The appreciation of Philippine peso (Part 2)

According to the Institute for Development and Econometric Analysis, Inc. (IDEA) Economic Trends, a regular publication produced by IDEA, Inc., “a strong peso can both have favorable and unfavorable consequences. On the one hand, the strong peso helps tame inflationary pressures. Imported goods like oil and wheat will be cheaper in peso terms if the peso appreciates, assuming all other factors held constant. Overall, this can help lower the rate of inflation in which all consumers will benefit.

First, the strong peso decreases foreign liabilities in peso terms as it allows more purchases of dollars for debt servicing. This implies that the government would be able to save monetary resources that can be allocated to the provision of basic social and infrastructure services.

Second, the strong peso enables the BSP to stock up the country’s gross international reserves (GIR) given the strong inflows of dollars. With a higher GIR level, the government can better pay for its imports or purchases of goods and services or for its external debt. In fact, the high level of the GIR has encouraged the government to pre-pay its dollar obligations, translating to lower interest expense. This could likewise improve its credit rating, affording it lower costs of borrowing, especially from abroad.

On the other hand, a high peso value puts the exports sector, producers of import substitutes, OFWs and their households, tourism sector, and the business process outsourcing sector at a disadvantage. When the peso appreciates, competitiveness of exporters and producers of import substitutes deteriorate. Beneficiaries of dollar income like the OFWs and their households and the tourism and the BPO sectors find themselves with lower peso income.

Furthermore per same published report, determining the appropriate level of the peso may seem a daunting task given the ambiguities in the net losses or gains in the economy. Fortunately, there is a way of detecting whether the value of the peso has gone up too far through the real effective exchange rate (REER) index. The REER index is a measure of external price competitiveness, taking into account not only the movements of nominal exchange rate but also of the relative inflation rates among the country’s major trading partners and trade competitors. If it increases, it denotes a real appreciation of the peso and a loss in external price competitiveness.

On a year-on-year basis, the peso continues to lose external price competitiveness against major trading partners (US, Japan, European Union, United Kingdom).

When compared, however, against the basket of competitor currencies in the broad series (Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia, Hongkong), the peso gained external price competitiveness, offsetting the loss in price competitiveness arising from the appreciation of the peso against the dollar. This is because other currencies in the region were strengthening as well against the dollar, according to IDEA.

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