Why is the Philippine peso so weak and who benefits?

The Philippine peso fell to its weakest level ever against the US dollar in late October. While it’s since regained some ground, officials have signaled a tolerance for further depreciation and traders are keeping a close watch for any signs of central bank intervention.

A weak peso is a double-edged sword for the Philippines. It could boost remittance flows from the millions of Filipinos who live overseas and send money home, potentially encouraging higher spending in the consumption-driven economy. But it could also cause inflation to spike again as imports become more expensive. In addition, the Philippines is one of the most active sovereign bond issuers in Asia and prolonged peso weakness would drive up government borrowing costs and risk further inflating the national debt.

The peso has fallen more than 2% since July when President Ferdinand Marcos Jr. revealed during his State of the Nation address that many of the government’s flood infrastructure projects — in what is one of the world’s most typhoon-hit nations — were money-making schemes.

Congressional hearings uncovered allegations of collusion among lawmakers, public works officials and contractors to divert billions of pesos of government funds meant for those projects. That ignited mass protests and a broad exit by foreign investors in the equities market. Global investors pulled out a net $127 million from the local stock market between July 29 — the day after Marcos’ speech — and Oct. 29, according to data compiled by Bloomberg. Foreign investors account for more than 40% of the Philippines’ stock market turnover.

The Philippine central bank in October said that the outlook for domestic economic growth had weakened due to dampened business confidence over concerns about public infrastructure spending.

Also weighing on the peso are expectations of further interest rate cuts, as the central bank moves to cushion the economic fallout from the graft scandal, with flow-on effects expected to persist until the end of 2026. The Bangko Sentral ng Pilipinas has already reduced the benchmark rate by 175 basis points since August last year. Monetary Board member Benjamin Diokno told Bloomberg Television that another 25-basis-point cut is likely in December and more downward adjustments are possible “maybe sometime next year.”

There are other headwinds for the economy beyond the corruption scandal. The 19% tariff the US imposed on imports of Philippine goods from August has slowed factory activity. The Bangko Sentral has warned of weaker investment inflows and softer growth in key service exports.

Prior to the corruption scandal, the government cut its economic growth target for 2025 to 5.5%-6.5% from a previous goal of 6%-8% amid the US tariff risks and some economists revised down their own growth projections as the graft controversy unfolded.

WHAT ARE THE PROS AND CONS OF WEAK PESO?
More than 10 million Filipinos live and work abroad, and many of them send money home to help their families. These remittance flows reached a record $34.5 billion last year.

A weaker peso makes the remittances more valuable, increasing the purchasing power of this money in the Philippines. This could spur household spending, which would benefit consumer-centric companies. Household consumption accounts for around two-thirds of the nation’s gross domestic product. The currency depreciation could also strengthen the usual seasonal uptick in remittances in the fourth quarter ahead of the Christmas and New Year holidays.

A weaker peso would also make it cheaper and more appealing for overseas businesses to outsource jobs to the Philippines, providing a favorable backdrop for firms to boost hiring or raise salaries, which could in turn support consumption. The Philippines is one of the world’s largest hubs for business-process outsourcing, employing nearly 2 million people in the industry.

A weaker currency also makes a country’s goods more affordable for foreign buyers. The peso’s depreciation could therefore boost the international competitiveness of Philippine manufacturers, potentially leading to an increase in export volumes and revenues. That, in turn, may help to shrink the national trade deficit, which currently averages around $3 billion to $4 billion a month.

On the flipside, a weak peso makes imports more expensive, curbing demand for foreign products while adding to inflationary pressures. The Philippines imports most of its electronic components, as well as industrial machinery, iron and steel, and many meat and dairy products. The country relies on imports for nearly all of its oil requirements, raising the risk of higher fuel prices.

The government’s finances, however, stand to benefit from the peso’s weakness. According to a Department of Budget and Management’s sensitivity analysis, every 1-peso depreciation against the dollar could generate an additional P9.3 billion ($158 million) in tax revenue, including from import duties, in 2026.

WHAT DOES A WEAK PESO MEAN FOR INVESTORS?
A weaker peso makes Philippine assets cheaper for foreign investors, since the same number of dollars is now able to buy more of the local currency. That could encourage overseas investors to invest more in the country and expand their portfolios. That said, the value of any gains or dividends would be worth less in dollar terms.

The appeal of cheaper assets may also be outweighed by what a weaker currency signals — declining investor confidence and broader economic uncertainty. The economic growth of the Philippines, while still among Asia’s fastest, may lose steam if the corruption scandal continues to erode business optimism.

ARE THE CENTRAL BANK AND GOV’T WORRIED?
So far, officials don’t seem to be too concerned about the peso’s recent fall and they haven’t signaled any intent to intervene heavily. That contrasts with other Asian monetary authorities that have stepped in to support their currencies. The Reserve Bank of India, for instance, is prepared to keep selling dollars in both onshore and offshore markets until the rupee stabilizes at a stronger level, Bloomberg reported.

In early October, Bangko Sentral Governor Eli Remolona said authorities would defend the peso if “the depreciation is so sharp, so large that we think it will become inflationary.” Should the downward pressure on the currency intensify, he said that imposing capital controls was “not out of the question, but I think we’d rather not.”

After the slump in late October, the central bank said that it allows market forces to determine the foreign exchange rate and that when it does intervene, it is largely to dampen inflationary swings over time rather than to prevent day-to-day volatility. The Bangko Sentral also said it continues to maintain robust foreign reserves, $109 billion as of September, the highest in almost a year — giving the bank flexibility to sell US dollars if needed to steady the peso.

The Bangko Sentral may be content to let the peso weaken, with inflation still below the central bank’s 2%-4% target range. “Recent statements from central bank officials indicate that supporting growth is a greater priority in the near term,” according to Emilio Neri, chief economist at Bank of the Philippine Islands. — Bloomberg