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  • Writer's pictureBy The Financial District

Stagflation Risks Seen To Renew "Risk Aversion" Towards Peso

The Philippine peso is expected to weaken in the coming months despite government officials’ bullishness on the performance of the currency this year.

Photo Insert: The peso is expected to average P56.3 to the dollar in the next three months and further depreciate to P57 to the greenback by the end of this year.

Advisory firm Oxford Economics Group Ltd. expects the peso to average P56.3 to the dollar in the next three months and further depreciate to P57 to the greenback by the end of this year. Oxford Economics analysts said stagflation risks could renew “risk aversion toward” the Philippine peso.

Stagflation is “an economic condition characterized by slow growth, high unemployment, and rising inflation.”

They also pointed out: “We see growing stagflation risks leading to renewed risk aversion towards the PHP [Philippine peso]. Headline inflation remained elevated at 7.6 percent year-on-year in March, higher than the US’s [5 percent year-on-year], driven by prices of food, energy, and services.”

The think tank said the Bangko Sentral ng Pilipinas (BSP) has helped keep the peso afloat by raising interest rates following the US Federal Reserve’s policy actions. This was done to maintain a policy rate differential of at least 100 basis points, which is necessary to stabilize the Philippine currency, the 42-year-old firm said.

All the news: Business man in suit and tie smiling and reading a newspaper near the financial district.

“That said, we don’t expect major PHP weakness, given an improving balance of payments,” Oxford Economics, however, said.

Last April 25, Wednesday, BSP Governor Felipe M. Medalla admitted that monetary authorities have been intervening in the foreign exchange market to prop up the peso. Medalla emphasized it was imperative to keep the Philippine tender competitive compared to the dollar.

Business: Business men in suite and tie in a work meeting in the office located in the financial district.

This is one of the key monetary policy tools that are at the disposal of the BSP.

“I will tell you three months after we intervene, whether we intervened or not,” Medalla told reporters in a briefing on April 26., hastily adding: “By the way, hindi niyo ako kailangan tanungin. pag pinuntahan ninyo ang aming web site nandun ang balance sheet namin eh, makikita ninyo.” [You don’t have to ask me. You can see our balance sheet on our website.]

Entrepreneurship: Business woman smiling, working and reading from mobile phone In front of laptop in the financial district.

Earlier, the Monetary Board had relaxed the requirements and expanded the coverage of eligible foreign exchange (forex) transactions, according to the BSP.

The BSP said these amendments were made by the Monetary Board on the Currency Rate Risk Protection Program (CRPP).

Banking & finance: Business man in suit and tie working on his laptop and holding his mobile phone in the office located in the financial district.

The amendments were made to encourage the use of the hedging facility by increasing its availability, to relieve pressures in the forex spot market. Documentary requirements have been aligned with the existing regulations on forex transactions and have eliminated the notarial rules to enable expeditious applications.

Further, forex obligations and transactions eligible for the CRPP Facility have been expanded to include non-trade transactions and investments from the original trade-related coverage.

Market & economy: Market economist in suit and tie reading reports and analysing charts in the office located in the financial district.

Other operational amendments include the change in the applicable US dollar-interest rate to be used in the computation of the rate for non-deliverable forwards following the cessation of the Libor benchmark, the removal of the 1 p.m. to 2 p.m. trading window, and the change in maximum tenor.

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