STRONG PESO: BOON OR BANE?
The Philippine Star
06/28/10

The bankers and pundits in financial markets are saying the Philippine peso has nowhere to go but up against the US dollar over the next 12 to 18 months. Is this something to crow about? Not if you ask our exporters and the millions of Filipino workers abroad who are now expecting some package of relief measures from the incoming administration.

President Benigno Aquino III begins his six-year term on June 30 facing a lot of economic challenges, one of which is how to give our exports sector, already crippled by the recent global financial crisis, a much-needed shot in the arm while some of ur key markets – the US and Europe, in particular – have yet to fully recover from recession.

According to the International Monetary Fund, World Bank, and Asian Development Bank, the world economy is slowly rebounding with Asia leading the global recovery. 

But while global trade has begun to pick up and the business environment has started to look a lot better than last year, local exporters still believe there is no big relief in sight for them. A peso that keeps on strengthening against dollar remains one of the industry's biggest problems, according to the Philippine Exporters Confederation Inc., or Philexport.

A strong peso also spells bad news for Filipinos working overseas whose remittances provided a big boost to consumer spending and helped the domestic economy from falling into a recession last year.

Yuan’s movements

Last week, the biggest news in the financial markets was not about Europe and its sovereign debt problems. The spotlight was on China, which on June 19 announced a major shift in its foreign exchange policy, pledging to make its currency – the yuan – more flexible.

The yuan, also called renminbi, is expected to strengthen gradually as China ends the yuan’s two-year-old peg to the greenback. According to analysts, Asian central banks including our Bangko Sentral ng Pilipinas currently have less clout to stop their currencies from further appreciating.

Bankers speculate that the peso will strengthen further this year and in 2011. Their forecasts vary, with some looking at an exchange rate of 43 to the dollar by the middle of next year, while others think such level may be hit as early as December of this year. Surely, a development not welcome by exporters and OFWs.

Exporters’ woe

Philexport, which has been advocating for a peso devaluation, is reportedly preparing its legislative agenda to be presented to the 15th Congress. This includes a proposal for a review of the mandate of the Bangko Sentral ng Pilipinas (BSP). The perception is that the BSP is supporting a strong peso to artificially rein in inflation.

Philexport is has urged the central bank to start rethinking its exchange-rate policy that, it points out, has equated a strong peso with a vibrant economy since the American occupation.

The strong peso, the group laments, has had a "devastating" impact on exporters who could not raise their prices and have seen their margins eroded. An industry leader was recently quoted in a newspaper report as saying that exports revenue has begun to pick up this year as major markets show signs of recovery, but he said a 48-per-dollar exchange rate could help accelerate the sector's growth this year.

Barking up the wrong tree

But for the BSP, the exchange rate should remain driven by market forces. That means it will never fix the peso value against the greenback nor intervene in the trading to support any exchange rate level.

Monetary officials have repeatedly told exporters that keeping the peso weak is not the way to compete and certainly not the only solution to the problems besetting their sector. Export competitiveness does not depend solely on the exchange rate, they said, but on the quality of export products, the ability of exporters to turn around and deliver on orders, and on operating costs such as power and labor.

Exporters complaining about the strong peso are, thus, barking up the wrong tree. The relief measures they need will not come from the BSP, but from the national government, which certainly can do something to address the high cost of power, for instance, and offer incentives.

OFWs’ dilemma

With the global economy on the road to recovy, the central bank has revised upward its 2010 growth forecast for OFW remittances to 8 percent from 6 percent previously, over last year's record level of $17.3 billion.

However, a rising peso will also mean weaker buying power for our millions of OFWs and their beneficiaries. If the peso reaches 43 to the dollar by year's end, from 46 in December last year, it means a reduction of P300 for every $100 they send home. Based on last year’s level of remittance, it means a loss of over fifty billion pesos in purchasing power.

A bit of good news is that the BSP has agreed to waive, for a period of six months, the fees imposed on banks that use its remittance processing facility called Philippine Payments and Settlements System, or Philpass. This will reduce the cost of sending money that is passed on to OFWs.

As more Filipinos leave the country to work overseas, they are expected to remain a major contributor to economic growth for several more years. Thus, they expect that as the new government crafts its economic policies, it will protect the interest of their beneficiaries and will provide measures that will mitigate the erosion of value of their remittances.

Shared response

The exchange rate movement is not entirely within the government’s control. Even China, an economic power, came to realize this and intends to temper its tinkering of the yuan value.

Whether the strong peso is a boon or bane depends on the response of government, the private sector and the public. For example, since ours is still an importing economy, the strong peso means lower cost of imported items such as fuel, industrial machineries & some vital commodities and raw materials. The lower cost must be passed on to the consumers to preserve and sustain their purchasing power. Manufacturing and export sectors should also avail of the lower peso cost to maintain their competitiveness.

However, while not entirely within its control, the new government should be seen as formulating policies that respond to concerns as exchange rates fluctuate. This includes a credible and doable program that the private sector and the public can look up to.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, SalcedoVillage, 1227 MakatiCity. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net