Report on the Effects of Strong Peso

The Peso is the foreign currency of the Philippines. It's subdivided into one hundred
centavos. Prior to 1967, English was used on all notes and coins, hence the term “peso” was used
as the name of the currency in the Philippines. When Filipino was introduced as a written
language, the term used on notes and coins became “piso”. The Philippines is estimated to be the
45th largest economy in the world, with a GDP of USD$216 billion (2011). Major exports
includes semiconductors and other electrical components, transport equipment, clothing, copper
and petroleum products and fruits. In recent times, the Philippines has been transitioning from an
agricultural-based economy to one that increasingly relies on services and manufacturing.
Agriculture now only accounts for roughly 30% of the workforce and about 14% of GDP. The
economy of the Philippines was the second largest in East Asia after World War II. However the
economy stagnated until the 1990s, based on economic policies and political volatility, and other
Asian countries surpassed the Philippines in terms of GDP growth. In the 1990s, a new program
of economic liberalization was introduced, leading to economic recovery until the 1997 Asian
Financial Crisis.
Last week, the Philippine Chamber of Commerce (PCCI) urged the government to
review the Philippine peso’s steady appreciation. The business group is concerned about the
impact of a strengthening peso on small exporters, especially those from the agricultural sector.
After closing at 48.58 last Friday, the peso is up 4.1 percent year-to-date, making it one of the
strongest currencies in Asia. The strong peso bears careful watching as it can be positive or
negative for specific sectors of the economy.
Positive effects of a strong peso:
1. Cheaper imports. A stronger peso makes imports less expensive and benefits
businesses and manufacturers that import their raw materials.
2. Lower consumer prices. The strong peso has translated to lower consumer prices,
thus providing some relief to Filipinos who have lost their jobs or are underemployed as a
result of the pandemic.
3. Benign inflation. The appreciation of the peso can temper inflationary pressures
emanating from imported goods and international commodity prices.
4. Lower foreign debt servicing. Since foreign debt is denominated in US dollars and
other currencies, a stronger peso translates to lower interest and principal payments.
Negative effects of a strong peso:
1. More expensive exports. Priced in our local currency, Philippine exports become
more expensive and less competitive as a result of a strong peso.
2. Less competitive BPO. A continued appreciation of the peso may make our Business
Process Outsourcing (BPO) sector less competitive against outsourcing powerhouses
such as India.

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 3. Less value for OFW remittances. A strong currency reduces the peso value of cash
remittances from Overseas Filipino Workers (OFWs).
4. Curtails development of local industries. Too strong a peso may hamper the
development of important local industries such as tourism, manufacturing, and
agriculture.

Good housekeeping contributes to currency appreciation one of the reasons behind the
strong peso is the country’s robust fiscal position. This was affirmed by our credit rating from
major agencies such as S&P, Moody’s, and Fitch. This was also recognized by the recent
upgrade to A by the Japan Credit Rating Agency. The government’s economic managers deserve
credit for being proactive and remaining vigilant in managing the country’s finances. Bangko
Sentral ng Pilipinas (BSP) Governor Ben Diokno pointed to the country’s solid fundamentals as
the reasons behind the strong peso. He cited benign inflation, a strong banking system, a prudent
fiscal position, and sufficient levels of GIR as positives for our economy. The central bank
governor, likewise, explained that our country exhibits favorable debt management and
international reserve metrics compared to our peers, and this is being manifested in the
movement of the peso. Furthermore, Finance Secretary Sonny Dominguez noted that the
appreciation of the peso was caused by a high currency reserve position and mild inflation. Gross
international reserves (GIR) rose to an all-time high of $98.6 billion as of end-July. According to
Secretary Dominguez, this is equivalent to 8.9 months’ worth of imports, 7.5x the country’s
short-term external debt based on original maturity, and 4.9x the short-term external debt based
on residual maturity. In fact, our country’s GIR currently exceeds total foreign debt stock. On top
of this, inflation for the month of August was lower than expected at 2.4 percent, thus
highlighting the country’s benign inflation environment.
Broad-based US dollar weakness drives peso higher Aside from the country’s sound
fundamentals, a major reason behind the strength of the Philippine peso is the weakness of the
US dollar. The US dollar index (DXY) has fallen 3.7 percent year-to-date. In a previous article,
we enumerated the reasons behind the broad-based weakness of the US dollar (see The end of
the strong US dollar?, June 8). US dollar weakness can also be seen in the 5.5 percent year-to-
date appreciation of the euro. In fact, the euro has appreciated more than the peso in recent
months. As seen in the chart below, the EUR/PHP rate has broken out of a 2 ½-year downward
channel back in July. The recent breakout is now consolidating, preparing to resume the uptrend
if 58.40 is broken.
Price chart of EUR/PHP Market to determine direction of peso a strong peso can be
harmful or beneficial to various sectors of the economy. We believe that the BSP has actually
been buying US dollars to smoothen the appreciation of the peso. If not for the central bank’s
buying, the peso would probably be stronger. Going forward, a combination of domestic and
global factors will remain as the primary drivers of the Philippine peso. Ultimately, the
movement of the peso will be determined by market forces.

