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It's a Case of a Strong Dollar, Not Weak Peso

One will wonder if there is a political turmoil in the Philippines or an economic collapse that is precipitating the fast decline of the peso against the US dollar. Nothing could be farther from the truth.



Political instability is a very remote possibility after the overwhelming votes received by President Ferdinand Marcos Jr. in winning the May presidential elections. Mr. Marcos is continuing the pro-business policies of the past administration and the Philippine economy is recovering well from the pandemic and weathering the effects of the Russia-Ukraine war.



Economic opportunities still abound in the Philippines despite the recent depreciation of the peso against the US dollar, which was triggered by the interest rate hikes by the US Federal Reserve.



The sharp drop in the value of the peso in recent days does not, by any means, reflect the structural weakness of the local economy. In fact, the opposite is true. The economic recovery led to a strong demand for imports that resulted in a wider trade deficit.



Merchandise imports reached record levels in the Philippines this year, contributing to a balance of payments deficit that reduced our gross international reserves below the $100-billion mark and pulled down the peso to an all-time low of 57 against the greenback last week.



The series of global economic and trade developments also contributed to the weakening of the peso. Supply chain issues, brought about by the conflict between Russia and Ukraine, as well as the lockdown in China—which supplies many of the world’s commodities—have sharply lifted inflation and the interest rates to record-high levels.



After keeping the interest rates at record-low levels in the past two years amid the pandemic, the Federal Reserve raised the rates aggressively and hinted of more adjustments with hawkish signals. The cue from the US Fed convinced foreign investors and money market traders to park their short-term funds in US securities for higher yields, and dumped the peso and major currencies like the yen, euro and the pound sterling.



A strong US dollar is contributing to higher inflation rate in the Philippines as it makes imported commodities such as petroleum and food products more expensive. 



While the peso fell against the US dollar, it remained stable against other major currencies such as the euro, the Japanese yen or the Chinese renminbi. This means that the peso depreciation against the US dollar was more of a case of a strong dollar, and not of a weak local currency.



The bias toward the American currency may continue for some time as the US Fed adjusts its interest rate further in response to the high inflation rate that affects ordinary Americans. The Bangko Sentral ng Pilipinas will also respond accordingly by raising its own policy rates to keep the interest rate differential between the US and the Philippines at a minimum.



The BSP will try to reduce the difference between the overnight borrowing rate of 3.75 percent and the inflation rate of 6 percent. It already raised by 175 basis points the benchmark rate this year, after keeping it at a record-low of 2 percent for more than two years.



The fact that inflation rate exceeds the savings rate offered by banks indicates that our money is losing value. Many high-income Filipinos try to protect their money by investing in US dollar-denominated funds, which, unfortunately, adds downward pressure to the peso.



For the ordinary Filipinos, there are other investments that also offer protection and even higher yields, such as the stock market, which is on a rebound, or the real estate sector. Property prices continue to rise because of the growing economy and the increasing population.



The development of more infrastructure projects will also spread economic activities in the countryside and eventually lead to higher prices of land and housing units. This gives us all the more reason to take advantage of the thriving property market to shield our currency from foreign exchange fluctuations.



I think it is also timely to look inward by boosting our local production to meet domestic demand and supply the export market. We can only achieve a stable foreign exchange rate if our exports are in parity with imports. While we have the international services sector such as remittance-producing skilled labor, tourism and business process outsourcing to rely on, we must bolster our merchandise exports if we are to become an industrialized economy. This is the path followed by many Asian countries such as Japan, Korea and now China.



The peso depreciation should give Filipino exporters a competitive edge in the international market. Our semiconductors, garments, minerals and agricultural products will surely benefit in terms of foreign pricing. 



Overseas Filipino workers and their families will benefit from the strong dollar because the peso equivalent of their money will be greater than before. This would mean higher household spending and investments in local communities.



Food and energy security, as I have written in my past columns, are the key to thwarting numerous external economic threats. Hopefully, the peso will recover against the US dollar in the fourth quarter, which is traditionally the peak season for OFW remittances.



So, chillax. I am confident the Philippine economy will sustain its robust expansion and back up President Marcos’s assertion that our nation is “Asia’s fastest rising star.”




Business Mirror/Author/MannyVillar