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Who is afraid of a strong peso?


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smokey

Who is afraid of a strong peso?  

By Eduardo “Eddie” H. Yap

Philippine Daily Inquirer

11:44 pm | Sunday, January 13th, 2013
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The debate is on. Is the peso getting too strong? Is a weaker peso better?

The peso surged below 41 against the US dollar, closing at P40.77, on the first business day of the 2013 New Year. This rate is a five-year high and represents a gain of P15.55, or 27.62 percent, from the 2005 low when a dollar fetched P56.32.

Analysts, following textbook prescription and conventional wisdom, prefer a weak currency, which our country had been accustomed to or plagued with for decades. They fear a strong peso will adversely affect exporters and foreign exchange earners, such as overseas Filipino workers (OFW), whose earnings will get less pesos. A weak currency is supposed to improve the competitiveness of a country’s exports. Let us examine this theory in the light of the Philippine experience.

Peso tiempo de muerte

To put the peso recovery in perspective, it is well to remember certain facts. The peso tiempo de muerte (period of death) spanned two preceding administrations. It was during this period that the peso plunged from P38 in 1999 to P56 in 2005 from a combination of political instability, corruption scandals and fiscal mismanagement. The peso became the sick currency of Asia.

Tiempo de vida and retracement

With the “matuwid na daan” administration of P-Noy, political stability and fiscal prudence have been restored. Now it is the tiempo de vida (period of life) for the economy and peso. Credit ratingicon1.png upgrades come in regular frequency and with the influx of foreign funds, the foreign exchange reserves reached an all-time record high $84 billion and still counting. As a consequence, the downward courseicon1.png of the peso reversed.

At P40.77, the peso has retraced or recovered the losses sustained during the muerte period. But still to be recovered were the losses sustained as an offshoot of the Asian financialicon1.png crisis that saw the peso drop from P26 in July 1997 to P38 in 1999. The Thai baht, for instance, has recovered almost all its crisis losses. At 30 to the dollar now, the baht is still below the pre-crisis peg of 25 units against a basket of currencies. But it is way above its crisis low of 56 reached in January 1998. In our case, it will take more than the consumption-driven economy we have to achieve the same recovery. There is still a long way to resolve the structural deficiencies in our economy. Much has to be done.

Failures despite weak currency

A weak currency is supposed to make our goods more competitive to export. One should ask if the weak peso, which was extant for so many years, had resulted in the development of a meaningful export industry. Instead, we import practically everything we consume. Were we able to revive the employment-intensive garments and shoe industries? Why has import substitution that a weak currency is supposed to engender not taken root? Why has an even small measure of horizontal integration of the export industries not developed? Why has Malaysia, with its strong currency, surpassed us by leaps and bounds in palm oil exports? Why has Thailand, also with a strong currency, become the manufacturing and export powerhouse of Asean? The answer has nothing to do with the currency.

Our problem goes deeper. It is structural and requires more than a weak currency to solve. We are way behind the curve in infrastructure and production. Our distribution system is inefficient, being reliant on trucks running on toll roads rather than more cost-efficient rail transport. Power cost is very high. Traffic gridlock is a daily occurrence. It is cheaper to ship a container van from Manila to an overseas port than to, say, Davao. The only food terminal we have in Metro Manila, where produce merchants can get a fair price through price auction, had been sold for conversion into another concrete jungle. The “matuwid na daan” drive still has to be meaningfully embraced by the front-line agencies. These are among factors that account for the inefficiency, low productivity and high cost penalties obtaining in our economy.

Strong currency equals low inflation

A strong local currency renders exports more expensive. That is a negative … if we have much to export. But 70 percent of our economy is consumption-related spending. A strong peso will be beneficial to most by way of higher purchasing power and lower prices. This will help the common people, who have tight budgets. In a country where even toothpaste and much of the raw coffee beansicon1.png that go into our daily caffeine fix are imported, the whole gamut of consumer goods, durables and capital equipment has no reason not to become cheaper. Feed ingredients for food production should be cheaper. So will fuel and power, transportation fares, housing, power generators, telecommunications gear plus that must-have-smartphones, among many others.

Already, the full year 2012 inflation rate was reported at 3.2%, a five-year low. If the 2.9% inflation rate in December 2012 is an indication, inflation in 2013 will be below 3%. This is a sign that the stronger peso is dampening prices. As prices come down to meet income, inflationary wage rises will find less justification. The challenge to policy makers is to ensure that currency gains are quickly and commensurately translated to price markdowns to benefit the people.