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 Report on the Effects of Weak Peso
The Philippine peso is termed an ‘exotic’ currency, which means that there is far less
participation in the market for pesos than in the market for more established currencies, such as
euros or Australian dollars. For this reason, the price paid to change your money into or from
pesos (the "price" being equivalent to the market bid-ask spread) is far higher relative to the
amount of money being changed than it would otherwise be. ‘Liquidity’ in the peso market, or
the level of participation, is also far less than in many other emerging market currencies,
including the Indian rupee, the South African rand, the Brazilian real and even the Thai baht,
among others. In fact, even though the Philippine peso is the world’s thirty-third most traded
currency (as of 2016), peso trading contributes to just 0.1% of the foreign exchange market’s
total daily turnover. As an exotic currency, the peso is considered riskier than currencies from
major developed nations, which means that its value will fall against the FX majors (especially
JPY, USD, CHF, GBP and EUR) during periods of economic uncertainty or when global
geopolitical risk is elevated, or during bouts of high market volatility. Since 2000, the peso’s
lowest valuation against the US dollar came in April 2004 when USD/PHP reached 57.72. Its
post-2000 high occurred in January 2000 when USD/PHP fell to just 39.28.
The depreciation of the peso and impact on the economy
By: Fernando Fajardo
The peso exchange rate is determined by the supply of and demand for dollars in peso
terms or the supply of and demand for pesos in dollars terms in the foreign exchange market.
The peso gets weaker if more dollars go out of the country than what go in and vice
versa. This result is true in the current system of floating exchange rate where the Central Bank
allows the peso to seek its own value in the market in relation to the US dollar or any currency
foreign currency for that matter such as the Yen or the Euro.

Before the floating rate, there was the fixed rate system. After the last war the value of
the peso was pegged at 2 pesos to a dollar. At that time the Japanese was also pegged at 360 yen
to a dollar.

The scarcity of dollars forced the Central Bank to devalue the peso during the time of
President Diosdado Macapagal. During the time Ferdinand Marcos came the Nixon shock with
the unilateral cancellation of the direct international convertibility of the US dollar to gold in
1971. Consequently, most currencies that were pegged to the US dollar like the peso and the yen
found their anchors broken. The floating rate system was born.

The US dollar is the international currency of exchange. This means that to buy from
Japan, for example, we must first buy the dollars that we need to pay the Japanese exporter.
When the individual value of each country’s currency is determined in relation to the dollar in
the foreign exchange market, it is now possible to find the value of each currency in relation to

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each other. For example, if the Yen-US dollar exchange rate is 100 yens to a dollar and the peso-
dollar exchange rate is 50 pesos to a dollar. The peso-yen exchange rates are one peso to 2 yens.

A weak peso means a strong dollar and this makes all our imports in dollars more
expensive in peso terms. This tends to reduce imports or restrains its growth.
A weak peso, however, makes our export products cheaper to foreign buyers. This encourages
them to import more from us. With declining imports and increasing exports, our net export
expands.
This contributes to higher Gross Domestic Product or GDP. This is good. Higher GDP means
more income and employment for our people. The GDP is the value of our total output of goods
and services in final form or the sum of the value added or contributed by all sectors to the
economy. The problem arises when our exports have high import contents such as those coming
from our economic zones. It means higher production cost, thus negating in part the gains of our
exporters from the peso depreciation.

The depreciation of the peso also means that every dollar remitted by our OFWs could
translate into more pesos received by their loved ones here. It’s the same thing with the dollar
pensions received annually by foreign retirees living here, many of whom are married to the
locals. For them, the depreciation of the peso is good. Dollar remittances do not add up to our
GDP but it increases our Gross National Income or GNI. GNI is equal to our GDP plus our net
factor income from abroad which in part includes the inward remittances from our OFWs less
the outward remittances of foreign workers employed here. In all, our net factor income from
abroad is positive, making our GNI larger than our GDP. Countries with negative net factor
income from abroad, like Ireland, have smaller GNI than GDP. A bigger GNI means more
demand. This is good.

