INFLATION AND FOREIGN EXCHANGE

 What is inflation?

Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods
and services is rising.
Inflation represents the rate at which the cost of goods and services increase over a period of time.

 Causes of Inflation
1. Demand-pull inflation
- occurs when an increase in the supply of money and credit stimulates overall demand for goods and services
in an economy to increase more rapidly than the economy's production capacity.

 Causes of Demand-Pull Inflation

 Increased borrowing.
 Depreciation of rupee.
 Low unemployment rate.
 Due to fiscal stimulus.

 Effects of Demand-Pull Inflation

 Shortage in supply
 Increase in the prices of the goods (inflation)
 The overall increase in the cost of living

2. Cost-push inflation
- is a result of the increase in prices working through the production process inputs. It occurs when overall
prices increase (inflation) due to increases in the cost of wages and raw materials.
- As a currency loses value, prices rise and it buys fewer goods and services. This loss of purchasing power
impacts the general cost of living for the common public which ultimately leads to a deceleration in
economic growth.

 Causes of Cost-push Inflation

 Increase in price of inputs
 Increase in price of inputs
 Defective Supply chain
 Low growth of Agricultural sector

3. Built-in inflation
- is related to adaptive expectations, the idea that people expect current inflation rates to continue in the
future. As the price of goods and services rises, workers and others come to expect that they will continue to
rise in the future at a similar rate and demand more costs or wages to maintain their standard of living.
 The most commonly used inflation indexes are the:
1. Consumer Price Index (CPI)
CPI is a measure that examines the weighted average of prices of a basket of goods and services which are of
primary consumer needs.

Effects of INFLATION on the Economy

- Sudden or unpredictable inflation rates are harmful to an overall economy. They lead to market instability
and thereby make it difficult for companies to plan a budget for the long-term.
- Inflation can act as a drag on productivity as companies are forced to mobilize resources away from
products and services to handle the situations of profit and losses from inflation.
- Moderate inflation enables labour markets to reach equilibrium at a faster pace.

2. Foreign Exchange
- It is the process of exchanging/trading of national currencies into another.
- Foreign exchange markets has a critical role in facilitating cross border trade, investment and financial
transactions.

Factors that Affect Foreign Exchange

- The Market forces such as trade, investment, tourism, and geopolitical risk determine the value of any given
currency.

- For example, the importation of oil has inflated because of the geopolitics in the country of Russia and
Ukraine, the supply and demand has also change because of the inflated exports from Russia we have now
felt the sudden rise of prices in our oil that has now affected tons of People, and as the oil inflates other
things like price of commute has risen up as well

- Many factors can potentially influence the market forces behind foreign exchange rates. The factors include
various economic, political, and even psychological conditions. The economic factors include a government’s
economic policies, trade balances, inflation, and economic growth outlook.

- Political conditions also exert a significant impact on the forex rate, as events such as political instability and
political conflicts may negatively affect the strength of a currency. The psychology of forex market
participants can also influence exchange rates.

 Who Controls Foreign Exchange?

Bangko Sentral ng Pilipinas

- The BSP allows the residents and non-residents of the Philippines to purchase foreign exchange from
authorized agent banks.
GROSS DOMESTIC PRODUCT & GROSS NATIONAL PRODUCT
 Gross Domestic Product (GDP)
- Domestic means in HOME
- Goods made “in home”.
- It refers to the value of all the final goods and services produced within a nation’s borders.
- 2020 Philippine’s GDP: 361.5 Billion USD

GDP can be calculated in three ways using:

- Production
- Expenditure
- Income

Included in GDP:

- Personal Consumption
- Business Investment
- Government Spending
- Net Exports

NOT included in GDP:

- Sales of goods that were produced outside our domestic borders

- Illegal sales of goods and services (black market)
- Transfer payments made by the government
- Intermediate goods that are used to produce other final goods

 Gross National Product (GNP)