Winners and losers

Who are the winners and losers of a strong peso? The government will be a significant beneficiary of a strong peso. The $61.7 billion national external debt, as of September 2012, will require less pesos to repay. At P40, the debt is P2.5 trillion in peso terms. At P50, it will be P3 trillion. Interest cost will also be lower. During the first nine months of 2012, interest payments were down by P14 billion. Instead of the programmed P259.276 billion, only P245.249 billion was paid. This helped trim the budget deficit. Capital expenditures will cost less in peso terms with cheaper cost of steel products, cement, capital equipment, hardware and engineering services. Schoolhouses, roads, bridges, ports, public housing, etc., will cost less. With price deflation, there will be less pressure to increase the budget for personnel services and maintenance and operating expenses. Tax revenue will rise as a strong peso will spur private and public investments that will contribute to higher economic growth. The private sector will similarly reap the benefits of a strong peso.

On the negative side, the national government will collect less import duties and taxes as the peso value of imports on which duties and taxes are imposed, will be less. But this will not be a new phenomenon because tariff rates have been drastically reduced over the years pursuant to trade agreements. Internal revenue taxes now account for 70 percent of total revenue. It is, however, possible that better efficiencies in Customs collection can mitigate the further decline of this revenue source.

The BPO sector, on the other hand, is not without measures to cut operating cost to compensate for reduced peso earnings. To reduce fixed rental cost, astute managers of BPOs are resorting to densification where more agents are placed in the same floor space. Another measure is the shift to provincial locations where rental and wage pressure is less. The shift to higher-value services, such as medical and legal transcription, accounting services, instead of sticking to low-value operator service, is another.

Yes, OFW dependents will get less pesos but their pesos will buy more goods than before.

A strengthening currency presents a strong incentive to foreign investors, who typically shy away from assetsicon1.png denominated in a weak currency as the value of their investment will depreciate to negate or offset whatever capital gains or operating profits.

Peso strength, the new normal?

The rise of the peso is not all about better local fundamentals. A factor is the weakness of the dollar owing to the multi-decade decline in US interest rates to record lows. At one point in mid-2012, 10-year US treasury note yield dropped to a niggardly 1.39% and 30-year treasury bondicon1.png yield to 2.45%. There is a strong correlation between yield and the exchange rate. The low dollar yield has driven investors from the dollar to higher-yielding assets. As such, there is sustained inflow of foreign funds by investors into Philippine assets, such as bonds, stocks and property. This has created more demand for pesos, accounting for the stronger peso.

As long as returns on peso assets remain robust relative to the dollar and the “matuwid na daan” continues, peso strength should prevail. A strong peso could be the new normal unless something drastic occurs, again. Those who got used to a weak peso and didn’t see this trend, and continue keeping foreign funds will be on the losing side.

US interest rates inflection point

Will US interest rates and the dollar remain low? No. The low point in dollar yield may have been reached in 2012. The US economic recovery is gaining momentum and the recently released minutes of the US Federal Reserve Board meeting indicate some board members taking a hawkish stance with an inclination toward ending quantitative easing to reduce liquidity and allow interest rates to rise. In reaction, 10-year US treasury note yield is edging toward 2 percent from the recent record low. Higher interest rates, together with the fundamental shift in US energy production owing to the new fracking technology that will provide energy independence and industrial resurgence, will support the dollar. The bond bubble appears to have peaked. As such, future gains against the dollar will not come easy. Will the peso be able to hold up against these forces? Yes, if structural reforms in the local economy continue and above average growth is sustained.

The right path

A weak currency is synonymous to a weak economy and bad governance. These are stigma and blot on the nation. The title “sick man of Asia” should be expunged, never to return. A weak peso is a crutch for the inefficient and sore reminder that both the public and the private sectors can’t hack it in a dynamic region experiencing high growth with strong currencies. The right path is to render the economy more efficient and to compete with others on even terms, without the opiate of weak currency. Our country should not continue to be the odd-man out. Join the Asian tiger pack, embrace the strong peso and make it work for the people.

 

- See more at: http://business.inquirer.net/102415/who-is-afraid-of-a-strong-peso#sthash.8i7aBEKJ.dpuf

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As an economist, this is the only pertinent sentence in the whole article.  I watched with interest the rise of the Thai baht over the last few years, another Country ravaged by poor governance, corru

This is comedy right? You surely understand that with Government contracts being as transparent as a plate of sheet steel, the resulting corruption stifles everything, since everybody knows what is go

The U.S. and Europe share a common problem - too much debt.  There are only two ways out of this abyss.  The first is austerity which is politically unpopular and thus difficult to achieve.  The secon

Guy60417

 

A weak currency is synonymous to a weak economy and bad governance.

