‘Strong’ peso, weak economy

Reports describe the Philippine peso as the “best performing” currency in Asia this year so far, having appreciated against the US dollar by 4.3 percent since the year started, thereby “outperforming its regional peers.” I have a basic discomfort with statements like this, because the economist in me knows that a currency rising in value yields both winners and losers. I studiously avoid using the words “strong” or “strengthening” for the appreciating peso, or describing it as “outperforming” other currencies, because of the misleading notion these convey. A falling peso-dollar exchange rate is both good news and bad, depending on who is affected. In our case, it’s probably even more bad news than good, hence nothing to be glad about. Let’s see why.

Why is the peso price of a dollar falling, now close to P48? It’s the basic law of supply and demand at work: Price goes down when at any given price, supply increases, or demand decreases, or both — and vice versa. The peso price of a dollar would fall if the supply of dollars in the country rises, and/or demand for them falls. The supply of dollars comes via export earnings, spending by foreign tourists or investors, overseas Filipinos’ remittances, and foreign borrowings.

But note that our exports have been falling steeply since March. Foreign tourism is all but dead since the COVID-19 pandemic began, and foreign direct investments have slid for the fourth year in a row. Foreign portfolio investments (“hot” money) have been on a net outflow since last year, intensifying in recent months. While OFW remittances started rising again in June and July, it is still down 2.4 percent over the first seven months of the year due to three months of successive decline before that. Meanwhile, the government is reportedly poised to borrow around $16 billion in foreign-denominated debt this year, with at least $4 billion already in.

Even as supplies of dollars flowing into the country have fallen, demand has fallen even more. The demand comes mainly from importers, and Filipinos who wish to travel or invest abroad. Our imports actually fell by 28.1 percent this year so far, far outstripping the 16.4-percent drop in exports. What makes this bad news is that much of our imports are actually inputs to production: raw materials and intermediate goods, capital equipment, and fuels, all together making up more than four-fifths of the total. The steep drop thus signals that production in the months ahead will also drop correspondingly. Meanwhile, with foreign travel at a near-standstill, there is hardly any demand for dollars by outbound Filipino tourists, and investments abroad by Filipinos are also likely on hold, with declines in percentage terms likely to approach 100 percent.

The supply and demand story thus easily explains why the dollar is getting cheaper lately in terms of pesos — and it’s more due to weak demand in a depressed economy. This appreciation of the peso benefits some, and hurts some. Obvious gainers are consumers of imports and import-dependent products, as peso costs for every dollar’s worth of imports go down. Outgoing Filipino tourists also benefit, as it becomes even cheaper to visit Seoul or Singapore as against Bohol or Boracay. Filipinos investing abroad also find it cheaper to do so.

The losers are domestic producers, especially exporters. But even producers for the domestic market are hurt by the competition from now even cheaper imports. In normal times, foreign tourists would also find it less attractive to visit us, and more Filipino tourists choose to go abroad, hurting our own tourism sector. And while Filipinos are encouraged to invest more abroad, direct foreign investors find it more expensive to invest and create jobs here. In the end, then, the losers are our job-hungry workers, especially at this time when jobs have been drying up. Add to that the OFWs’ families, whose remittances convert into fewer pesos than before — in turn affecting the producers of the goods and services they can now buy less of.

And that’s why I’d rather not describe it as a “strengthening” or “well-performing” peso, when what actually comes with it is a weaker economy.

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