Business World, 28 April 2015


Recent data show that the United States economic recovery remains tentative. These lead to fresh speculation that the peso will start to appreciate. But a strong peso, say P42 to US$1, does not necessarily mean that the Philippine economy is weak, but that the US economy is weak. In fact, a strong peso is not necessarily good for most Filipinos and the economy.

A weak US economy means the Fed, the monetary policy-making body, would delay raising interest rates. That would make the US less of a magnet for portfolio investors. Low US interest rates will drive portfolio investors to look for lucrative places where they can park their footloose capital.

That’s why the local stock traders are happy that the Philippine Stock Exchange (PSE) might continue to soar for just a little bit more. That assumes, of course, that the PSE will be more attractive than the other stock markets in the world.

Here’s a warning for policy makers: the short-term gains from the entry of hot money into the country should be weighed against the adverse, usually painful, consequences as it exits when the economic sentiment changes. The PSE’s gain could be the economy’s loss.

Other than the state of the US economy, there are other factors that might affect the peso-dollar exchange rate.

On the supply demand, overseas workers remittances continue to increase but at a decelerating rate. The peso appreciates as these remittances rise.

However, while remittances continue to expand, the rate at which they are growing has slowed in recent years. In 2013 the remittances grew by 7.2%. In 2014 they inched up by 5.6%, and for the first two months of the year, remittances further slowed down to 2.4%. Remember that remittances used to grow at double-digit rates.

The slowing growth of remittances may be attributed to the ongoing wars in the Middle East and the African continent. It is also due to the still fragile world economic recovery. Unemployment remains high in Europe. And because of falling oil prices, joblessness has turned for the worse in oil-producing economies.

Unless Filipino policy makers understand that a strong peso is not necessarily good for the Filipino people and the economy, they might unwittingly contribute to the peso appreciation. The policy of borrowing from abroad to finance the budget will definitely cause the peso to appreciate. But it would be unwise to borrow money from abroad at a time when the local economy is awash with both dollars and pesos.

On the demand side, the peso depreciates when imports are high, which happens when the domestic economy is expanding rapidly. Faster construction activity means higher imports, as the sector has high imports content, in the nature of construction equipment and other inputs.

The peso might depreciate (appreciate) when imports rise (fall) due to faster (slower) implementation of public infrastructure projects. The poor completion of government projects is epic. Financing is the least of the government’s problems since it is way below its expenditure program.

On the other hand, the sharp fall in oil prices has dampened the demand for dollars. In 2014, the forecast was that imports would grow by 14%; it actually grew by only 9%.

In January this year, as a consequence of plunging oil prices, imports of mineral fuels, lubricants and related projects fell by a whopping 43.4% — from $1.279 billion in January 2014 to $723 million in January 2015.

Overall, there is a strong likelihood that the peso-dollar exchange rate would be between P44 to P45 per US dollar in the near term. This narrow range is not only likely; it is desirable. It addresses the welfare of overseas Filipino workers, the demand of a growing economy, and the desire of monetary authorities to keep their finances healthy.