Weak peso: Sign of a weakening economy?

Businessmen have remained optimistic about the country’s economy, but their voices betrayed concerns about the local currency’s steep depreciation.

The peso has turned to become the worst performer in the region from what used to be the best currency a couple of years ago.

“There is nothing to be worried about as long as the peso does not go beyond 154 to the US dollar,” said George Barcelon, chairman of the country’s largest business organization – the Philippine Chamber of Commerce and Industry (PCCI).

“As long as businessmen do not hoard dollars and just buy on need basis only. I hope people will not take advantage of the situation,” Barcelon added as he was worried that doing so will certainly add pressure to the already bludgeoned peso.

“The peso is doing okay because we are doing huge infrastructure projects for our own benefit in the future,” he said.

Barcelon was confident the peso will take a breather in the third quarter this year. He was also hopeful that President Duterte’s state of the nation address today, July 23, will touch on this issue.

“But generally, I don’t think this worries business at all, our macro fundamentals are okay,” he added.

Sergio Ortiz-Luis Jr., president of the Confederation of Philippine Exporters said the only protection for exporters and OFWs is a competitive peso. OFWs remittances in 2017 reached $28 billion.

“Remember we have 12 million OFWs with at least 5 dependents or 60 million, that do not yet include exports, tourism sector and local industries with no more tariff protection. So we would rather have stronger dollar than strong peso,” said Ortiz-Luis.

He further stressed that the Philippines’ depreciated its local currency later than most peers in the region. India even depreciated 11 percent as against the Philippines’ 5 percent.

The peso has depreciated by less than 12 since December last year and every peso depreciation means an additional 128 billion in OFW remittances that will go into the purchase of new condos and other goods, Ortiz-Luis said. “If computed, the peso is still overvalued. Our peso devalued to 156 against the US greenback in 2013,” he pointed out. But whatever you call it, a depreciated currency signals something amiss in the economy, stressed businessman Jose Luis Yulo Jr., president of the oldest business chamber in the country Chamber of Commerce of the Philippine Islands (The Chamber), who had seen the worst of the peso during the Marcos era.

“Overall, a weak peso is a sign of a weakening economy,” Yulo stressed. A weak peso or depreciating peso affects people differently. Yulo explained that for consumers living in the Philippines and earning in pesos, it means higher cost of anything imported like oil, gas, vehicles, etc. For consumers living here and earning foreign exchange like exporters, of families supported by OFWs, it means more peso income that can alleviate their purchasing of imported goods.

However, since the Philippines is a net importer with an endemic trade deficit, the immediate impact will be higher prices all around.

Conversely, if the Philippines is a net exporter, then it will further strengthen the peso and make local consumer prices go down.

Already, Philippine inflation has reached a fresh high in at least five years as it surged 5.2 percent in June this year.

Atty. Victorio Mario Dimagiba, president of consumer advocacy group Laban Konsyumer, Inc., pointed out that the peso to dollar rate as of December, 2017 stood at 150.39. But the peso depreciated by 5.2 percent as it hit 153.04 in June this year.

The June inflation rate was at 5.2 percent, but higher in the National Capital Region at 5.8 percent. Food prices were up 6.1 percent and transport costs up by 7.1 percent. The inflation has eaten up the additional pesos earned by OFWs, according to Dimagiba.

Barcelon, however, said that higher inflation is one of the characteristics of a growing economy.

“A growing economy needs a bit of inflation and this is not a runaway one, but just enough to sustain growth,” he stressed even as noted increases in prices that he partly blamed to external developments and other issues like shortage in rice supply that triggered higher prices of this staple food.

On the flipside, he said, “OFWs are getting more peso yield and this balances the high cost of commodities.”

The better situation, Yulo said, is to have a stable

and steady exchange rate that does not drastically move up or down, because a volatile currency makes it difficult for businesses to make plans and do business profitably since they will have to factor in and gamble on the volatility of the peso.

“A weakening peso means the economy is weakening, or dollar reserves are going down, or dollar inflows are slowing down compared to dollar outflows. Overall, immediate impact is higher prices. In the long term, if the country can produce good products to export or can attract dollar inflows, then the peso strengthens,” said Yulo.

For OFWs living abroad, there is no effect, but for their relatives/families that are sent dollars, then they will have more pesos for every dollar, but this can be mitigated by higher cost of imported products.

“Overall, a weakening currency means a weakening economy, increasing foreign loans, decreasing dollar reserves,” he stressed.

So far, the country’s dollar reserves fell to their lowest level in six years at the end of end June this year as investors continued to convert their holdings into foreign currency either to repatriate their assets or to protect them against the peso’s weakness.

The country’s gross international reserves level as of end-June 2018 was lower at $77.68 billion from the end-May 2018 level of $79.2 billion. This was the lowest since the $75.3 billion recorded at the end of 2011.

In addition, the Philippine Statistics Authority reported that the country’s trade deficit widened to a four-month high in April on robust purchases of capital and consumer goods abroad.

The trade gap swelled 43 percent to $3.62 billion in April versus March as demand for telecommunication and transport equipment, and iron and steel, saw imports rising by a near two-year high of 22.2 percent.

The import-driven trade gap could worsen the current account deficit, which will put further pressure on the peso, which was hovering near 12-year lows against the dollar after the data was released. It remains Asia’s worst performing currency.

Barcelon, however, noted that the current account deficit still reflects the Philippines’ robust economy. The economic expansion, fueled by the government’s massive infrastructure program under the Build, Build, Build program has driven higher imports of capital goods, raw materials and other commodities.

The Philippine economic growth rate slowed to 6.5 percent year-on-year in the second quarter despite a boost from government spending on public goods and services as private sector investments lagged behind. The second quarter GDP expansion was lower than the 7.1-percent growth posted in the same period last year, although a bit faster than the 6.4 percent in the first quarter.