What weak peso means

The peso has weakened in value against the US dollar in recent weeks, and closed last Tuesday at P47.16 to $1—its lowest since 2009. Economists and analysts have attributed this weakening to an impending increase in US interest rates, which has the effect of luring funds to the world’s biggest economy and away from emerging markets such as ours.

The strengthening of the US dollar has been due to the increasing likelihood that the US Federal Reserve Board will start raising interest rates next month. This has boosted demand for the greenback as investors start buying US treasuries in anticipation of higher US interest rates. Other currencies from the euro to the yuan have also been weakening against the dollar because of this.

For local consumers, a weaker peso means higher prices in peso terms for imported goods and services. For example, a weak peso will negate the impact of falling crude oil prices abroad.

The pump-prices of gasoline and other petroleum products would have been lower had the peso not depreciated against the dollar. Cheaper fuel prices, in turn, would have triggered a reduction in transport fares and, consequently, food prices.

But for sectors whose earnings are denominated in dollars, a weaker peso is a positive thing. Exporters and overseas Filipino workers and their dependents now receive more pesos for every dollar they exchange. Thus, analysts are divided on whether a weak peso has a net positive or negative impact on the country. Some believe that the net effect is negligible.

Beneficiaries of OFW remittances may at the outset be buoyed by a firm peso. As the peso depreciates in value, they receive more pesos for every dollar sent to them. However, their pesos can buy less products here because of higher inflation resulting from higher import costs due to the weaker local currency.

With a peso depreciation, Philippine exporters also believe that they become more competitive in foreign markets as their products become cheaper in dollar terms. But other currencies in the region have also been weakening against the dollar, thus reducing or even offsetting the gain in price competitiveness arising from the peso depreciation. Exporters who rely heavily on imported raw material components will likewise be heavily affected as import costs also rise due to a weaker peso.

A weak peso also fuels inflation due to increases in the price of imported commodities, including milk, wheat and oil. Imported goods and services are more expensive in peso terms whenever the dollar strengthens and the peso gets weaker. This has the effect of increasing the prices of basic commodities and services, a clear damper to all Filipino consumers, including OFWs and exporters.

For the government, a weaker peso translates to higher debt servicing. The depreciation of the local currency increases the peso equivalent of foreign liabilities and the amount of pesos needed to buy the foreign exchange required to settle maturing obligations. This should have been money that the government could use to build more schools and roads or provide health services.

The impact of a declining peso varies for some sectors. The tourism sector may be affected both ways as foreign tourists find it attractive to visit the Philippines with their dollars buying more pesos, while domestic tourists find it expensive to visit places abroad because they will need more pesos to buy dollars.

From a long-term perspective, the peso has remained stable, averaging P46.82 to $1 from 1998 to this year. The weakest it has fallen to was P56.34 in October 2004, and the strongest was P37.84 in May 1999. At the start of the year, the exchange rate was P45.06 to $1, marginally slipping to P45.10 in June and to the P47 to $1 levels this month.

As the impact of a weaker peso varies among sectors, the recent trend of the local currency cannot be viewed as either positive or negative for the Philippines in general. The more important thing is for the Bangko Sentral ng Pilipinas to ensure that any weakening—or strengthening—of the peso will not be too sharp or too abrupt to disrupt normal trade or business operations. For OFW beneficiaries, it is best to save those dollars than splurge on new gadgets this Christmas season as all indications point to a further strengthening of the greenback against all currencies, including the peso.