It encourages more domestic production and pushes our GDP higher.

The rise in prices or inflation, especially for products with high import contents, usually comes
with a falling peso. This is not good. It hurts the consumers. Among others, another consequence
of the falling value of the peso is the increase in the cost of servicing our foreign debts. When
our foreign debts are denominated in dollars, a weak peso means that we now have to allocate
more from our budget to pay for annual interests and amortization. This is not good. Less of our
budget will now be left for government programs and projects.

Finally, while the depreciation of the peso is good economically because of the GDP and
GNI expansion that follows, it is not so when it creates more uncertainties to our people and
investors. When the peso depreciates markedly like what just happened most recently, many will
be worried as to what will happen next?
Is the trend going to continue or reverse? Faced with uncertainties, a businessman may just
decide to do nothing at all and adopt a wait-and-see attitude. Otherwise, if he thinks, that the
depreciation will continue and act accordingly by increasing his production for export, for
example, he may lose in the end if his expectation proves wrong.

The housewife can lose too if she immediately spend the increase in pesos that she got
from the higher exchange rate of the dollar in pesos that she received from her husband abroad
when the peso strengthens against the dollar later on.

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 The peso exchange rate is determined by the supply of and demand for dollars in peso
terms or the supply of and demand for pesos in dollars terms in the foreign exchange market.

The peso gets weaker if more dollars go out of the country than what go in and vice
versa. This result is true in the current system of floating exchange rate where the Central Bank
allows the peso to seek its own value in the market in relation to the US dollar or any currency
foreign currency for that matter such as the Yen or the Euro.

Before the floating rate, there was the fixed rate system. After the last war the value of
the peso was pegged at 2 pesos to a dollar. At that time the Japanese was also pegged at 360 yen
to a dollar. The scarcity of dollars forced the Central Bank to devalue the peso during the time of
President Diosdado Macapagal. During the time Ferdinand Marcos came the Nixon shock with
the unilateral cancellation of the direct international convertibility of the US dollar to gold in
1971. Consequently, most currencies that were pegged to the US dollar like the peso and the yen
found their anchors broken. The floating rate system was born.

The US dollar is the international currency of exchange. This means that to buy from
Japan, for example, we must first buy the dollars that we need to pay the Japanese exporter.
When the individual value of each country’s currency is determined in relation to the dollar in
the foreign exchange market, it is now possible to find the value of each currency in relation to
each other. For example, if the Yen-US dollar exchange rate is 100 yens to a dollar and the peso-
dollar exchange rate is 50 pesos to a dollar. The peso-yen exchange rate is one peso to 2 yens.

A weak peso means a strong dollar and this makes all our imports in dollars more
expensive in peso terms. This tends to reduce imports or restrains its growth.

A weak peso, however, makes our export products cheaper to foreign buyers. This
encourage them to import more from us. With declining imports and increasing exports, our net
exports expands.

This contributes to higher Gross Domestic Product or GDP. This is good. Higher GDP
means more income and employment for our people. The GDP is the value of our total output of
goods and services in final form or the sum of the value added or contributed by all sectors to the
economy. The problem arises when our exports have high import contents such as those coming
from our economic zones. It means higher production cost, thus negating in part the gains of our
exporters from the peso depreciation. The depreciation of the peso also means that every dollar
remitted by our OFWs could translate into more pesos received by their loved ones here. It’s the
same thing with the dollar pensions received annually by foreign retirees living here, many of
whom are married to the locals. For them, the depreciation of the peso is good. Dollar
remittances do not add up to our GDP but it increases our Gross National Income or GNI. GNI is
equal to our GDP plus our net factor income from abroad which in part includes the inward
remittances from our OFWs less the outward remittances of foreign workers employed here. In
all, our net factor income from abroad is positive, making our GNI larger than our GDP.
Countries with negative net factor income from abroad, like Ireland, have smaller GNI than
GDP. A bigger GNI means more demand. This is good.

5
 Weak peso seen have positive economic impact
By: Julito G. Rada
First Metro Investment Corp., the investment banking arm of the Metrobank Group, said
Tuesday the peso depreciation will have a positive impact on the economy both in the short and
medium terms.
First Metro said in a statement while a lot of people including foreign analysts raised their
“worried” flag when the peso fell 53 against the US dollar on June 11, this would actually help
exporters and families of Filipinos working overseas.

