HSBC: Weak peso could fuel Philippine manufacturing revival

MANILA, Philippines — The peso’s sharp depreciation against the dollar could help revive Philippine manufacturing after years of stagnation, potentially boosting exports and narrowing the country’s persistent trade deficit, according to HSBC Global Investment Research.

In a report, HSBC senior ASEAN economist Aris Dacanay said the weaker peso has given local manufacturers a much-needed competitive advantage, with the sector showing its first sustained expansion since 2018.

The assessment comes as the peso has weakened near the 64-to-the-dollar level, raising concerns over higher import costs, inflation and the purchasing power of Filipino households.

Dacanay said the currency’s depreciation could nevertheless provide an opportunity to strengthen domestic production by making Philippine-made goods more affordable to foreign buyers while encouraging local consumers to shift away from increasingly expensive imports.

“The peso just hit its weakest level against the dollar (again) – and it may be the bitter pill the economy needs,” he said.

According to Dacanay, Philippine manufacturing has experienced roughly a decade of stagnation, partly because the peso remained relatively strong against other Southeast Asian currencies.

He explained that substantial remittance inflows from overseas Filipino workers had historically supported the peso, creating conditions similar to the so-called Dutch disease, in which strong foreign currency inflows undermine the competitiveness of domestic industries.

A relatively strong peso made Philippine exports more expensive overseas while allowing imported products to compete more easily with locally manufactured goods.

However, the peso’s recent weakness has begun reversing that disadvantage.

Dacanay estimates showed that, after adjusting for exchange rates and inflation, Philippine-made goods have become relatively more affordable than products from most other Asian economies, except India, South Korea and Indonesia.

The improvement has helped sustain Philippine goods export growth at around 14 percent year-to-date, despite the country’s relatively limited participation in global supply chains linked to artificial intelligence compared with some regional peers.

At the same time, more expensive imported products have strengthened the appeal of domestically manufactured alternatives.

Dacanay said these developments have contributed to a recovery in manufacturing output, with 2026 marking the first period of material and sustained growth in the sector since 2018.

He expects stronger export demand and reduced reliance on imported consumer goods to eventually help narrow the country’s trade deficit, which represents the amount by which imports exceed exports.

However, he cautioned that the improvement has yet to translate into a meaningful reduction in the external trade imbalance.

Dacanay said the country’s trade deficit has shown no signs of structural easing, partly because demand for imported capital goods remains elevated amid the expansion of data center investments.

HSBC also warned that currency depreciation alone would not guarantee a lasting manufacturing recovery.

A weaker peso also raises the cost of imported raw materials, equipment and other production inputs, potentially squeezing manufacturers’ profit margins.

Companies may respond by raising selling prices, adding to inflationary pressures and eventually weakening the competitive gains initially provided by the currency’s depreciation.

HSBC recommended reducing tariff and non-tariff barriers to trade to ease price pressures, alongside stronger measures against smugglers, hoarders and cartels.

“A weaker peso may be the bitter pill the Philippines needs to reinvigorate its manufacturing sector, but other policy remedies are needed to ensure these benefits are sustained in the long run,” Dacanay said.