 

When I first visited here, in 1980, the peso was at about 7.5 or 8, as I recall. So I guess the Marcos era was a time of very good governance.

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RogerDuMond

When I first visited in 1966 it was 3.9 pesos to the dollar.

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Skywalker

 

There is a strong correlation between yield and the exchange rate. The low dollar yield has driven investors from the dollar to higher-yielding assets. As such, there is sustained inflow of foreign funds by investors into Philippine assets, such as bonds, stocks and property. This has created more demand for pesos, accounting for the stronger peso.

 

As an economist, this is the only pertinent sentence in the whole article.  I watched with interest the rise of the Thai baht over the last few years, another Country ravaged by poor governance, corruption and an elite who wish to maintain the status quo.

 

The escalating peso, in reality, is simply reflecting the almost flatline interest rates in the West, causing depression of the major currencies.

 

The current property bubble growing in Cebu is a visible effect, many buyers being Chinese, other foreign nationals, OFW's and wealthy domestic consumers - however the bubble is not currently reflected in the rental market; a much better indicator in my view.  By that I mean achieved rents, not asked rents - the difference is often significant!

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The PHP is not getting stronger, neither is the THB, it's the financial crisis in the West that is making the Euro/USD drop.

Edited by Stone
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Peter C

The PHP is not getting stronger, neither is the THB, it's the financial crisis in the West that is making the Euro/USD drop.

 

this is the point

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Wombat No More

A friend, an exporter, is about to close up shop now as he can't afford to pay the higher cost to produce stuff (materials) and the almost dried up customers as the latter need to pay much more than just a couple of years ago and cannot sell in their country if they put up the prices to match. But, closures such as this has been happening longer than a couple of years.

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Thelandofku-an

When I first visited in 1966 it was 3.9 pesos to the dollar.

 

I think 1986 was 18 to the dollar and SMP 3/3.5? :beer2:  :beer2:

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I think 1986 was 18 to the dollar and SMP 3/3.5?  

 

I think for alot of regulars here its not so much the peso to the dollar but the beer to the dollar ratio they care about

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Thelandofku-an

I think for alot of regulars here its not so much the peso to the dollar but the beer to the dollar ratio they care about

 

Thanks, I was trying to appeal to the masses on that, actually I don't drink, but beer and rice were about the same price then and few here care about the price of rice...

Edited by Thelandofku-an!
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InternetTough

China is considered by many economists to have been guilty of deliberately devaluing its currency. South Korea also does it, but not as obviously. There is less agreement among economists if it is a good thing to do or not, as even exporting nations have to buy raw materials/imports. I don't think that a strong currency is automatically a sign of good governance. This will sound wishy washy, but the right value of a currency is the best value----it is a subtle question. The monetary authorities here seem sensible to me. I remember reading recently about how they didn't want to flood the market with pesos, as it can take a very long time to mop them up. If there is one thing that is worse than a problem, it is a hasty, panicky, "solution".

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smokey

I think 1986 was 18 to the dollar and SMP 3/3.5? :beer2:  :beer2:

yes your correct and a jeep ride was 10 cents ..  i remember my step dad telling me how after WW2 he could of bought a lot on Hollywood blvd . for 6,000 dollars that today would be worth 6 million and i said wow ... and then i asked what was his pay and he said 80 dollar a week ,,  sure the peso was 3 to the dollar but a peso was a lot of money back then in relationship to goods you could buy ///  i think it might take 2 more years but the peso will weaken when the west has more of a recovery already real estate is starting to creep up ..

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smokey

I think for alot of regulars here its not so much the peso to the dollar but the beer to the dollar ratio they care about

i have meet guys there that if you told them we discovered people living on mars in underground condo units they would say ..   ...    hummm ill drink to that 

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Skywalker

 

China is considered by many economists to have been guilty of deliberately devaluing its currency.

 

That is how they have managed to flood so many Countries with cheap (crap) goods, in an effort to undercut those Countries manufacturing industries.

 

"This will sound wishy washy, but the right value of a currency is the best value"   ...in a perfect World.

 

The market should decide on the value of anything, but it's not a level playing field, and the LIBOR scandal is small beer compared with currency manipulation by political pressure on Central Banks.

 

Simply stating that the peso and baht are not strong, the other currencies are weak, is like saying the World was created in 7 days - hmm.  And we all know what a convincing explanation that is.   :rose: 

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