The peso closed at 53.47 against the greenback Tuesday, down by 7 percent since the
start of the year. The local currency averaged 50.4 a dollar in 2017 and closed at 49.93 on Dec.
29.
Economists from First Metro and the University of Asia & the Pacific said there were several
factors driving the peso’s weakness.

“First, the US dollar has been strengthening since the end of the first quarter of 2018 due
to several reasons. The IMF projects the US economic growth to accelerate to 2.9 percent this
year compared to 2.3 percent in 2017,” they said.

They said that apart from the growth momentum, the effects of President Donald
Trump’s tax cuts would be felt by individuals and corporations starting the second quarter of
2018.
“The same tax reform tries to attract back to the US some $2 trillion of cash held by US
multinationals abroad. Even if only half of that returns to the US, that would add significant
demand for the greenback,” they said.

They also said that foreign stock and bond investors were selling off their peso-
denominated financial assets as they stood to lose with the peso depreciation. Foreigners were
net sellers in the local stock market by a total of P52 billion from February to May this year.

“Third, the Philippines’ trade deficit has been deteriorating and has reached a record $3.6
billion in April this year. For the first four months, this amounted to $12.2 billion, which if
multiplied by three [simple annualization] yields $36.6 billion—over 20 percent higher than a
year ago,” they said.
“However, this should not be viewed too badly as imports of capital goods [additions to
productive capacity] have shown robust growth,” they said.

The economists said the peso actually appreciated by 4.6 percent from 2004 to June 13,
2018, while Indonesia and Vietnam had large cumulative depreciation in excess of 40 percent
during the same period. Malaysia also showed net depreciation during the period.

“Peso depreciation also has positive effects for the country. The most obvious effect of
this would be to discourage imports and produce more exports, thus, reducing the trade deficits

6
over the medium term. And because of the increase in production locally, it will boost
employment generation,” they said.

The second positive effect is that it will give a boost to the peso income of OFW families,
exporters and those that supply raw materials to exporters, they said.
“There are about 10 million OFWs, and with an average family size of 4.6, the peso slide
benefits some 46 million Filipinos. Add to that the number of families dependent on exports,
which account for 30 percent of GDP, plus those that supply raw materials to exporters, we can
easily conclude that a vast majority of Filipino families benefit from the higher peso-dollar
exchange rate,” the economists said.

Both the First Metro-UA&P research and that of the Bangko Sentral would show that 10
percent-peso depreciation adds only around 0.5 percent to inflation, they said.

“If the foreign exchange rate averages 6 percent higher, the resulting additional inflation
would only be 0.3 percent. In addition, consumers of imported goods are mostly those that
belong to higher income classes. In conclusion, while the current weakness of the peso might
seem negative, its impact in both the short and medium term is net positive,” they said.

The peso posted a new 12-year low on June 18 on the lingering possibility that the US
Federal Reserve may increase interest rates two more times this year.
The peso closed at 53.48 from 53.27 previously. It was its weakest level in almost 12
years since the 53.55 on June 29, 2006.
Philip Wee, foreign exchange strategist of DBS Group Research, said in a report that
Asian currencies were facing depreciation pressures due to monetary policy divergences that
have supported the US dollar globally.

“The Fed has affirmed that it will be moving to deliver a total of four, not three, rate
hikes this year. The European Central Bank has confirmed that asset purchases will end in
December which forced markets to reverse earlier bets for the central bank to bring forward its
rate hike into 2019,” Wee said.

“… This should keep the Philippine peso, Indian rupee and Indonesian rupiah weak
beyond the key levels of 53, 68, and 14000 respectively,” Wee said.
Wee, however, said that while not immune, these three Asian currencies have been notably more
resilient than their emerging market peers.

The US central bank increased interest rates a few days ago and signaled that more
increases were on the way this year, as officials expressed confidence that the world’s largest
economy was strong enough for borrowing costs to rise without hindering economic growth.

The increase was the second this year and the seventh since the end of the Great
Recession and brought the Fed’s benchmark rate to a range of 1.75 to 2 percent. In a report, DBS
Bank of Singapore predicted that the peso might depreciate further to 54 per US dollar by the
end of the year due to the ballooning trade deficit.

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 In April alone, the country’s trade-in-goods deficit widened to $3.62 billion from $1.55-
billion deficit a year ago as imports surged by 22.2 percent while exports fell by 8.5 percent.
But Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. downplayed the peso’s current
level, saying the “FX market is naturally volatile.”
For its part, Australia and New Zealand Banking Group Ltd. said the peso might decline
further against the US dollar and may close the year at 53.50 because of the widening current
account deficit.
The country’s external position continued to weaken in 2017, with the current account deficit
hitting $2.5 billion, surpassing the projection of $100-million deficit for the year.

