Crossroads (Toward Philippine economic and social progress)
Philippine Star, 22 August 2012


The exchange rate as I write this piece is P42.42 to one US dollar. The peso exchange rate provides us the price of goods and services that we buy from foreigners and, likewise, the price that foreigners pay for the goods and services that we produce and sell to them.

Peso appreciation. The peso has been experiencing appreciation. In 2005, the exchange rate was P55 to the US dollar. In 2010, it was P44.3 to one dollar.

What this means is that the peso has been rising in value. It takes less pesos to buy foreign goods. In contrast, when the peso loses value – that is, when it depreciates – foreign goods become more expensive and exports become cheaper to foreigners.

The peso appreciation has given a false sense of optimism about the country’s economic condition. Domestic shoppers find foreign goods cheaper in the shopping malls. A side effect of this development is that domestic goods become relatively more expensive compared to imports.

Impact on export industries.” An unfavorable impact of currency appreciation is on export industries. They become more costly. Unless rising productivity overwhelms this rise in cost, export industries lose their markets. All export industries are hurt in the sense that it means loss of competitive advantage.

Recently, a car battery exporter in the country complained that a two-peso appreciation against the dollar erodes five percent of its export revenues. In terms of income, the company complains that this leads to a 33 percent reduction in profits.

Exchange rate appreciation has hurt the country’s garments industry badly. Already troubled by labor market policies, the peso’s strength has further reduced its ability to compete. The semiconductor assembly, for example, is threatened by rising cost from appreciation. So is the BPO industry.

Sourcing of supply by foreign buyers could shift to those countries that offer cheaper competing products. Reduced competitiveness means reduced employment at a time when unemployment and underemployment are big problems for the country.

The exchange rate is policy determined. Although the exchange rates of most countries are likely to be more market determined today, there is much room for the exercise of policy discretion. The country’s exchange rate is an indirect outcome of many domestic policies that affect the demand for and supply of foreign exchange.

In the Philippines, export earnings including proceeds from foreign tourism and the volume of remittances from abroad substantially determine the exchange rate. Government and private domestic spending matched against total output ultimately sets the stage for the balance of payments to be in surplus or in deficit. Aggregate investment spending, fiscal policy and monetary policy all combine to influence the way the economy – and the peso currency rate – evolves.

In recent years, these developments have produced a balance of payments surplus. As a result, the country’s currency has become stronger.

It is the central bank’s role to manage the currency in the midst of these macroeconomic developments. On a day to day basis, however, it is the central bank that sustains, manages, and defends the peso.

Comparing the peso with the currencies of China, Indonesia, Thailand, Korea. As a way to instruct ourselves on how the Philippine peso exchange rate has evolved, I decided to track the currencies of four East Asian countries along with that of the peso.

Daily exchange rates of all these currencies with the US dollar are compared for a period of two years from Sept. 20, 2010 to July 31, 2012. I converted each of these exchange rates series into an indexed series based on the beginning period.

The period under study is one in which the world’s currencies are undergoing structural adjustments with each other. In particular, the US dollar is on a course of long term depreciation. The weakening of the dollar will strengthen US exports and force down its heavy dependence on imports, thereby reinforcing economic recovery.

A major complement of this economic scenario is for China’s currency to become stronger, that is, to appreciate. China’s currency appreciation accommodates its own structural adjustments to rely more on internal growth rather than export growth.

The results of this comparative review will help instruct on how all the countries are managing their exchange rate policies. From the nature of the world’s economic problem, the rate of appreciation of China’s currency is the upper limit for currency appreciation.

The exchange rates of five East Asian countries. On Sept. 20, 2010, the base period for the comparison, the per dollar exchange rate of each currency was as follows: China, 6.711 yuan; Indonesia, 8,070 rupiah; South Korea, 1,163.1 won; Philippines, P44.254; and Thailand, 30.73 baht.

On July 31, 2012 (the end of the period), the per dollar exchange rates of the same countries were: China, 6.33 yuan; Indonesia, 9,485 rupiah; South Korea, 1,139.9 won; Philippines, P41.93; and Thailand, 30.623 baht.

Looking at these exchange rates in terms of the indexes and relative to the beginning period, we find that on July 31, 2012, the following currency rates have these index numbers all measured in percent: China, 94.33; Indonesia, 105.64; South Korea, 98.01; Philippines, 94.76; and Thailand, 102.75.

(If the index number is below 100, it means that the currency has appreciated. If they have risen above 100, the currency has depreciated. Judging from the viewpoint of export encouragement, the currencies that have depreciated have gained an advantage over those that have appreciated.)

These numbers are telling to any economist and businessman. The peso has behaved like the Chinese yuan, although the peso’s day to day value has changed unsteadily compared to the yuan. They have both appreciated, with the Chinese yuan only slightly so.

By July 31, 2012, a rough calculation of the export edge of other countries relative to the Philippines is clear. Indonesia’s advantage in relative depreciation to the peso is 10.57 percent; South Korea’s, 3.25 percent; and Thailand’s 8 percent. We don’t belong yet in China’s league, yet we are tracking its currency exchange rate. (To arrive at these numbers, I simply deducted the index value of the exchange rates of the respective country from the peso index of 94.76.)

Conclusion: the peso approaches China yuan appreciation. The stark conclusion from this simple exercise is that the Philippine peso has appreciated the most compared to the three currencies of Indonesia, Thailand and South Korea, three high growth East Asian economies.

The Bangko Sentral has a lot of work to do to give the domestic economy much greater room for growth, to promote improved structural health, and to raise export performance. We are not China but our exchange rate has followed China’s path. This is unthinkable but true.