The Peso and the DollarBy Randell Tiongson on February 21st, 2013
Question: I have been reading about the peso getting stronger and the BSP controlling the exchange rate. Why is the peso getting stronger and what are its effects? Why is the BSP controlling it? —Name withheld upon request, asked via e-mail
Answer: One of the most common questions asked of me is the future of the US dollar in relation to the exchange rate. Things have been different these past years as we have seen the value of the dollar plummeting and the peso appreciating. If my recollection serves me right, I remember the dollar reaching a high of about 1: P56. Imagine buying a lot of dollars at that time and holding it up to today—that’s a lot of money down the drain.
There are generally two reason why the exchange rate is the way it is now. The US economy has been in a downturn. The US government’s response to the economic woes is to pump more money into the economy in the hope that it will usher growth. Unfortunately, the move means they need to print more money, which ultimately affects the currency—that’s the law of supply and demand at work. More supply and not so high demand will affect the value of the dollar. More demand is anchored on the performance of the economy, so the US is now in a very tricky situation.
Over this side of the globe, there has been much attention to Asian economies, led by China. Business (and the economy) must go on and they are continuously looking for areas where they can continue generating revenues. The Philippines, although a small player even in the region, has been getting its share of the action. The rising OFW remittances and the sterling performance of the BPO sector have kept our economy going and growing. It is said that the fundamentals of the Philippines are sound and the Aquino administration has been busy putting things in order.
The US economic woes coupled by the Philippine economy gains are the primary reasons why we see the exchange rate tipping to our favor.
Why is the concern on the strengthening of the peso getting much attention? I asked my friend, Dr. Alvin P. Ang, of the Philippine Economic Society, and this is what he says:
“The appreciation of a currency is generally viewed as a sign of a strong economy. That view is based on international trade—where physical trading of manufactured goods is key.
In the economy we are in, we are dominated by non-tradables mainly components of services which include BPOs, real estate, tourism, communication and transportation. These components invite foreign exchange if they are relatively cheap compared to other countries. This is what is happening at the moment. We are having large inflows of foreign exchange leading to a peso appreciation. However, these are not due to increased productive capacities per se but on services which cannot be traded physically. I think the BSP looks at it this way—the peso appreciation will not be sustainable unless the foreign exchange creates productive capacities leading to sustainable jobs. Thus, it sells dollars in the market or buy them as the case maybe; until a credible evidence of productive expansion is seen. At the moment, manufacturing is just expanding its base and the current growth is fueled by services primarily real estate, construction, BPOs and tourism.
“Besides, a strong currency could turn off foreign investors (less peso for their investments), tourists (will make Boracay more expensive than Phuket or Bali) and BPOs (will make Bangalore better than Makati). Worse, it will affect inflows of exporters (making our bananas expensive compared to Costa Rica) and OFWs. In the long run, a strong currency is not just the monetary value; it must be a combination of trust and faith in governance capacities, productive expansion and job creation, and the quality of the workforce, tourist spots, real estate services, among others.
“Thus, the peso will not appreciate sharply but will trade around 39-41. The view of a strong currency has to be linked with its long term sustainability.”
Dr. Ang raised a lot of valid points and enlightened me about the current strategy of the government. However, interventions usually have limited efficacy and we will eventually have to face the fact that market forces will ultimately exert themselves. While the BSP is giving us some relief from the strengthening peso, we must also start preparing by improving our efficiencies and be prepared for such eventuality. Industries must be more efficient to ensure profitability, BPOs should further enhance their competencies to ensure competitiveness, tourist attractions should be improved and the dollar earners should manage their finances better and take advantage of investment opportunities to ensure the growth of their wealth.
To those wondering what to do with their greens, re-read this blog and read between the lines.
My 2 centavos.
Also appears at the Inquirer.