The deficit was also more than double compared to the $1.2-billion deficit a year ago.
The 2017 deficit was the biggest since 1999 when current account shortfall stood at $2.85
billion.

This year, however, Bangko Sentral expects current account deficit to hit $700 million.
Current account is one of the main components of the balance of payments.

For the full year 2017, the country’s balance of trade in goods deficit widened to $29.786
billion from $26.702-billion deficit in 2016.

The peso closed 2017 at 49.93, weaker than the 49.72 at the end of 2016. It opened 2018
stronger at 49.81 on Jan. 3. The peso’s all-time low was at 56.45 in August 2004.
First Metro Investment Corp., the investment banking arm of the Metrobank Group, said
Tuesday the peso depreciation will have a positive impact on the economy both in the short and
medium terms.
First Metro said in a statement while a lot of people including foreign analysts raised
their “worried” flag when the peso fell 53 against the US dollar on June 11, this would actually
help exporters and families of Filipinos working overseas.
The peso closed at 53.47 against the greenback Tuesday, down by 7 percent since the
start of the year. The local currency averaged 50.4 a dollar in 2017 and closed at 49.93 on Dec.
29.
Economists from First Metro and the University of Asia & the Pacific said there were
several factors driving the peso’s weakness.
“First, the US dollar has been strengthening since the end of the first quarter of 2018 due
to several reasons. The IMF projects the US economic growth to accelerate to 2.9 percent this
year compared to 2.3 percent in 2017,” they said.
They said that apart from the growth momentum, the effects of President Donald
Trump’s tax cuts would be felt by individuals and corporations starting the second quarter of
2018.

8
 “The same tax reform tries to attract back to the US some $2 trillion of cash held by US
multinationals abroad. Even if only half of that returns to the US, that would add significant
demand for the greenback,” they said.
They also said that foreign stock and bond investors were selling off their peso-
denominated financial assets as they stood to lose with the peso depreciation. Foreigners were
net sellers in the local stock market by a total of P52 billion from February to May this year.
“Third, the Philippines’ trade deficit has been deteriorating and has reached a record $3.6
billion in April this year. For the first four months, this amounted to $12.2 billion, which if
multiplied by three [simple annualization] yields $36.6 billion—over 20 percent higher than a
year ago,” they said.
“However, this should not be viewed too badly as imports of capital goods [additions to
productive capacity] have shown robust growth,” they said.
The economists said the peso actually appreciated by 4.6 percent from 2004 to June 13,
2018, while Indonesia and Vietnam had large cumulative depreciation in excess of 40 percent
during the same period. Malaysia also showed net depreciation during the period.
“Peso depreciation also has positive effects for the country. The most obvious effect of
this would be to discourage imports and produce more exports, thus, reducing the trade deficits
over the medium term. And because of the increase in production locally, it will boost
employment generation,” they said.
The second positive effect is that it will give a boost to the peso income of OFW families,
exporters and those that supply raw materials to exporters, they said.
“There are about 10 million OFWs, and with an average family size of 4.6, the peso slide
benefits some 46 million Filipinos. Add to that the number of families dependent on exports,
which account for 30 percent of GDP, plus those that supply raw materials to exporters, we can
easily conclude that a vast majority of Filipino families benefit from the higher peso-dollar
exchange rate,” the economists said.
Both the First Metro-UA&P research and that of the Bangko Sentral would show that a
10 percent-peso depreciation adds only around 0.5 percent to inflation, they said.
“If the foreign exchange rate averages 6 percent higher, the resulting additional inflation
would only be 0.3 percent. In addition, consumers of imported goods are mostly those that
belong to higher income classes. In conclusion, while the current weakness of the peso might
seem negative, its impact in both the short and medium term is net positive,” they said.
The peso posted a new 12-year low on June 18 on the lingering possibility that the US
Federal Reserve may increase interest rates two more times this year.

9
References

Fajardo, F. (2016, October 6). The depreciation of the peso and impact on the economy.
Retrieved from Cebu Daily News Inquirer:
https://cebudailynews.inquirer.net/107657/the-depreciation-of-the-peso-and-impact-on-
the-economy
Rada, J. (2018, June 26). Weak peso seen to have positive economic impact. Retrieved from
Manila Standard: https://manilastandardtoday.com/mobile/article/269020
Sy, W. (2020, September 7). Strong peso - good or bad? Retrieved from Philstar.com:
https://www.philstar.com/business/2020/09/07/2040489/strong-peso-good-or-bad/amp/

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