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RPís External Competitiveness Improves

09.24.1999

“Recent exchange rate trends show some weakening of the peso. After appreciating for most of 1999 relative to levels seen in 1998, the peso-dollar rate softened beginning august of this year. Such weakening of the peso was brought about by several factors, including the depreciation of regional currencies, particularly the Thai baht and the Indonesian rupiah, the 25 basis points increase in us federal funds rate in late august which induced some adjustments in the portfolio composition of foreign investors, and some increase in demand for dollars as imports began to pick up. From an average of P38.28/US$1 in July, the exchange rate averaged P39.26/US$1 in August. By 10 September, the average peso-dollar rate has breached the P40/US$1 level and has since then fluctuated around this level.”

“The recent depreciation of the peso has important implications on the country’s competitiveness. Based on the preliminary estimates of the real effective exchange rate or REER index for September, the peso has gained some competitiveness vis-a-vis the currencies of the country’s major trading partners as well as vis-a-vis the broad basket of currencies of competitor countries.  The peso lost some ground against the narrow basket of competitor countries’ currencies  (Malaysian ringgit, Thai baht, and Indonesian rupiah).” 

“The REER index provides a measure of the relative cheapness or expensiveness of a currency, and thus the exports of a country. This is computed by taking into account the exchange rates and inflation rates of trading partners.  A real depreciation of the REER means that the country gained some level of competitiveness in the international market. A real appreciation on the other hand, implies some loss in external competitiveness.” 

“With the current trend in the peso-dollar rate and as inflation remains on a downtrend, we expect a continuation of the improvement in our external competitiveness. This should augur well for our exports which registered a healthy growth rate of 17 percent in 1998 and 13.7 percent for the first seven months of 1999. We believe, however, that a more sustainable situation is one in which the peso gains in external competitiveness from a significant reduction in inflation rate rather than from a continued weakening in its nominal exchange value. The BSP’s monetary policy, therefore, remains focused on achieving greater reduction in inflation over the medium term. The BSP is now expecting an annual average inflation rate of  7 - 8  percent from the old target of 8 - 9 percent and a year-end inflation of 6 percent.”

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