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How does Philippines fare with the continuing peso appreciation?

01/05/2013

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Philippine peso emerged as the second-fastest appreciating currency in Asia and the fourth-fastest among all the actively traded currencies in the world for 2012 according to the Bangko Sentral ng Pilipinas. During the last day of trading, it posted a value of Php41.05 against US dollar. It started the year with a value of Php43.619 which makes its latest currency 6.53% stronger. The Philippine peso hit its strongest rate since January 2008 last December 8 as it closed at Php4.862.

Peso-Dollar Exchange Rate Trend for 2012

Source:Rappler

With this increase in the value of peso, the Bangko Sentral ng PIlipinas (BSP) has been in discussion with some of the local banks of the country to regulate its exposure to the non-deliverable (NDFs) and financial instruments being used to evade currency exposure. There has been a forecast that the peso would hit P38.50:1 value in the next two months.

Source: Interaksyon

 

Reasons for the Peso Gain

It is said that the rise of peso along with the weakening dollar is due to President Obama’s firm decision of imposing higher tax rates to the rich which he believes is essential for the US economy not to fall in the fiscal cliff.  On the domestic scene however, the increasing peso rate has been due to the improving rates it posted especially during the last period of the year caused by the rise in the foreign exchange inflows, large remittances of overseas workers, foreign investments of peso-denominated portfolio assets and foreign investments from the BPO sector.

This is supported by the Manila Times as it cited the following reasons as the cause of the increasing Philippine peso:

  1. The continuing bad health of the US and European economies, and improvements in the US economy.
  2. The never-ending increase in OFW remittances to their families,
  3. The continuing surge in Gross Domestic Product, which in the third quarter this year grew by 7.1 percent, more than twice the GDP figure of the third quarter of 2011
  4. The good news that the latest Forbes’ “Best Countries for Business” List has raised our ranking to 87th among 141 countries, ahead of China (96th) and India (97th)
  5. The large foreign exchange reserves of the Bangko Sentral ($82 billion) and the P2.95 trillion in deposits (savings) held by the Philippine banking system,
  6. The relatively low inflation rate, and
  7. Many other indicators showing, as the government and the Bangko Sentral love to boast, that ours are “very sound fundamentals.”

The positive performance of the economy could also be attributed to the economic measures presently implemented by the government. These projects seem to be working well that it has resulted to positive reviews about the country’s economic performance. This trend is expected to continue on the succeeding months.

 

Every peso counts

While the Philippine economy is growing in line with the continuing bad health of the Western economies, the sudden boost to the Philippine peso could not be immediately interpreted as a good sign for the country. Some economists shared that the peso growth also has its negative effects to the economy as well as to the performance of the various industries in the country.

  1. In general, Socioeconomic Planning Secretary Arsenio Balisacan explained that the strong peso value may cause the following:
  2. make Philippine-made products expensive abroad;
  3. erode the purchasing power of Overseas Filipino Worker (OFW) remittances;
  4. encourage the flow of hot money or investments in stocks and bonds
  5. reduce exporters' earnings;
  6. threaten local firms' earnings through cheaper imports.

The Philippine economy is affected by any movement of the US economy and vice-versa since US is the largest and most steady buyer of the country’s products. The economy is also affected by the amount of remittances coming in the country. They are playing a major role in contributing to the inflow of money in the Philippines. Due to this stronger peso, the debts of the Philippine government, banks and private corporations which are denominated in dollars are now at a lesser value so they would need to spend less to pay these debts.

        OFWs

This however affects the remittances coming in the country through the overseas Filipino workers (OFW). The higher value of peso means that the value of peso shrinks and so, the OFWs should send more in order to maintain the same amount of income they are previously sending out to their loved ones in the Philippines. Despite this effect of these higher remittances to the OFWs, the government continues to claim that the remittances coming in the country is till flourishing.

        Exporters

The export companies have warned that the increasing peso rate could cause the laying off of workers or shutting down of some of their operations. Some of the exporters in the country, particularly in Cebu, are already anticipating the impacts of this to their industry. The Philexport Cebu recently held seminars concerning the process control that aims to improve the industry by implementing controls on the processes and cost structures. Some exporters of the country are already noticing and experiencing the decline of the industry. Aside from this, other problems faced by the industry according to Exporter and Gift, Toys and Housewares (GTH) Foundation Inc. – Cebu president Ramir Bonghanoy includes the slow growth in US and Europe economies, P20 wage increase, strong appreciation of the peso and the natural calamities hitting the country. Due to this, there would be a downsizing in his business as he reduces his employees from 350-285 and 30-50 more by next year.

This, according to Bonghanoy however could be avoided by implementing some reforms in the business by making investments on new technologies, adopting some innovations and expanding the market just like what he does.

         Business Process Outsourcing (BPO) Firms

According to Benedict Hernandez, Business Processing Association of the Philippines (BPAP) president and CEO, the appreciation of peso widens the cost difference of putting up a BPO firm here in the Philippines and in India. In a statement, BPAP said that, “the combination of an appreciating peso and a depreciating Indian rupee has provided India with a cost advantage”. The competitive peso rate according to them is P42:$1 but beyond that, the industry would be gravely affected. Due to this, the fate of about 638,000 employees from the voice-based (call centers) and non-voice BPOs are at stake.

Also, this affects the profit margin BPO companies are getting from their clients. Even though all of their expenses are being paid in peso, the resources from abroad are being paid in dollars so they are gaining less than they used to.

        Local Firms

As for the local firms, there is a threat in the employment rate of the country due to the appreciating peso as the strong peso threatens to erode the country’s overall competitiveness, according to Socioeconomic Planning Secretary Arsenio Balisacan. This encourages cheaper imports which pose as a threat to the local producers. On the positive note, an appreciating peso could also encourage the flow of hot money or investments in bonds and stocks that is greatly essential in the development of the local industry.

 

What More to Expect?

Amidst this peso appreciation and the good performance of the currency in Asia, BSP Governor Armando Tetangco Jr mentioned that the current policy of the institution of allowing the value of peso to be determined by the market would still be practiced with constant monitoring to regulate its appreciation.

BSP expects that the peso’s strong performance would continue until 2013. The Philippine government also expects that the country would grow in between 6-7% this year. With these developments, it is also anticipated that Philippines would have an investment upgrade from the credit-firm ratings.

In relation, various industries in the country are expected to make necessary adjustments in their operation in order to cope with this god performance of the Philippine peso as the trend is expected to continue in the next few years.

 

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