Gainers and losers

The peso weakened quite rapidly against the dollar in the past two weeks. After closing at a 17-month low of P43.80 to $1 last Thursday, the local currency hit its weakest since February 2011 the next day at P44.17 to $1. In contrast, it averaged P41.14 to $1 in April and P40.73 to $1 at the start of the year.

The impact of a depreciating currency on the economy is varied: Some will benefit, others will suffer. The recent slide in the peso’s value has revived the debate on whether a weak currency is beneficial or not to the Philippines.

Proponents argue that a weak currency will boost a country’s exports and this, in turn, can lead to economic prosperity. This actually worked well for China, which has kept the value of its renminbi artificially low to the consternation of its major trading partners in the developed world. However, China is successful in this because it has a huge manufacturing base from which to flood the global market with ultracheap products. The Philippines, on the other hand, has no manufacturing base to speak of. It imports nearly everything it needs, and a weak currency only makes these imports more expensive.

Another favorite proposition is that a weak currency helps the beneficiaries of the more than 10 million overseas Filipino workers who send home billions of dollars a year. Money sent home by Filipinos abroad reached $2 billion in April, bringing the total for the first four months of 2013 to $7.7 billion. Converted to pesos, these remittances will indeed be bigger if the peso weakens against the dollar. A depreciation of P1 in the exchange rate in a month easily translates to about P2 billion in additional peso purchasing power for OFW beneficiaries here.

However, the Philippines being an import-dependent country, a weakening peso also increases the prices of basic items from toothpaste to canned goods to utilities like electricity and water. Transport costs also rise as imported oil and fuel products become more expensive in peso terms. With higher transport costs, everything being moved from the provinces to the metropolis, like vegetables and other foodstuff, will increase in price.

At the end of the day, the rise in the peso value of these remittances due to the peso’s depreciation will only be offset by the increase in the prices of basic goods and services that the OFW beneficiaries use daily.

Only two months ago, economists and analysts were projecting the peso to strengthen to below P40 to $1. This led to complaints from exporters that they were losing markets for their products. With the reversal in the exchange rate trend, the peso is now threatening to weaken to P45 to $1. But a return to P56 to $1, as what happened in 2005, has been ruled out in the present situation.

Given this scenario, it is well to remember that 70 percent of the economy is consumption-driven. While a weak peso will benefit exports (although this is arguable as many of these exports are made using mostly imported components, electronics being a good example), 70 percent of the economy will suffer in terms of higher prices of goods and services.

The peso has fallen in value against the dollar not because the Philippine economy is weak. On the contrary, the Philippines has more than $80 billion in foreign exchange reserves and a vibrant consumer-led economy. Besides, other Asian currencies have also been weakening since May 22, when US Federal Reserve chair Ben Bernanke announced that the American monetary authority would scale back its bond-buying program and end its easy money policy. This signaled a prospective increase in US interest rates and, in the process, drawn funds back to the American economy.

The current currency weakness is temporary. Bangko Sentral ng Pilipinas officials have said that the present volatility would even out after investors refocus on sound economic fundamentals. As BSP Assistant Governor Cyd Tuaño-Amador pointed out in a briefing last Friday: “We think that when the market has finished digesting all these bits of news [on the US Fed’s move and China’s slowing economy], it will concentrate on searching for fundamental stories that remain well anchored.”

This will include the Philippine growth story, where a strong economic expansion of 7.8 percent in the first quarter and a huge balance-of-payments surplus this year will support the peso. The central bank has also assured the market that monetary authorities have enough tools to cushion risks stemming from the currency weakness. We just have to believe this.