The Philippine’s peso is hovering at historic lows amid a confluence of economic challenges at home and geopolitical turmoil abroad.
On Friday, the currency hit an all-time low of 62.71 to the United States dollar.
Here’s everything you need to know about the plunging value of the currency:
What has been happening with the peso?
The peso has been on a downward trajectory since the start of the year, losing about 6 percent of its value against the US dollar since January 1.
The currency has broken several records over the past few months amid rising oil prices and other negative headwinds from the US-Israel war on Iran.
The peso hit a record low of 61.847 to the US dollar on July 24, before falling further to 62.265 last Friday.
The peso has continued its slide this week, closing at 62.565 on Wednesday and sinking to 62.71 on Friday.
Why has the peso fallen so much?
The peso is responding to several negative trends in the Philippine economy, and the strength of the US dollar.
Before the war, the Philippines imported almost all its oil from the Gulf. In March, Manila was forced to declare a state of national emergency when Iran’s shutdown of the Strait of Hormuz disrupted supplies.
As oil prices have risen, Philippine importers have had to convert more pesos for US dollars to buy dollar-priced crude, driving down the value of the local currency.
At the same time, rising yields of US Treasury Bonds – a type of loan to the US government – have encouraged international investors to trade the currencies of developing economies for safer dollar-dominated assets, pushing the peso lower.
The Philippines’ strained public finances and large trade deficit have exacerbated these downward pressures.
“The weakness in the Philippine peso stems largely from the large twin – fiscal and current account – deficits the economy is running, combined with the elevated inflation that the central bank, the BSP, is trying to tackle,” said Philip McNicholas, Asia sovereign strategist at Robeco Singapore.
“This has left the peso vulnerable to swings in global risk sentiment, which has soured in recent weeks as events in the Middle East have kept oil prices elevated,” McNicholas said.
What is the impact for the Philippines’ economy and Filipinos?
Currency depreciation is not inherently negative, but it typically benefits exporters at the expense of consumers.
A weaker currency means firms can sell their products overseas more cheaply, but also that households pay more for imported goods.
“It can improve competitiveness, support tourism and increase the local-currency value of foreign income,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management in Tokyo.
“The problem arises when depreciation becomes too rapid, particularly for energy-importing economies, because it raises import costs and fuels inflation,” Loo said.
The Philippines’ inflation rate stood at 6.1 percent in August, well above regional peers and double the central bank’s target of about 3 percent.
Ashwin Binwani, founder of Alpha Binwani Capital, a private closed-end joint venture fund in Singapore, said the peso could sink past 63.00 to the dollar if oil stays above $90 a barrel.
“The damage becomes materially worse if the currency weakness persists alongside high oil prices and above-target inflation rather than reversing quickly,” Binwani said.
“The peso’s fall does not instantly raise the price of every item in a supermarket. The main transmission is through imported inputs and energy.”
President Ferdinand Marcos Jr’s administration has pledged to improve fiscal discipline and said it expects the central bank to intervene as necessary to stabilise the currency.
One bright spot for the Philippines is the large amount of remittances it receives from the more than two million Filipinos working overseas.
Filipinos sent home a record $35.63bn last year, much of it in dollars, according to the country’s central bank.
“Remittances, which account for roughly 8 to 9 percent of GDP, provide a powerful stabiliser for the peso and help cushion external shocks. However, they are not a complete shield,” Loo said.
Binwani said the peso’s fall will place a significant but “uneven” strain on households.
“It raises the peso cost of essentials that depend on imports – especially fuel, transport, food inputs, and manufactured goods – while offering a partial cushion to families receiving overseas remittances,” he said.
