Is the Philippine Peso Inherently Weak?
The Philippine peso is not the only currency that is losing its value in recent weeks. Every major currency in the world, including the Japanese yen, and the British pound, and the Euro had taken a beating. Unspeakably, the Euro and is now at parity with the USD.
The peso yesterday fell to another all-time low of 59 against the greenback.
The dollar just the other day touched a 37-year high against the pound sterling of the UK.
HENCE: Peso- Weak because the dollar is strong? Or inherently weak?
Graduate school economics teaches that a currency loses its value against the US dollar for any of the following reasons:
1 Domestic political turmoil that results in a capital flight and loss of investor confidence.
2. Economy is close to collapsing because of dubious policies. Think Argentina or Zimbabwe's rapid inflation where values eroded by the day.
3. The US Federal Reserve Board, or the US central bank, continues raising interest rates and executes quantitative tightening to stop inflation in the US
Arguably, #2 and #3 apply for the Philippines' financial woes. Wealth fund managers gravitate toward the US dollar because of higher returns than those offered by other currencies. Global and local Businesses had either closed down or pulled out of the nation dude to a persistent lack of infrastructure or hostile business registration policies that make operations difficult. Notice how Citibank, Ministop and luxury car brands have shuttered? The recent government drive to implement Return to Office was intended to jump start real estate lease and acquisition. However this placed a toll on workers and industries incapable of supporting the influx of a commuting public.
RATES RATES RATES
The interest rates in the US may increase to above 5 % next year and persist till inflation ends. Locally, the Bangko Sentral ng Pilipinas has raised the local interest rate to 3.75 percent in its own fight against rising inflation.
The US dollar, via mechanisms such as US Treasury Bills, will draw foreign money because of better yields. The peso and Asian currencies will remain weak unless their interest rates are priced higher than those offered by dollar-based financial instruments.
SOLUTIONS?
The local Central Bank does not predetermine a price of Peso maintained. Rates moves dynamically with respect to economic developments. To maintain growth, the Philippines has raised imports since its productive capacity is still lagging due to COVID-19’s shocks. This weakened the Peso
Crushing pressure on the peso came from increased speculation on commodity prices; these prevailing conditions have further depreciated the peso.
There is upside. A weak peso implies that demand for PH exports may increase. OFWs, paid in dollars, will find that their salaries are now worth more in Philippine pesos. GNP will increase.
Domestic constraints limit the gains. The Philippines is not a producer and is remains an importer. The increase in foreign remittances received by OFWs’ families are offset by rising prices of imported basic goods such as rice (?!) and oil.
The clobbered peso implies foreign debt more difficult to repay. As of last year, the Philippines’ foreign obligations stood at $106.43 billion, 55.4% of which is denominated in the US dollar. Our gross national reserves had been depleted.
Given the mixed consequences of the peso’s weakening, the BSP’s response is vital in effectively mitigating the negative effects. Furthermore, revitalizating industries with tax perks and enhanced infrastructure may stem the bleed.
The peso yesterday fell to another all-time low of 59 against the greenback.
The dollar just the other day touched a 37-year high against the pound sterling of the UK.
HENCE: Peso- Weak because the dollar is strong? Or inherently weak?
Graduate school economics teaches that a currency loses its value against the US dollar for any of the following reasons:
1 Domestic political turmoil that results in a capital flight and loss of investor confidence.
2. Economy is close to collapsing because of dubious policies. Think Argentina or Zimbabwe's rapid inflation where values eroded by the day.
3. The US Federal Reserve Board, or the US central bank, continues raising interest rates and executes quantitative tightening to stop inflation in the US
Arguably, #2 and #3 apply for the Philippines' financial woes. Wealth fund managers gravitate toward the US dollar because of higher returns than those offered by other currencies. Global and local Businesses had either closed down or pulled out of the nation dude to a persistent lack of infrastructure or hostile business registration policies that make operations difficult. Notice how Citibank, Ministop and luxury car brands have shuttered? The recent government drive to implement Return to Office was intended to jump start real estate lease and acquisition. However this placed a toll on workers and industries incapable of supporting the influx of a commuting public.
RATES RATES RATES
The interest rates in the US may increase to above 5 % next year and persist till inflation ends. Locally, the Bangko Sentral ng Pilipinas has raised the local interest rate to 3.75 percent in its own fight against rising inflation.
The US dollar, via mechanisms such as US Treasury Bills, will draw foreign money because of better yields. The peso and Asian currencies will remain weak unless their interest rates are priced higher than those offered by dollar-based financial instruments.
SOLUTIONS?
The local Central Bank does not predetermine a price of Peso maintained. Rates moves dynamically with respect to economic developments. To maintain growth, the Philippines has raised imports since its productive capacity is still lagging due to COVID-19’s shocks. This weakened the Peso
Crushing pressure on the peso came from increased speculation on commodity prices; these prevailing conditions have further depreciated the peso.
There is upside. A weak peso implies that demand for PH exports may increase. OFWs, paid in dollars, will find that their salaries are now worth more in Philippine pesos. GNP will increase.
Domestic constraints limit the gains. The Philippines is not a producer and is remains an importer. The increase in foreign remittances received by OFWs’ families are offset by rising prices of imported basic goods such as rice (?!) and oil.
The clobbered peso implies foreign debt more difficult to repay. As of last year, the Philippines’ foreign obligations stood at $106.43 billion, 55.4% of which is denominated in the US dollar. Our gross national reserves had been depleted.
Given the mixed consequences of the peso’s weakening, the BSP’s response is vital in effectively mitigating the negative effects. Furthermore, revitalizating industries with tax perks and enhanced infrastructure may stem the bleed.