- Refers to the value of all the final goods and services produced by a nation’s citizens.
- Goods made “by citizens”
- Excludes goods + services produced w/ labor + property supplied by foreigners in the US.GNP is used to
measure income – not output.
- Usually very close to a nation’s GDP.
- GNP signifies how a country’s people contribute to its economy. It considers citizenship, regardless of the
location of the ownership.
- GNP does not include foreign residents’ income earned within the country. GNP also does not count any
income earned in PH by foreign residents or businesses, and excludes products manufactured in the country
by foreign companies.
- 2021 Q4 Philippine’s GNP: 5,019,573.95 PHP
FOREIGN INVESTMENTS
1. FOREIGN INVESTMENTS
- Involve capital flows from one country to another, granting the foreign investors extensive ownership
stakes in domestic companies and assets.

Foreign investments can be classified into two ways:

 FOREIGN DIRECT INVESTMENTS

- physical investments and purchases made by a company in a foreign country, typically by opening plants
and buying buildings, machines, factories and other equipment in the foreign country.

 FOREIGN INDIRECT INVESTMENTS

- Involve corporations, financial institutions, and private investors buying stakes or positions in foreign
companies that trade on foreign stock exchange.

The Role of Foreign Investments in Economic Development

- In general, FDls are made in open economies that have a skilled workforce and the potential for growth. Foreign
direct investment frequently goes beyond capital investment. It may include the provision of management,
technology, and equipment as well.

Advantages of Foreign Direct Investments

1. Creation of Jobs
- FDI boosts the manufacturing and services sector.
2. Human Capital Development
- Skills that employees gain through training and experience can boost the education and human capital of a
specific country.
3. Technology
- Targeted countries and businesses receive access to the latest financing tools. technologies, and operational
practices from all across the world
4. Increase in exports
- Many goods produced by FDI have global markets, not solely domestic consumption.
5. Improved Capital Flow
- Inflow of capital is particularly beneficial for countries with limited domestic resources
6. Creation of a competitive market
- FDI helps create a competitive environment, as well as break domestic monopolies.

Disadvantages of Foreign Direct Investments

1. Hindrance of Domestic Investment

- Sometimes FDI can hinder domestic investment.
2. Higher costs
- It is more expensive than when goods are exported
3. Negative exchange rates
- Foreign direct investments can sometimes affect exchange rates.
PHILIPPINE STOCKS EXCHANGE AND PHILIPPINE STOCK EXCHANGE INDEX
 PHILIPPINE STOCKS EXCHANGE (PSE)
- It is the national stock exchange of the Philippines.
- The Philippine Stock Exchange (PSE) is the corporation that governs our local stock market.
- The Philippine Stock Exchange, Inc. (PSE or Exchange) is a private non-profit and non-stock organization created
to provide and maintain a fair, efficient transparent and orderly market for the purchase and sale of securities
such as stocks warrants, bonds, options and others

Role of Philippine Stocks Exchange

- It brings together companies that aim to raise capital through the issue of new securities.
- Facilitates the selling and buying of the issued stocks and warrants.
- It plays a vital role in the financing of productive enterprises that use the funds for the growth and expansion of
new jobs.
- Essential to the growth of the Philippine economy.
- Has committed itself to:
o protecting the interest of the investing public; and
o developing and maintaining an efficient, fair, orderly and transparent market.

How PSE's work and managed

- PSE is categorized as a market operator enabling investors to avail investment opportunities and list these
securities through the trading process. On the flip side list of securities are able to raise funds from public
investors. And we are not just talking about retail investors but also insurance companies, banks, and
institutions. When it comes to secondary trading and in existing stockholders ups to buy and sell securities which
are listed in the markets, using PSE's facilities
- One of the non-broker members heads the Exchange, appointed by the Board as the President and Chief
Executive Officer (CEO). The President, along with the professional management of the PSE, executes the policy
determinations of the Board and ensures that the Exchange is operating efficiently. It carries out for the
members, listed companies, and exchange system to ensure that stock market operation in the Philippines is
kept within the standards of fairness, transparency, professionalism, trust and integrity.

Companies benefit from listing under the exchange:

1. They are able to tap the capital markets for their projects.
2. Being listed in the PSE pushes the company to comply with regulatory requirements.
3. Firms will know how much is their company's worth.
4. They will be able to generate income/ dividends for the investor and the company.
5. Listing with PSE gives you seal of excellence.

