ANALYSIS: Peso fall is something to worry about

Jose Galang – Your Business

Posted at Nov 07 2017 05:00 PM

It has become customary for the Duterte economic managers to tell the people that the recent depreciation in the peso exchange rate is “nothing to worry about” and that a weak peso benefits exporters and families of Filipinos working abroad.

“Whenever you have a peso depreciation, that is favorable to our exports sector, which will then create more jobs,” Budget Secretary Ben Diokno told a press briefing in Malacañang recently. “The families of OFWs like this [depreciation] because that will increase their purchasing power,” he added.

Finance Secretary Carlos Dominguez said in a separate encounter with journalists that a peso depreciation increases government tax collections more than it pushes up expenditures. A decline in the peso exchange rate is a “net gain” for the government, he said.

Such is the confidence of the economic managers that a further drop in the exchange rate even up to P52 to the US dollar will “not worry” them. The peso value at end-October stood P51.7990 to the dollar, a loss of nearly P2 since the start of this year.

Impact on prices

There are other effects of a peso depreciation that the economic managers have been silent about. One of them is the faster rate of increase in prices of goods. Recent increases have been caused by higher production and handling costs incurred by import-dependent manufacturers that are ultimately passed on to consumers.

This was highlighted once more by the release of new inflation data by the Philippine Statistics Authority (PSA). At the end of October, the PSA reported, consumer prices were up by 3.5 percent overall from last year. Mirroring the fall in the peso rate, the October inflation rate was significantly higher compared to 2.3 percent in the same month last year. The speed of price increases last October was also the fastest since November 2014.

The faster inflation rate was driven by food prices, which in October were higher by 3.8 percent from the year before. Corn, meat and vegetables were among the food items that increased the most. Also reflecting the peso depreciation, imports-related prices in housing, water, electricity, gas and other fuels rose by an overall 4.6 percent, according to PSA’s calculations.

Higher rates of price increases could be expected until end-2017, given that the last two months of the year usually see brisk consumer spending driving up prices. Also, manufacturers could be marking up their prices more aggressively to reflect the costlier petroleum products, equipment and raw materials they use in their operations.

With this recent behavior in prices, obviously even the families getting dollar remittances from relatives abroad can be negatively affected. For instance, combined effects of peso depreciation and inflation could raise expenses for food, the largest item on the Filipino household budget, by over 15 percent to around P10,750 a month for a family receiving the peso equivalent of a $500 monthly remittance. That would leave around P15,150 a month, or nearly P505 a day, for other family expenses like education, transportation, medical and leisure.

In the case of Filipino families with no dollar remittances to depend on, the effects of inflation pushed higher by a weak peso can be harsh, particularly in an environment of stagnant or shrinking household incomes exacerbated by a growing unemployment rate. As of July this year, there were around 2.37 million individuals without jobs, some 1.8 percent more than last year. Another 6.54 million were underemployed.

It is no surprise therefore that public satisfaction with the government’s record on 15 performance subjects has been lowest in “fighting inflation”, according to the latest “Governance Report Card” released by the Social Weather Stations (SWS).

A net satisfaction rating of +24 on the government’s ability to manage inflation was reported late in August by the SWS reflecting results of its survey conducted during the period June 23-27, 2017. The +24 rating on “fighting inflation” was just below the +25 net satisfaction rating on “resolving the traffic problem”, another major issue for residents of Metro Manila and a few other cities in the country.

National debt

Estimates from the Department of Finance ostensibly point to “net gains” for the government from a declining value of the peso in terms of projected increased pesos from Bureau of Customs collections, remittances from Filipinos abroad, and earnings from business processing outsourcing companies. 

Still, the pesos needed to pay for foreign currency-denominated obligations are also going up. Largely as a result of the peso depreciation, the national government’s external debt (owed to other countries and foreign institutions) as of last September has ballooned by P99.4 billion in peso terms since the beginning of this year even though most of new borrowings incurred by the government are from local sources.

The total peso amount of external debt, at P2.26 trillion as of end-September, was bigger by nearly 3.4 percent from the year-ago P2.18 trillion, according to Bureau of the Treasury data. Including obligations from local lenders, total outstanding national debt came to over P6.44 trillion.

The increase in external debt’s peso value was equivalent to nearly 3 percent of the government’s total budget for this year. That increase will also eat up almost 4 percent of all tax collections this year, based on revenue expectations of the Department of Budget and Management.

Trade deficit

On trade, a peso depreciation has mixed results. Pesos generated from foreign currencies earned by exporters go up. On the other hand, exporters also need to import raw materials as well as machineries and parts regularly, and a weak currency results in more pesos having to be coughed up even for the same volume of these imports.

Exports in the January-August period (latest available) totaled $42.11 billion, higher by 13.5 percent from the same 8-month period last year. On the other hand, total imports reached $59.15 billion, up by 8.2 percent.

Despite the higher growth rate in exports as of August, imports still exceeded exports by $17.05 billion. The trade deficit, together with a retreat in foreign direct investment in local company equities, has pushed the overall balance of payments (BOP, a measure of the economy’s financial relations with the rest of the world) into a deficit this year from surpluses in previous years that were in part a result of strong dollar remittances from Filipinos abroad.

As of the end of September, the BOP deficit stood at nearly $1.37 billion, compared to a surplus of $1.65 billion in the same month last year. A continued weakness in the BOP position usually results in a further erosion in the currency’s exchange rate.

‘Increasing risks’

The World Bank Manila Office, in its latest Philippine Economic Update report released early in October, sees macroeconomic fundamentals remaining intact, but cites “increasing” risks to the country’s outlook. 

It says that increases in the US interest rates, seen to be triggered by coming Federal Reserve Bank’s rate adjustments, “could lead to a further depreciation of the peso and continued capital outflows from the Philippines”.

“Both the fiscal and monetary space to address risks can quickly diminish and limit the government’s ability to mitigate those risks,” the report says. 

Other analysts, including those at the research unit of Australian banking giant ANZ, see the Philippine peso to remain to be the Southeast Asian region’s “worst performing” currency this year. The recent period of strong growth, the researchers point out, has led to “imbalances” in the economy that are “intensifying”.

The Duterte economic managers appear to have miscalculated on their optimistic projections of a surge in investment that could add to production capacity and create more jobs. With these expectations, the economic managers went on a spending spree on long-gestating infrastructure projects and incurred big fiscal deficits as a result.

Investors have remained adamant, with some even pulling out and relocating their operations elsewhere in Southeast Asia. Meanwhile, manufacturing, which was viewed as a key driver to growth, has reached its operating capacity and leaves little room for growth. The entry of more new investors can improve the situation.

In the coming days, the Duterte economic managers will be extremely busy as they search for schemes to rebalance the economy. They cannot continue to tell the people that the peso depreciation is nothing to worry about.