Reaching a gross international reserve of $98 billion in August 2020, the Philippines goes into the year’s final quarter more stable than the rest of Southeast Asia.
Despite COVID-19 restrictions, the Philippine peso has impressively increased throughout the year; by September 2020 the currency jumped 4.3% against the US dollar. The US dollar has faced hardships of its own but still remains superior to the Asian market.
The financial success of the Philippines has been made possible due to a decline in imports which has led to a large surplus since exports have remained relatively stable. Imports are expected to decrease as the year comes to an end, meaning there is less prevalence of the US dollar in the Filipino economy during this quarantine period.
Imports in the Philippines have gone down since the beginning of the pandemic in March and continued to fall in May 2020 by 40.6% followed by a 24.5% drop in June to $6.63 billion according to the Philippine Statistics Authority (PSA). The PSA also reported that “merchandise exports shrank by 13.3% to $5.33 billion in June after a 26.9% yearly decline in May.”
With imports dropping more aggressively than exports, the Philippines should keep a close eye on foreign exchange markets in order to preserve the strength of their surplus and capitalize on the currency’s rise in value.
The Credit Agricole SA and Normura Holdings Inc says that “the Philippine peso is heading for its biggest quarterly gain in a decade;” their latest forecast shows that the currency has its strongest exchange rate since November 2016.
Lifting COVID restrictions could inhibit the GDP growth of Philippine’s economy as an increase in imports would greatly affect their surplus, weakening the peso’s exchange value overall.
According to Bloomberg the surplus in the Philippines grew to $657 million in August, outperforming the last 5 years where the average surplus was $171 million. Foreign reserves also jumped to a record $99 billion this year, from $75 billion in October 2018. The median forecast in a Bloomberg survey states that PHP is expected to have little change by the end of the year and weakened by the middle of 2021.
The Philippines should be cautious about how increased quarantine measures could impact its surplus in the remaining months of 2020. Nicholas Mapa, senior economist for the Philippines at ING told CNBC that “the continued fall in imports translates into subdued demand for foreign currency and will likely lead to short term support for PHP.”
The current surplus might not be as beneficial for the Philippines as it reads on paper; the Credit Suisse Group AG says there could potentially be a “central-bank intervention to curb the currency’s strength” in order to manage the risks of inflation in the future. In the midst of economies faltering during the COVID-19 pandemic, the Philippines provides a rare example of how a lack of imports can temporarily benefit the stability of a country. Whether this surplus is the best platform for growth will be evident by the middle of next year.
By Surina Nath