 PHILIPPINE STOCKS EXCHANGE INDEX (PSEI)

- PSEI is the main index of the Philippines Stock exchange and was formerly known as "Phisix"
- An index that tracks the performance of the 30biggest and most actively traded stocks in various industries that
are listed in the Philippine Stock Exchange (PSE) or also called "blue-chip companies"
- Benchmark for the Philippine stock market and serves as the bellwether for the Philippine economy.
 - The index's movement is particularly good for identifying investors expectations for the whole economy. If
sentiment is negative, you'll see a drop in the index. The reverse happens if the sentiment is positive.
- Serves as an indicator of the price level changes of the entire Philippine stock market.

How are companies chosen for PSEI?

3 CRITERIA

1. Free float level must be at least 15%

2. Company must rank among the top 25% in terms of median daily value in nine out of the twelve month period in
review
3. The Philippine Stock Exchange (PSE)chooses the Top 30 among qualified companies based on the full market
capitalization
PHILIPPINE FISCAL POLICY
The Philippines’ Gross Domestic Product has already contracted by 0.2% during the first quarter on the year 2020 and is
projected to fall in the - 1% to 0% range, according to the Bangko Sentral ng Pilipinas or to 2% according to the Asian
Development Bank’s projection.

 MACROECONOMICS
- "study of the behavior of the economy as a whole."

Three Objectives of Macroeconomics

• High GDP
• Low Unemployment
• Price Stability

Macroeconomics Policy Instruments

• Fiscal Policies
• Monetary Policies

FISCAL POLICY

- It is the government regulation, including tax policy, government spending and resource allocation, which has
significant effects on our aggregate demand, inflation and employment.
- It refers to the measure employed by the governments to stabilize the economy specifically by manipulating the
levels and allocation of taxes and government expenditures.
- It is a collective term for the taxing and spending actions of governments

Major types of Fiscal Policy

1. Expansionary Fiscal Policy

- It is a policy use when an economy is experiencing a recession or a downward business cycle.
- The government uses this policy to:
• Build a strong economic growth
• Nudge the economy toward full employment
- Two important aspects in Philippine Economy:
• Government Spending
• Tax Cuts

Government Spending

This data obtained from Philippine Statistics Authority shows the increased government spending for the
past 10 years, as part of the governments' pursuit of economic growth this expansion fiscal policy includes
infrastructure investment that would help businesses and would attract investors.

Tax Cuts

- It is a policy by which Tax Cuts government system reducing tax would generate more income for the
people that would be used for purchasing goods and services.
 - Corporate Recovery and Tax Incentives for Enterprises (CREATE ACT)- March 26, 2021

2. Contractionary Fiscal Policy

- This type of policy is undertaken to pay down government debt and to cap inflation wherein in
government spending is lower than tax revenue.
- It is the opposites of Expansion Fiscal Policy

R.A. 11496 (Bayanihan to Heal as One)

- This law provides for wide-ranging spending on social amelioration programs or SAPs, to aid those
economically afflicted by quarantine measures.
- Republic Act 11469 was signed into law on 23 March 2020 declaring a national health emergency
throughout the Philippines as a result of the COVID-19 situation
- Two Keys to SAPs:
• Emergency Subsidy Program (ESP)
• Small Business Wage Subsidy Program

Emergency Subsidy Program (ESP)

- a general cash subsidy aimed at putting money in the handsof those negatively affected by quarantine
measures
1. Assistance to Individuals in Crisis Situations
2. Livelihood Assistant Grants
3. Pantawid Pamilyang Pilipino Program or 4Ps

Small Business Wage Subsidy Program

- designed to allow small businesses to continue paying their employee

PHILIPPINE IMPORT AND EXPORT SITUATION POLICY
• IMPORT - stands for the purchase of goods and services that a country lacks from other countries to use in the
domestic country.
• EXPORT - stands for selling goods and service which are produced in the home country to other countries.

