Battered peso

The peso weakened last week to its lowest level in 12 years against the dollar. At more than P53 to $1, the exchange rate has breached the upper limit of the government’s forecast of P50-53 to a dollar for 2018.

While this is welcome news to exporters and Filipinos working abroad (as well as foreign tourists visiting the country), it has a debilitating impact on the broader economy and the cost of living of ordinary Filipinos.

The local currency fell to a low of P53.27 to $1, the weakest since June 29, 2006, when it hit P53.55 to the dollar.

For perspective, official data showed that the peso traded against the dollar at an average of P50.41 in 2017; P47.49 in 2016; P45.50 in 2015; P44.40 in 2014; P42.45 in 2013; P42.23 in 2012; P43.31 in 2011, and P45.11 in 2010.

Economists ascribed the peso’s depreciation to the rising interest rates in the United States that make dollar-denominated investments more attractive to fund managers compared to peso-denominated securities.

This is evident in the net outflow of the so-called “hot money” or foreign funds invested mainly in the local stock market. For the month of May, for instance, $1.2 billion came in, but $1.4 billion went out.

This is exacerbated by the yawning trade deficit as the country spent more dollars to pay for imports than what it earned from exports.

Latest official data showed that the balance of trade in goods was at a deficit of $12.2 billion for the January-April 2018 period.

The Bangko Sentral ng Pilipinas reported that this trade imbalance had already pushed the balance-of-payments (BOP) deficit to $1.5 billion in the first four months of 2018.

(The BOP is an accounting of all transactions the country has with the rest of the world for various goods and services. A surplus means the country is earning more than it is spending, while a deficit represents the opposite.)

The central bank had initially targeted a BOP deficit of $1 billion for the entire 2018.

A weak currency puts pressure on inflation, which has risen to its highest in five years at 4.6 percent last May, as one needs more pesos to buy the same amount of goods and services from abroad.

For example, the Philippines imports nearly all its petroleum requirements. A weaker peso makes crude oil imports more expensive. This, in turn, will raise the cost of generating electricity, as some power plants still run on diesel or bunker

fuel. Transport costs — public buses and jeepneys as well as delivery expenses for nearly all products — will also increase.

Add to this the additional taxes on petroleum products imposed by the Duterte administration’s Tax Reform for Acceleration and Inclusion (TRAIN) Act in January — an excise of P3 a liter for kerosene, P2.50 a liter for diesel and bunker fuel, and P1 a kilogram for liquefied petroleum gas. The law also imposed an excise of P7 a liter on gasoline.

The spike in prices of essential goods and services has led to calls for an increase in wages and even a suspension of the TRAIN Law, despite the Department of Finance pointing out that the tax hikes contributed only 0.4 percent to the current inflation rate.

A weaker peso also raises the cost of wheat imports, thus resulting in higher bread prices. It also raises the cost of electricity as power utilities need more pesos to either import fuel or repay their foreign debts.

Manila Water Co. And Maynilad Water Services Inc. have given notice that they are seeking an increase in rates because of the weakening peso.

Economists also predict that the external payments position would likely deteriorate further as increased economic activities fuels demand for imported equipment and consumer goods.

The unfolding events on the economic front — the foreign exchange and inflation picture in particular — will be a major test for the Duterte administration, especially its economic managers.

Ordinary Filipinos would not mind much if prices of mobile phones or smart TVs go up due to the peso weakness. But if transportation fares, electricity and water prices, and expenses for food rise further, that is a different matter altogether.