Philippine Markets Newsletter

MONDAY MACRO: The Philippine peso remains stable even with the threat of a weaker global economy. 6%-7% Uniform earning power is still likely.

March 9, 2020

A country’s currency is its medium of exchange for goods and services both locally and internationally. The strength of its currency depends on a variety of factors in the economy, but short-term foreign exchange rate fluctuations are impacted heavily by sentiment.

Major global currencies are currently experiencing volatility because of the ongoing COVID-19 scare, but the Philippine peso has remained resilient.

As long as monetary policies and the business environment remain favorable in the country, any short-term forex fluctuations are unlikely to impact Philippine corporates’ earning power.

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Currency as a tool of trade dates back thousands of years, with its early stages in the form of copper ingots, beads, and cowry shells, among others. Coins made from gold, silver, and bronze were later developed to create a standard unit of measure, especially as trade flourished across different lands.

But even as commerce developed, there was still no standard form of currency worldwide until paper money was created.

The banknote was developed in 7th century China, when carrying bags of coins became too troublesome for wholesale merchants. Instead of bringing all their copper coins around, they kept those with someone they trusted who would then give them a slip of paper with the record of how much they deposited.

It was only in the 12th century when the Song dynasty started issuing the early form of paper money that we know today.

Today, there are over 160 official national currencies across the globe, and international trade has never been this dynamic. The US dollar is considered as the world’s reserve currency because of how widely used it is and how much of it is in foreign exchange reserves of various central banks.

It comes as no surprise then that when concerns about the US economy surface, business owners and investors all over the world pay closer attention to foreign exchange rates.

Foreign exchange rates are affected by a variety of factors, such as interest rates, inflation rates, political environment, and ease of doing business in a country, among others.

Since 2013, the values of selected Asian currencies showed a decline against the US dollar, but have gained strength from 2017 to 2019.

The volatility in Asian currencies against the US dollar in 2018 was driven by the tension around the US imposition of tariffs on Chinese goods.

The Philippine peso’s underperformance in 2016 to 2018 was driven by political tensions surrounding the Duterte administration and growing inflationary concerns in 2018. Despite the global economic impact of COVID-19, the Philippine peso is one of the best performing Asian currencies against the US dollar in 2020.

The Singaporean dollar weakened early in 2018 due to concerns about emerging market growth and growing confidence in US economic growth. Singapore is heavily dependent on trade, which is why their economy is more sensitive to volatility in foreign exchange rates.

Ever since the outbreak of COVID-19 in January 2020, the Singaporean dollar has fallen by 3.4% compared to the US dollar, and has been one of the worst performing currencies in Asia.

Meanwhile, the Chinese yuan appreciated around 10% against the dollar in 2017 due in part to the weakness of the dollar and the robust Chinese economy. However, the yuan began devaluing in 2018, remaining at elevated levels in recent history.

For years, China kept its currency as weak as possible to make their goods cheap and competitive outside its borders.

The successful insertion of liquidity by the People’s Bank of China (PBOC) into the market has stabilized the yuan and maintained market confidence. Since January 7, 2020, the Chinese yuan has only fallen by 0.9%.

Currency volatility could remain a short-term concern because of the uncertainty surrounding COVID-19 and the impact this has had on international commerce and travel. However, this alone does not change the long-term outlook for the Philippine economy and health of Philippine firms.

Our previous Monday Macro Report on Philippine corporate profitability emphasized that Philippine companies’ return on assets (ROA) as a whole is expected to remain at current 6% levels based on Uniform Accounting. This is likely in a low interest rate environment, and at par with global corporate averages at 6% as well.

About the Philippine Markets Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim & Joel Litman
Research Director & Chief Investment Strategist
Philippine Markets Daily
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