Peso appreciation, trick or treat?

For the first time in seven years, the peso breached the P43 to the greenback level as of this writing. And also this year, the peso has gained almost 12 percent against the dollar and is the region’s top performer next to the Indian rupee which is the strongest performing currency in Asia to date.

Despite Bangko Sentral’s momentary intervention last Monday to subdue the strength of the peso, the debate as to whether or not we should fix the exchange rate now to save the export industry remains a polarizing issue.

It was exactly a decade ago – The Asian Financial Crisis - when the currency markets went berserk  that almost got many of our economic managers to seriously consider nailing the currency at a price they thought would inoculate our economy from the debilitating effects of devaluation. But thank heavens, we did not.

Albeit converse, we are faced with the same test as to whether or not a fixed exchange regime offers the best panacea to the current woes exporters are facing owing to industry’s contribution of more than half of our Gross Domestic Product and employs millions directly and indirectly to it.  The pressure to fix the currency is also compounded by the fact that OFWs are also affected by it and a proposal is now floated for the President’s consideration.

If we had survived the worst currency crisis ever to have hit this country ten years back or years before it, I don’t see any reason why we can’t survive the same crisis now [that is if we consider the pesos appreciation a crisis by definition]. Unknown to many, a fixed exchange rate presents a great deal of risk that will only drain our resources to serve or save one industry at the cost of others. 

First and foremost, we have to live with the fact that the peso is heading for a “no-turning back” position. Meaning, it is highly improbable at this time to expect the peso to depreciate as more and more Filipinos getting employed abroad, more and more dollars will be pumped to the economy thus, dampening the demand for the dollar in the long term.  Large foreign direct investments (FDIs) also have increased dramatically over the last three years and if such measures are to be pursued, it’s like warding off future investments. Investors want to see an economy driven by market forces not artificially created.

Reports say that the proposal is seeing an exchange rate at P50 to the dollar. Again if we were to pursue such policy, how do you expect the government to find the resources to pay off the real value of the peso as it would have to pay the seven-peso difference? Come to think of too, that for every peso appreciation or gain against the dollar, the country reduces its foreign debt by several billion pesos. So, how do you think we ever reduce our debt with such kind of proposal? 

And if we were to pursue such proposal, the amount to subsidize by the government would be over 85 percent of the total national government budget deficit for 2007 alone according to the Bangko Sentral!

The peso’s appreciation must be viewed in a different light. Had it not for the peso’s appreciation, we would have to pay more in gas prices. We wouldn’t have to pay more on our electric bills and such other necessities. And mostly, had it not for the strong peso, industries would have to pay more on imported raw materials.

There are other creative means to help OFWs and exporters. Prices of products and services can be pegged to Euro instead of the dollar or prices of the same maybe adjusted or negotiated ahead to cover for forex losses.

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