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No cause for alarm

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Editorial

No cause for alarm

/ 07:12 AM July 10, 2017

For the past weeks, the peso has been weakening against the dollar, nearing 11-year lows and causing concern among consumers about the impact on prices of basic goods and services. Just to be clear, it is not only the peso that is weakening against the greenback. A number of other currencies in Asean and emerging states are also weakening due to both economic and political reasons.

Last Friday, the peso ended at 50.58 to $1, a fresh low in nearly 11 years. The peso and other emerging-market currencies are depreciating mainly because of the rising possibility of tighter monetary policy in the United States, Japan, and European countries. “A major driver is sentiment for a stronger dollar as the US Fed moves forward with steps to normalize from
ultra-easy monetary policy as US economic conditions steadily improve,” explained Governor Nestor Espenilla Jr. of the Bangko Sentral ng Pilipinas. The recent weakness of the peso, he added, was in line with the Bangko Sentral’s exchange rate policy. Adding to the economic factor is the political tension especially in the Korean peninsula, which has prompted investors to seek safer haven for their money, away from risky emerging markets.

The concern mainly centers on fears of surging prices of essential goods and services, including electricity rates and rice, among others. However, economists have pointed out that the exchange rate is just one of many factors affecting the prices of goods, with supply and demand playing the most crucial role in price determination. For an oil-importing country like the Philippines, there is also worry that a weaker peso would raise pump prices of gasoline, diesel and kerosene, which are used in power generation, transportation and cooking. But current prices of crude oil have been low and the prospects of any increase despite production cutbacks by the Organization of Petroleum Exporting Countries are minimal. This explains why pump prices of petroleum products have hardly moved despite the peso breaching the 50-to-$1 level.

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On the other hand, there are many families who stand to benefit from a weaker peso — the millions of dependents of overseas Filipino workers who receive an average of $2 billion a month in remittances. They now get more pesos for every dollar sent by their relatives working abroad. The booming business process outsourcing industry also stands to benefit from a weaker peso as it gets more for every dollar that it bills its foreign clients. And if BPO companies will trickle down the benefits to their employees through higher salaries, then more Filipino families stand to benefit from the peso decline.

Looking ahead, it’s not as if the peso is heading toward 55 or 60 to a dollar. BMI Research, the research arm of international credit watchdog Fitch Group, even expects the peso to outperform by yearend despite its being “one of the worst performing” Asian currencies so far. It expects the peso to end the year at 50.20 to $1 before further weakening to 50.75:$1 in 2018.

The Bangko Sentral is also forecast to tighten its policy rate by half a percentage point before the end of the year, and this should see the real interest rate move in favor of the peso. Other factors that will prevent the peso from falling sharply against the dollar would include the robust economic growth to be caused by the government’s massive infrastructure spending plan, an improved business environment, steady remittance inflows, and strong foreign direct investments particularly from Japan and China.

For whatever it’s worth, historically, the peso reached an all-time low of 56.34 to $1 in October 2004 and a record high of 37.84 to $1 in May 1999.

Inflation in 2004 averaged 4.8 percent and was 6 percent in 1999. This year, the exchange rate averaged P49.92 to $1 in the first half and inflation averaged 3.1 percent. In short, a weak peso does not necessarily mean higher consumer prices.

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TAGS: currencies, foreign exchange, Inquirer editorial, Inquirer Opinion, peso
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