widening its investor base for its bonds. This strategy is vital as the government plans to cover a budget deficit of about 1.5 trillion pesos ($26 billion) in 2024. This deficit financing is crucial for supporting the government’s budget needs and sustaining economic growth amid global economic uncertainties.

Final Thoughts

By broadening its investor base and securing diverse funding sources, the Philippines aims to strengthen its financial stability and ensure that it can continue to fund its development goals effectively. This approach will help buffer the economy against external shocks and maintain steady growth in the challenging global economic landscape.

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