Wednesday, January 11, 2006

An Improved Philippine Peso

Mr. Rod Ceralvo in one of the Email lists that I belong to had this very precise and easy-to-understand dissertation on what and how the present improvement of the Philippine peso vis-à-vis the US dollar would affect the citizens of the Philippines in general, and in particular, the OFW family which gets its essential funding from abroad. OFW is acronym for the Overseas Filipino Workers, representing the millions of Filipinos who have gone abroad, either temporarily or permanently, to search out for employment opportunities that otherwise are not available in the home country.

-Immediate/Obvious/Short term: It means fewer pesos for every remittance sent by an OFW to his/her family. (Para na ring binawasan yung sweldo na iniuuwi ng isang breadwinner sa kanyang pamilya). This means a decrease in the purchasing power of the OFW family. Therefore the OFW family has to immediately cease and desist from their usual spending, may be, even downgrade their standard of living, but rest assured that this is only temporary.

-After the short-term: An improved exchange rate will gradually (and hopefully not very long) translate to lower prices of utilities, commodities and many other day-to-day needs that the OFW family regularly purchases and consumes.

-An improved exchange rate will lead to lower import prices (good news for local businesses because most of them still rely heavily on imported raw materials).

As such, it will enable the oil and other utility companies to buy/import more oil, gasoline and other fuel products with fewer pesos. This will translate to lower prices at gas pump/stations (so dapat bumaba rin yung presyo ng pamasahe sa jeep at bus), lower Meralco bills (pwede ng buksan ulit yung aircon), lower Shellane/gasul/kerosene bill, lower telephone & cable TV bills, etc.

-A lower exchange rate will also make the price of the latest Xbox cheaper. SM, Western Appliances, Abenson, etc. will also be able to cut the prices of their electronic and appliance items, specially computers, karaoke equipment, washing machines, DVD and LCD-TVs from Korea.

-A lower exchange rate, which at the onset translates to lower domestic purchasing power for OFW beneficiary families, will, in time, translate to a general increase in the real purchasing power, i.e. it will be cheaper to buy imported goods, cheaper to travel abroad, etc.

-The most significant effect of a lower exchange rate for the OFW family, as well as for the rest of the nation, is the resulting lower price of important imported medicines, especially those medicines required by the aging members of the OFW family.

So you see in the above example, the immediate effect of an improved exchange rate is the lowering of the purchasing power of an OFW family. But as pointed out, is only temporary. There are always time lags in the rise and fall of exchange rates and its effects on other economic variables like prices, import, export, GDP, BOP, and the standard of living. Even in the most sophisticated economies, an improved exchange rate doesn’t immediately translate to improvements in the living conditions of its people. The economy needs time to adjust. I was surprised to read that, as one of the country’s ex-economic managers, Mar Roxas hurled a cheap shot at this positive development. Wrong choice of a fight!

Now let’s go further, to the macro level. I happened to browse at the NEDA website ( ) and examined the components of what our country sells and what our country buys. Do I need to mention that our country buys (import) more, a lot more, than what our country sells (produce, export)? I guess not – everybody knows that we are over-spenders, living beyond, way beyond our means, borrow here, there, and everywhere. Anyway, the NEDA statistics only confirmed what we all knew all along – that we import a lot more consumer electronic items and components, mineral fuels, oil and related materials, cars & other transport equipment, dairy products & even rice, medicine & medical items, etc. We export less and less of our products: semi-conductors & electronic items, apparel & clothing, handicrafts, etc, banana and coconut. And what effects will an improved exchange rate on these NEDA numbers, to our economy?

Let’s enumerate:
When the peso is strong, it is cheaper to import all the things that we are buying (remember, we are a buyer economy) , consumer goods and capital equipments like computers, electronics, machineries & equipment, raw materials, and other inputs to production. Indeed good news for businesses that rely on imported input or raw materials. This is also good for those who are investing on call centers, telecoms and BPOs who are buying and bringing in new technology from other countries.

Cheaper prices of imported foodstuff, i. e., apples, grapes, oranges, even rice, are also good news for consumers. Cheaper price of gasoline means cheaper price of kuryente(Meralco), pamasahe sa jeepney & bus, and operationally, for LRT & MRT, and even travel and shopping in Hongkong. These all translate to lower rate of consumer price inflation, which means improvement in the living standards index. Sory hindi applicable ang living standard index sa Payatas but good enough for the average OFW family.

The sectors of our economy which will suffer more from a strong currency are our export industries, particularly the SMBs (not San Miguel beer, but the small-medium businesses). Right now our handicrafts, woodcrafts, toys, gifts & collectibles, home furnishings, Christmas décor, apparel and garments industries, etc. are gasping their last breath, trying to survive from stiff competition from China, Vietnam, Indonesia, new republics from eastern Europe and Africa.

A strong currency certainly is not good news for this sector. It will make our exports more expensive, and a fall in exports has negative effect on our economic growth. I don’t know if you are aware that the SMBs are the largest employers in the country. A shutdown of this sector will slow down considerably our economic growth and can have more grim consequences than we can imagine.

Of course these SMBs can choose to produce new product lines where both domestic and overseas demand is less sensitive to fluctuations in exchange rates, less price elastic, i.e. where non-price factors are more important for the buyers, and where there is higher income elasticity of demand.

For a fragile, strange economy like ours, there are certainly losers and winners in the fluctuation of the exchange rates, both short-term and long-term. The good news is, on the average the OFW family has more leverage and hedging abilities than the rest of the population, to offset the negative effects of a strong currency, and likewise, fully enjoy the positive effects of a deteriorating peso exchange rate. A great economic paradox indeed! Happy New Year!

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