The appreciation of Philippine peso (Part 1)

According to the Institute for Development and Econometric Analysis, Inc. (IDEA) Economic Trends, a regular publication produced by IDEA, Inc., “there seems to be no end to the strengthening of peso against the US dollar after the monthly average exchange rate peaked at Php49.19/ US$ in November 2008. Average exchange rate continued its fall: it was Php47.63 in 2009 before dropping further to Php45.11/US$ in 2010 and Php43.48/US$ as of August 2011.

The sustained inflow of OFW remittances has kept the peso afloat while the two-speed global economic recovery is feeding demand for assets in emerging economies, including the Philippines, which in turn further pushes the domestic currency up relative to the greenback. While the downtrend in the exchange rate is causing concerns over the steadiness of the purchasing power of peso, remittances and of exports demand, there are sectors in the economy that are able to benefit from the relative high value of the peso – the government and the consumer at large”.

Furthermore according to IDEA, “the peso value has generally been on an uptrend since 2005, albeit temporarily disrupted in 2009, owing to some robust factors: 

One, investor sentiment has been generally favorable resulting from the strong macroeconomic performance. Average annual gross domestic growth rate from 2005 to the second quarter of 2011 has been at 4.8 percent, marginally higher than the 4.5-percent rate in the period 2000 – 2004. This was despite the higher average annual inflation rate in the former at 5.4-percent average, largely due to the global twin price increase in oil and rice, while the latter only averaged 4.7. The other significant development in the macroeconomic environment was the rapid narrowing of the fiscal deficit in 2005 – 2007. During the years 2000 to 2007, the fiscal deficit peaked at Php210.4 billion in 2003. The deficit narrowed a year later with the pace accelerating until it hit only Php12.4 billion in 2007. But as cushion to the global financial crisis, the government pump-primed the economy by means of stimulus coupled by revenue-eroding measures, causing the deficit to spike at Php298.5 billion in 2008 and was sustained at Php314.5 billion a year later. In this way, the government was able to save the economy from falling in 2009 and shored up its recovery in 2010.

Second, the generally positive inflows of net foreign direct investments and portfolio investments save for the dips in 2004 when the government was in danger of fiscal problems and in 2009 during the global economic crisis, benefitted the peso.

Third, the sustained inflow of OFW remittances and strong export performance – discounting the drop in 2009 and 2011 – largely supported the peso’s strength. According to the latest data from the Commission on Filipinos Overseas, there were around 8.6 million Filipinos abroad as of 2009. Deployed OFWs remained high at 1.4 million and 1.5 million in 2009 and 2010, respectively, from the 1.2 million registered in 2008, despite the softness of international labor markets. Furthermore, the increase in remittances was not only driven by growth in OFW deployment but also of the OFWs’ decision to send more money in light of the depreciating trend of the dollar. Meanwhile, the exports sector had been going strong since 2002 but was interrupted by the global economic crisis in 2009 and the end of the global inventory cycle and base-effects in 2011”, according to IDEA.

(To be continued)

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