Trade Policy

- The Philippines has developed strong international ties, obtaining membership of ASEAN (1967), the WTO
(1995) and China-ASEAN Free Trade Area (2010).
- In addition, the Philippines is strengthening ties with China, the EU and have negotiated a number of trade
agreements including:
- Regional free trade agreements (FTAs) signed under the auspices of ASEAN with six countries individually,
including China, Japan, Korea, India, Australia and New Zealand
- Bilateral FTA between the Philippines and Japan (currently undergoing review)
- FTA signed with EFTA member states in 2016
Tariffs and Taxes

For Importers:

• United Nation’s Standard International Trade Classification (SITC).

• tariff finder
• 12% VAT
For Exporters

• The only exported good which incur a tariff are logs at 20 percent.

Special Economic Zones

Exempted from paying taxes and tariffs on imported raw material and manufacturing.

The main SEZs in the Philippines include:

- Clark Freeport Zone;

- Poro Point Freeport Zone;
- John Hay Special Economic Zone;
- Subic Bay Freeport Zone;
- Cagayan Special Economic Zone;
- Zamboanga City Special Economic Zone and;
- Freeport Area of Bataan.

Free Trade Agreements

- The Philippines is a member of six regional free trade agreements (FTAs) as well as one bilateral FTA with Japan.
- The Philippines, by virtue of its membership in ASEAN, is also a party to the five FTAs that ASEAN has signed with
the following countries or group of countries:
- Australia and New Zealand; China; India; Japan; and Korea
R.A 7653- BANGKO SENTRAL NG PILIPINAS
• Overview
- Bangko Sentral ng Pilipinas is the central bank of the country
- It is established on July 3, 1993
- Formerly known as Central Ba k of the
- Philippines and established on January 3, 1949

• Section 1: Declaration of Policy

The State shall maintain a central monetary authority that shall function and operate as an independent and
accountable body corporate in the discharge of its mandated responsibilities concerning money, banking, and credit In
line with this policy, and considering its unique functions and responsibilities, the central monetary authority established
under this Act , while being a government - owned corporation, shall enjoy fiscal and administrative autonomy.

• Section 2: Creation of the Bangko Sentral

There is hereby established an independent central monetary authority, which shall be a body corporate known
as the Bangko Sentral ng Pilipinas, hereafter referred to as the Bangko Sentral ng Pilipinas.

• ART. 12 National economy and Patrimony, Section 20

The Congress shall establish an independent central monetary authority, the members of whose governing
board must be natural-born Filipino citizens, of known probity, integrity, and patriotism, the majority of whom shall
come from the private sector. They shall also be subject to such other qualifications and disabilities as may be prescribed
by law. The authority shall provide policy direction in the areas of money, banking, and credit. It shall have supervision
over the operations of banks and exercise such regulatory powers as may be provided by law over the operations of
finance companies and other institutions performing similar functions.

Primary Objectives

 Must provide policy directions in the areas of money, banking, and also in credit.
 Must have supervision over the operations of banks and exercise such regulatory powers as provided by the
law.
 To maintain price stability that is conducive to a balanced and sustainable growth of the economy.
 It also promotes and maintains the monetary stability and convertibility of the peso.

Functions of BSP

 The Money Manager

 The Supplier of Money
 The Banker's Bank
 The Supervisor of All Banks
 The Main Bank of the Government
• Organizational Chart of Bangko Sentral Ng Pilipinas

• Monetary Policy of the Philippines

What is Monetary Policy?

 To manage the supply and cost of money and credit

 To influence overall demand for goods and services
 To attain price stability

Contractionary

- When there is too much money in the economy.

 Higher interest rates
 Less lending/borrowing
 More saving
 Less spending

Expansionary

- When there is too little money in the economy.

 Lower interest rates
 More lending/borrowing
 Less saving
 More spending
EFFECTS OF MONETARY POLICY ON THE PHILIPPINE ECONOMY

(2002-PRESENT)

 Inflation Targeting
- Government sets inflation target (in consultation with BSP)
- AFFECTS: Households and Businesses
- Increase in Policy Rate = Decrease in Money