Business World, 21 January 2014


In recent days, the peso has dipped to a three-year low at P45 to a dollar. Should government authorities panic? I hope not. Overall, its effect on economic growth, employment, the government’s fiscal position, and the Bangko Sentral’s financial position is positive.

The weakness of the peso could have an adverse impact on government interest payments for 2014, National Treasurer Rosalia de Leon said on Tuesday. She estimated that for every peso appreciation against the US dollar, the government’s interest cost increases by P2 billion.

But she didn’t appear alarmed. She mentioned that there are offsetting factors to the peso depreciation. For one, the government intends to borrow less than last year. It plans to borrow P715 billion from both foreign and local sources in 2014. This is lower than 2013’s borrowing program of P735 billion.

The planned financing mix this year is 13% foreign sources, 87% domestic sources, or P95 billion externally and P620 billion internally.

In preparing the 2014 budget, the government assumed an exchange rate of P41-P43 per US dollar. Assuming that the peso averages P45 per US dollar, or two pesos lower, then the government could save $160 million (P7.2 billion), since it would have to borrow only $2.11 billion instead of $2.26 billion. That’s more than the potential additional borrowing cost (the difference between P45 and P42 times P2 billion) estimated by Treasurer de Leon.

But the Development Budget Coordination Committee (DBCC), the country’s top fiscal policy body, has done a budget sensitivity analysis to some macroeconomic parameters for FY 2014.

Based on the budget sensitivity table, a one-peso depreciation could result in a P5.5 billion surplus or reduction in the budget deficit. Revenues will increase by P8.4 billion through higher tax collection by both the Bureaus of Customs and Internal Revenue. The incresase will be partly offset by a P2.9 billion increase in disbursement owing to higher interest payments.

With a P3 peso depreciation, to P45/$1 from P42/$1, the budget deficit will be reduced by P16.5 billion (P5.5 times P3). Hence, the fiscal authorities should not fear the peso depreciation.

The monetary authorities should not fear the weaker peso, too. It means lower financial losses, or slight financial gains, for them. With the peso depreciation the BSP would have the opportunity to make up for its prior year’s gigantic loses.

Workers in both export-oriented and import-oriented manufacturing and agriculture are big winners too. A weaker peso provides greater opportunity for those employed, together the unemployed and underemployed sitting in the sidelines, to find better and more decent jobs.

The families of OFW workers are big winners too. With a weaker peso, their remittances will increase, in peso terms. Consequently, they can consume and invest more. In turn, the economy could grow much faster.

And according to the DBCC sensitivity analysis, a one-percentage point increase in real GDP growth could raise government revenues by P17.1, which the government can then spend in the next budget cycle. This should appeal to policymakers and fiscal authorities.

Overall, the benefits outweigh the costs of a weaker peso. Hence, policymakers shouldn’t fear it. They should embrace rather than fight it.

Budget shortfalls