In the past few weeks, the Philippine peso has been climbing to record highs, with investment bank Goldman Sachs seeing the peso climbing to 43 per dollar in the next three months, 42 in six months and 41 in 12 months. Barclays Capital was even more optimistic, expecting the peso to rise to 40 against the dollar over the next 12 months.
The peso closed at P43.25 to a dollar on Monday, Oct. 18.
The peso also climbed to new highs in December 2007 – P41.50 to the US dollar. However, while President Noynoy Aquino’s financial advisers were quick to admit that the rapid ascent of the peso was largely because of the surge in dollar remittances from overseas Filipino workers (OFWs) and the downward spiral of the American dollar against the world’s currencies, Gloria Macapagal Arroyo boasted then that the rise of the peso was proof of the Philippine economy’s growth.
“It’s less the issue of the peso, it’s really the dollar’s problem,” Finance Secretary Cesar Purisima said last week.
While the rise in the value of a country’s currency is generally an indication of a robust economy, the peso’s rise in both instances were largely due to the weakening of the US dollar, which remains the standard of the world’s currencies, and the seasonal increase of workers’ remittances at this time of the year.
However, in the current instance, the inflow of foreign investments also helped tremendously in the rise of the peso. Bangko Sentral reported that foreign portfolio investments yielded a net inflow of over $1.4 billion in the first three quarters of 2010, with total inflows breaching the $7-billion mark. Most of these funds were invested in local stocks, resulting in a robust stock market.
Also contributing to the peso’s ascent are the dollar revenues earned by the country’s outsourcing industry and tourism sector.
One advantage of the strong peso is that since most of the country’s goods are imported, including oil and food, prices are kept stable because the importers can buy more with their stronger peso. Thus, inflation is kept at current levels.
The irony of the strong peso is that the very sectors that caused its rise are the very ones who suffer most from the peso’s new strength. The business process outsourcing (BPO) industry, for example, has warned that the strong peso is becoming “worrisome” and a real threat to the viability of their operations.
“At P43 to the US dollar, that is already painful and small operators are already operating at a loss. If your capital is small, you might close shop and that is understandable,” said BPO Association of the Philippines (BPAP) president Oscar Sanez.
And then there are the exporters, whose products suddenly lost their competitiveness in the world market because of the increasing value of the peso. Add to these the local manufacturers, who now must worry not only about the glut of imported goods from China, Thailand and other countries, but who must now also worry about these imported goods becoming even more cheaper than theirs. And then, there are the local hospitals and derma clinics whose efforts to lure in patients from the US and other countries would be severely stalled because their services would be more expensive because of the weakening dollar.
Another industry that would be severely affected is the tourism industry. Because of the strong peso, it would be more expensive for Koreans, for example, to play golf, eat in restaurants, enjoy the nightlife, and fly to the country’s various vacation destinations.
When I first traveled back to the Philippines in September 2004, my dollar fetched me 56 pesos in the foreign exchange outlets. When I came back in 2005, it was still around 54 pesos. On my next trip in April 2007, it was down to around 52, but when I came back in November of that year, it was down to 41.50 pesos. That means in just a few months, I lost about 10,000 pesos for every $1,000 that I brought, meaning I got less goods and services for the same amount of dollar that I brought with me.
If I were a tourist, and not a balikbayan, I might have considered going to China instead, where the value of the yuan against the dollar has remained almost the same through the years because the Chinese government wanted it that way to make Chinese goods more competitive in the world market. Or I may decide to go to another Asian country, where the depreciation of the dollar is not as high as in the Philippines.
The biggest losers in the peso’s rise, however, are the biggest contributors to its strength – the OFWs and their beneficiaries. The more than 8 million overseas Filipinos all over the world are estimated to remit around $19 billion annually to the Philippines, almost the entire amount of which is poured into the economy through their purchases, mortgage or rent, tuition, transportation, and other expenses.
On June 6, the peso was valued at 47.13 to the dollar, and last Monday, Oct. 18, it closed at 43.25. In just four months, the value of the OFWs’ income, which are mostly remitted in US dollars, have dropped by around P4 for every dollar.
This means that if the average appreciation of the peso to the dollar stays at P4 for every dollar for one year, these families would be spending around 76 billion pesos less than they would normally do. Can you imagine the impact of this amount to the economy? That means a total of 76 billion pesos less income for sari-sari stores, supermarkets, department stores, tricycle drivers, bus companies, airlines, shipping companies, schools, manufacturers, banks, and other Philippine businesses.
The government must find a way to check the rise of the peso to a level that would not hurt the economy in the long run. But more than the economy, the government should intervene in the peso-dollar exchange rate because of its adverse effect on the OFW families, who have done more than enough to keep the country afloat despite bad governance of the past administrations.