The problem with a strong peso…

The first problem with a strong peso is that it should not be called as such. Economists refer to currencies as either appreciating (increasing in value against another currency) or depreciating (decreasing in value). Calling the peso weak or strong puts positive or negative connotations into it.

An appreciating peso can be good or bad depending on your situation. If you earn US dollars like exporters, OFWs and call-center firms, then an appreciating peso is bad for you. You get to buy less in peso for the same amount of dollars you earn. But if you spend in dollars like importers, then a depreciating peso is bad for you.

From a nation’s point of view, an appreciating currency can be good or bad depending on whether it is a net importer or net exporter. For several decades, the Philippines has been a net importer thus we generally prefer an appreciating peso.

This also led to a strong belief that earning foreign currencies is good, thus pushing our countrymen to more than 190 countries and territories around the world. However, as more and more Filipinos work abroad (and send more and more dollars into the Philippines), the balance between import and export is shifting. Additional dollars come in due to the increased earnings of BPO firms and call center companies (warning: as the peso appreciates call center agents might be in for a crunch).

Right now our biggest import is oil, while OFWs are our biggest export. The overall economy is generally benefiting from the appreciating peso. Inflation is at its lowest levels in history. And oil prices in the Philippines would have risen much faster if the peso is not appreciating as much.

But the issue must be seen from an international perspective, the peso is not just appreciating… the US dollar is depreciating against all major currencies. One problem is that major oil-producing countries receive US dollars for payment. As the dollar depreciates, oil suppliers jack up their prices because they are now receiving less for every barrel of oil they produce. As oil prices go up, the economy of the US is affected more because it is more oil-dependent compared to Europe, Japan and other developed economies. As the US economy weakens, US dollar depreciates further, and a global economic slowdown might be triggered.

OFW families are also badly affected by the depreciating dollar. Since their dollar can buy less, OFWs have to send more dollars, leading to further appreciation of the peso. They even launched a campaign to withhold remittances with the aim of curbing the peso appreciation. It might be a losing battle; their remittances are being used for food, education, household maintenance and medicines. They cannot withhold for a very long time.

What should the government do?

1. Train OFW families to be dual earners. They should not rely on the remittances alone. More remittances should be channeled to savings and investments and less on immediate consumption and luxury.

2. Help exporters find other markets than the US. The EU, Japan (we need the JPEPA), Canada, and the rest of Asia is waiting for our products if only we can get our acts together.

3. Diversify and move away from the US dollar. When we buy oil, we pay in US dollars. When we take loans from China, we borrow and pay in US dollars. Since we get currencies other than the US dollar from our OFWs (Saudi Riyal and Dubai Dirham), we can probably use this to pay for our oil imports.

4. Resist the temptation of intervening too much. The main goal of the Bangko Sentral ng Pilipinas (BSP) is to maintain price stability. Then, why is it intervening with the foreign exchange? You can only achieve two out of three: price stability, free flow of capital and foreign exchange stability. Recent actions by the BSP suggest that they want all three… the results can be disastrous.

5. The appreciating peso is not really the biggest concern, a bigger concern is rising oil prices. We probably need an economist in NEDA and a competent person in the Department of Energy to deal with the problems of rising oil prices.

(thanks to rey barcelon for inspiring me to write this blog)