Introduction to the Peso’s Plight
The Palace spokesperson recently made an unusual statement, announcing that President Ferdinand "Bongbong" Marcos Jr. does not want the peso to fall to P60:$1. This statement, although carried by a few news outlets, eventually slipped through the cracks of the daily news cycle.
Understanding the Concern
It was unclear from the spokesperson’s account if the President was ordering the BSP to intervene to stop the peso’s fall or was simply expressing a desire. An exchange rate of P60:$1 has become a sort of psychological threshold, with the potential to significantly impact domestic inflation due to the country’s import dependence.
The BSP’s Stance
The BSP assured that the rate of P60:$1 is not expected to happen "anytime soon." However, several bank economists estimate that the year will end with an exchange rate of about P61:$1.
The Oddity of the Statement
The odd part about the Palace spokesperson’s remarks is that this is something that is never said, never publicly admitted. As a matter of formal policy, the country observes a market-determined exchange rate, with the currency’s exchange rate moving according to market trends. A market-determined exchange rate is not merely the fashion; it is the most prudent policy to maintain.
The Risks of Managing the Exchange Rate
Managing the exchange rate can become very costly for any central bank. In order to prevent the exchange rate from sliding, the central bank will have to create artificial demand by buying a sagging currency and selling a rising one. Moreover, there is peril in keeping an artificial exchange rate, as seen in the Asian Financial Crisis of 1997, which occurred because Thai monetary authorities were manipulating the exchange rate and keeping the baht overvalued.
Factors Undermining the Peso’s Value
Numerous large trends are forcing the peso’s exchange rate to deteriorate against the dollar. These trends include the country’s mounting debt, with the outstanding public debt now standing at P17.6 trillion. The public debt per capita has zoomed to P155,000 in just three years, with no pandemic to excuse fiscal profligacy.
The Impact of Debt
New bond sales by the national government will add to the debt stock. Although two-thirds of the public debt is peso-denominated, there is also a long-term cost to this, as public borrowing crowds out the private sector from the debt market, inhibiting private investments. The government is not the most efficient user of a nation’s capital stock, especially one saddled with corruption.
Economic Challenges
The 2026 GAA projects a budget deficit of P1.6 trillion, which is 5.3% of GDP, slightly above what is generally considered the prudential limit. The debt-to-GDP ratio is now 63.1%, exceeding the 60% conventionally regarded as prudent. Moreover, the debt is growing at twice the rate of GDP, contrary to the conventional wisdom that the domestic economy should outgrow the debt.
The Need for Comprehensive Reforms
To address the structural weaknesses of the economy, comprehensive reforms are necessary. The administration recently convened business leaders to promise "big, bold reforms," although no details were made public about what these reforms could possibly be. What businessmen need to see is a clear indication that the administration recognizes that corruption is a systemic problem crying out for a comprehensive solution.
Conclusion
Like the President, all of us wish the peso would not fall below the P60:$1 threshold. However, we will all be indulging in pure wishful thinking if we do not comprehensively address the structural weaknesses of our economy. The country needs a clear indication that the administration is committed to addressing corruption and implementing meaningful reforms to ensure the long-term stability of the economy.
