Abstract

The Influence of Global Events and Economic Policies on the Philippine Peso The value of the Philippine peso (PHP) is shaped by both domestic and international factors. As a small, open economy, the Philippines is highly susceptible to global economic conditions. From changes in interest rates by major central banks to global crises like the COVID-19 pandemic and the Russia-Ukraine war, the peso’s value fluctuates in response to these external shocks. Moreover, the Bangko Sentral ng Pilipinas (BSP), as the country’s central monetary authority, plays a significant role in managing the peso’s stability through policy interventions. In this essay, we will explore the impact of several global events on the Philippine peso and analyze how the BSP has responded to these challenges. 1. The US Federal Reserve’s Interest Rate Hikes (2022-2023) The US Federal Reserve’s (Fed) decision to raise interest rates in 2022 and 2023 was one of the most influential events affecting global currencies, including the Philippine peso. The Fed’s interest rate hikes were implemented to combat rising inflation in the US. As a result, investors flocked to the US dollar, seeking higher returns on US assets, which led to an increased demand for the dollar. This made the US dollar stronger, thereby weakening other currencies like the peso. From around 50 pesos per US dollar in 2022, the peso depreciated to approximately 58 pesos per dollar by mid-2023. The depreciation of the peso was compounded by higher import costs, particularly for oil, which made goods and services more expensive in the Philippines. In response to this, the BSP raised interest rates in a bid to curb inflation and attract investment. By making investments in the Philippines more attractive, the BSP hoped to support the peso and contain the inflationary pressures caused by the stronger US dollar. 2. The COVID-19 Pandemic (2020-2021) The onset of the COVID-19 pandemic in 2020 created a global economic shock that severely impacted the Philippines. During the early months of the pandemic, the economy contracted due to lockdowns, business closures, and disruptions in global supply chains. Additionally, the decline in remittances from Overseas Filipino Workers (OFWs) due to reduced international labor demand also weakened the peso. The currency weakened to about 52-53 pesos per dollar in 2020, reflecting the uncertainty of the global and local economy. To mitigate the economic downturn, the BSP cut interest rates to historically low levels (down to 2% in 2020) in an effort to stimulate demand and support economic activity. The government also introduced fiscal stimulus packages aimed at boosting domestic consumption and helping businesses weather the crisis. While these measures helped stabilize the economy in the medium term, the peso continued to face pressure due to global economic uncertainty. 3. The 2008 Global Financial Crisis The 2008 global financial crisis, triggered by the collapse of major banks and financial institutions in the US, also had a significant impact on the Philippine peso. During this crisis, the US dollar strengthened as investors sought safe-haven assets. This global flight to safety led to a depreciation of the peso, which fell to around 48-50 pesos per dollar as capital flowed out of emerging markets, including the Philippines. In response to this crisis, the BSP lowered interest rates to increase liquidity in the financial system and reduce the cost of borrowing. At the same time, the Philippine government implemented fiscal stimulus measures, including government spending programs, to support the economy. Despite the global economic turmoil, the Philippines was able to recover relatively quickly, aided by strong remittance inflows and a resilient domestic economy. 4. The Russia-Ukraine War (2022-Present) The Russia-Ukraine war, which began in early 2022, created major disruptions in global markets, particularly in oil prices and supply chains. The conflict caused global energy prices to spike, which severely impacted countries like the Philippines that are net importers of oil. The rise in oil prices led to an increase in the country’s import bill, which exacerbated the trade deficit and created downward pressure on the peso. The peso weakened further, reaching record lows against the US dollar in 2022-2023, as investors grew more risk-averse and shifted their capital into the US dollar. The geopolitical instability and higher global energy prices also led to inflationary pressures in the Philippines, further straining the economy. To counter these effects, the BSP raised interest rates to stabilize the peso and attract foreign investment. The Philippine government also explored alternative sources of energy to reduce reliance on volatile oil markets. Despite these efforts, the peso continued to face challenges due to the broader geopolitical instability and global economic disruptions caused by the war. 5. Oil Price Shocks Historically, oil price shocks have played a major role in influencing the value of the peso. As a net importer of oil, the Philippines is particularly vulnerable to increases in global oil prices. When oil prices rise significantly, the Philippines experiences higher import costs, which puts pressure on the country’s trade balance and leads to a weakening of the peso. This effect was particularly evident during the 2008 and 2011 oil price surges, when the peso weakened significantly as the country’s import bill surged. During these periods, the BSP typically raised interest rates to curb inflation and stabilize the currency. Additionally, the government sought to reduce its dependence on oil imports by promoting energy diversification and increasing energy efficiency. These efforts aimed to mitigate the long-term impact of oil price fluctuations on the Philippine economy and the peso. BSP Responses to Global Economic Pressures Throughout these global events, the Bangko Sentral ng Pilipinas (BSP) has taken a variety of steps to stabilize the peso and manage inflationary pressures. Some of the key responses include: Raising interest rates to attract foreign capital and increase demand for the peso. Selling foreign exchange reserves to stabilize the currency during periods of excessive volatility. Lowering interest rates during economic downturns to stimulate domestic demand and support economic growth. Intervening in the foreign exchange market to smooth out large fluctuations in the value of the peso. Managing fiscal policy, including government spending and borrowing, to ensure long-term economic stability. Through these interventions, the BSP has played a crucial role in maintaining the stability of the Philippine peso, ensuring that it remains resilient in the face of global economic shocks. Conclusion In conclusion, the value of the Philippine peso is shaped by a complex interplay of global economic events and domestic policy responses. Events like the US Federal Reserve’s interest rate hikes, the COVID-19 pandemic, the 2008 global financial crisis, the Russia-Ukraine war, and oil price shocks have all contributed to fluctuations in the peso’s value. The Bangko Sentral ng Pilipinas has played an essential role in stabilizing the peso through interest rate adjustments, foreign exchange interventions, and fiscal management. Despite facing significant challenges, the peso has shown resilience, thanks to the BSP’s active role in managing both domestic and external economic pressures. As global events continue to influence the value of currencies, the BSP’s ability to respond effectively will remain crucial in maintaining the peso’s stability and ensuring the long-term health of the Philippine economy.