Weaker peso: Should you worry?

Almost exactly 12 years ago, $1 was worth more than P56. Five months later, it was down to less than P52, and in due time went as low as P40. Other currencies in the region moved similarly, as weakness in the US economy and the dollar was driving it all. Government economic managers asserted then that the rising peso (that is, the falling peso-dollar exchange rate) was good news for Filipinos.

Last week, the exchange rate breached P51 to the dollar anew. It was under P50 five months ago, and just above P46 a year ago. The rapid fall of the peso is worth watching, especially as it’s been moving on its own. Our neighbors’ currencies have gone up in value, but ours alone depreciated since the year started, and is now described as Asia’s worst performing currency. Our economic managers say it’s good news. Actually, whichever way the currency goes, it could be both good and bad news, depending on how one looks at it, and on who is affected.

The law of supply and demand tells us that when the price of something goes up (including of a currency like the US dollar), supply has either decreased or demand has increased. Given recent trends, our dollar supply must be falling, or demand must be rising, or both have occurred. On the supply side, our exports are actually growing twice faster now than last year, so dollar inflows are up. Remittances from our workers overseas have also grown briskly, and could top $30 billion this year, which would be a record. But foreign direct investments from January to May (latest data available) are so far down a hefty 23 percent from a year ago. Portfolio or “hot money” investments from January to August also show a net outflow of $204 million, reversing the $1.7 net inflow in the same period last year. These ought to give us a clue on what’s happening. Supply fundamentals look good, but investor sentiment seems moving the other way, for reasons internal to us. One candid economic manager blames it on “political noise.”

Pressures on the demand side are giving a further push: demand for dollars has been surging as our imports outstrip exports, widening our trade deficit. But with the bulk of our imports being production inputs including equipment, fuel and raw materials, growing imports could also signal greater production and faster economic growth ahead, which would be good news.

A falling peso helps some and hurts some. Direct winners are families of overseas Filipino workers, whose remittances translate to more pesos. Domestic producers, especially exporters, also benefit. But even nonexporting producers can win, to the extent that the falling peso has made imported competing products costlier—if costlier imported inputs don’t wipe out the advantage. Meanwhile, foreign tourists would find their money going a longer way here—except that the Marawi crisis and the “noise” aren’t exactly making us attractive to visit at this time, and the tourism numbers are reportedly down from last year. Foreign investors would normally
also find it cheaper to invest here, especially in export-oriented ventures. But the numbers have moved the other way.

Losers are consumers of imported goods, as the peso cost of every dollar’s worth of imports would rise, leading to higher prices. Producers relying on imported inputs, and that’s nearly everyone, also face higher costs. Higher consumer prices could thus hit us all, including OFW families. Also hurt are those paying back foreign loans, who will need more pesos to pay them back, and this includes government itself.

Government, we are told, actually gains from the falling peso, as its higher foreign debt payments are more than offset by higher Customs collections with the bigger peso value of imports. Budget Secretary Ben Diokno explains that every P1 depreciation raises government debt service by
P2 billion, but boosts Customs revenue collections by P9.2 billion, so government still ends up on top by P7.2 billion.

Should we be alarmed with the falling
peso, then? I am. But taking everything together and considering your own peculiar circumstances, you would be your own best judge.

cielito.habito@gmail.com