The two sides of the peso

MONDAY, 22 AUGUST 2011 19:29 KENDRICK CHUA / PERSONAL FINANCE

JUST a week ago, the Philippine peso headlined business news after it breached the 41-to-a-dollar mark, its strongest close in three years. The day ended with the peso trading at 41.925 against the greenback.

Good news? It depends on who you ask. Just like anything else, a strengthening peso has both advantages and disadvantages. The coin has two sides after all. And if one is benefitting from its rise, the other is suffering.

There’s no denying the fact that a strong peso benefits the economy as a whole, and there are a lot of reasons to cheer for our currency. It’s an indication that foreign investors are gaining confidence in our country. With the United States and some countries in Europe experiencing debt crisis, the logical thing for foreign investors is to shift funds to emerging markets, one of which is the Philippines. Recently, rating agency Fitch raised our credit rating from “BB” to “BB+” or just a notch below investment grade.

In June net foreign portfolio investments yielded $140 million compared to $2.4 million just a year ago.

Small-time investors like me, who have been trading paper assets for several years now, benefitted from this and will likely continue doing so if this keeps up.

Second, debt servicing is reduced and the government can appropriate whatever savings into more important projects that can benefit its citizens, meaning us. (Whether we really get something out of it is an entirely different story.)

True enough, in July, House Minority Leader and Albay Rep. Edcel Lagman reported that some P12 billion can be saved from debt service and interest payments just because of the peso appreciation. He suggested allocating the amount to improve education, health and infrastructure services.

Third, our country’s Gross International Reserves have also been consistently rising because of a strong peso. At the end of June, the country’s reserves amounted to $68.97 billion, a staggering 42-percent increase from the same period of last year. In order to ease the rapid appreciation of the peso, the Bangko Sentral ng Pilipinas (BSP) purchases foreign currency, hence, beefing up its reserves. A comfortable and acceptable level of reserves is four months’ worth of imports; the country has 10.4 months’ worth.

Fourth, a strong peso generally helps temper inflation since importing goods becomes cheaper in local currency terms. Our country imports commodities heavily. A stronger peso means importers need to pay less for the goods they bring in to the country. Consumers benefit from this.

But this has an adverse effect on local manufacturers, which may find themselves at a disadvantage against imported products. If and when that happens, these manufacturers may suffer losses as a result of the competition. Case in point: One manufacturer I know laments the difficulty in competing with products made in China. While it’s true that the quality of Chinese products is way poorer than ours, the fact of the matter is the prices are much cheaper than ours.

That’s one party. There are several more.

My sister has been earning in dollars for the past six years. When she started, the peso was trading at 55-to-a-dollar. Naturally, she was very much excited every time she goes to the money changer and exchanges her dollar. That’s not the case nowadays. Throughout the years, she saw the peso hit 50, then 45, and most recently, 41. Her purchasing power depreciated by 23 percent without any fault on her end. Before, her $2,000 fetched her P110,000. Now, she only gets P84,000. The P26,000 difference is what economists define as exchange-rate risk. For my sister, it means money vanished into thin air.

Her sentiment is echoed by the millions of OFW (overseas Filipino workers) families. The irony of it all is that the OFWs go abroad to earn a higher income, but it’s because of their remittances that allows the peso to strengthen against the dollar. That means fewer goods and services bought for the same amount of dollars remitted and exchanged. This isn’t helping the economy which is primarily driven by consumption. I know of several OFW beneficiaries who have to curb their lifestyle and consumption simply because there isn’t enough to go around.

But my sister and the OFW families are not the only ones affected from the rise of the peso. The export industry is also suffering from the phenomenon. A stronger peso makes our export less competitive. If importers from abroad find our products more expensive, what is stopping them from sourcing the same thing from other neighboring countries? This can lead to revenue losses and consequently to laying-off workers or worse, closing down. Unemployment does not bode well for our country.

Economists are projecting that the peso may even further appreciate toward the end of the year to 37 or even 36. One side would be delighted; the other won’t be. Unfortunately, our country cannot have its cake and eat it, too. We just have to take the good with the bad.

****

Kendrick Chua is a candidate for Registered Financial Planner (RFP) designation and a Certified Investment Solicitor (CIS). He is a financial advisor for one of the leading financial institutions in the country. To learn more about the RFP program, visit www.rfp.ph or inquire at info@rfp-philippines.