Brace for the worst

Last Friday, the peso exchange rate fell to 54.985 to a dollar, the lowest in 17 years. Despite this, the Bangko Sentral ng Pilipinas (BSP) is not worried, saying the year-to-date peso average at 51.98 is still in line with the government’s assumption of 51-53:$1 for 2022. “We can see that the recent weakening of the peso along with other currencies in the region is consistent with more aggressive monetary policy normalization in advanced economies, particularly the US Fed,” explains BSP Deputy Governor Francisco Dakila Jr. Since the peso performs about average compared to its regional peers when measured against the US dollar, Dakila notes that external factors are the main reason for the local currency’s continued weakening. “You can see that this is more a strong dollar phenomenon rather than something that is attributable to domestic considerations.”

The truth, however, is that the peso weakness is an added burden particularly to ordinary Filipinos who are already reeling from the impact of the prolonged pandemic and surging fuel prices caused mainly by the Ukraine-Russia war, which disrupted the global flow of oil. The burden comes in the form of higher prices of essential goods and services with imported components. A more expensive dollar has added to the high price of importing oil products, which have the cascading effect of increasing transport and electricity prices, as well as processed food items that use imported inputs such as corn, wheat, and sugar.

A strong currency is always welcome news as it reflects positive developments in the country’s economy. For instance, in 2007, as the Philippine economy grew at its fastest rate in 31 years, the BSP noted that the peso emerged as one of the top-performing currencies in Asia, hitting its strongest in more than seven years at 41:$1 in December that year. For Filipino consumers, a firmer peso meant lower prices in peso terms for imported goods and services and locally produced items with inputs bought from abroad. The BSP said the stronger peso shielded the Philippines from the full impact of record-high world oil prices then and, based on its estimates, prices of oil products would have been higher by about P2 a liter if the peso had not appreciated against the dollar. This would have raised transport fares and food prices. On the other hand, for sectors whose earnings are denominated in dollars, a firmer peso is not a positive development, particularly for exporters and overseas Filipinos and their dependents who receive less pesos for every dollar they get.

Now the situation is reversed. The peso has fallen to its lowest in 17 years and prices of oil products are surging. Even as the peso weakened and neared 55 to $1, the increases implemented by oil firms last June 21 also brought the year-to-date adjustments to a net increase of P29.50 a liter for gasoline, P44.25 for diesel, and P39.65 for kerosene (used mainly for cooking and heating). As of June 23, pump prices of diesel averaged P89 a liter; gasoline, P85; and kerosene, P96, representing increases of 99 percent, 53 percent, and 70.4 percent, respectively.

The sad part is that the government cannot do anything about the factors causing the peso to depreciate and oil prices to skyrocket. They are all external factors beyond its control. At the same time, the BSP is also constrained in the use of available monetary tools — particularly interest rates — by the need to keep the economic growth momentum on track. Raising interest rates unduly to dampen demand for dollars can have the effect of stifling the economy as the cost of borrowed money might become prohibitive or unprofitable for business activities.

Although critics say the nominal increase in the peso value of remittances from overseas Filipino workers is easily canceled by rising consumer prices, just imagine if their families depended only on local incomes. Life would be more difficult for them as it is now. The millions of dependents of the more than 10 million Filipinos working or residing overseas will at least have more pesos to help them cope with rising prices of essential goods and services. For the others who have no recourse to dollar incomes, they can only tighten their belts some more and hope that the Ukraine-Russia war will end soon to bring order to the global crude oil and agricultural commodities markets and, in turn, allow economies around the globe to recover and get back to a growth trajectory.

For the poorest in society, the government must immediately provide whatever targeted financial assistance it can give them, even though its hands are tied by money constraints as the public debt has swelled to more than P12 trillion because of the unprogrammed expenses due to the COVID-19 pandemic. Filipinos can only brace themselves from the impact of a weakening peso and surging fuel prices as there is very little the government can do to address their underlying external causes. Preparing for the worst is the call of the times.

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