Ben Kritz over at the Manila Times recently ran an opinion piece regarding the faltering Philippine peso. Kritz was reporting a recent Twitter feed from David Ingles, a commentator for Bloomberg.
The Bad & the Ugly
Let’s address the “bad and ugly” side of the declining Philippine peso first.
Ingles kicked up a carabao crapstorm by stating the Philippine peso is among the worst-performing currencies in the world so far this year. The Bloomberg analyst also reported that the Philippine Stock Exchange (PSEi) is practically the worst-performing stock index in the world.
The PSEi is “practically” the worst, because the only index its 12.20 percent negative price return is outperforming right now is Venezuela’s.
Venezuela’s stock market has basically lost all of its value and is hardly worth recognizing.
The Philippine peso, however, is being kept from the bottom of the list by a handful of other losers. Its negative 4.50 percent spot return is still better than the Mozambique new metical, the Argentine peso, palladium, the Angolan kwanza, and of course, the Venezuelan bolivar.
What does the decline of the Philippine peso mean?
Kritz opines on what this decline actually means.
According to Kritiz, between the two problems, it is the weakness of the peso that matters more.
The peso’s decline has a universal economic impact on the country. However, the local stock market exists in a vacuum, reflecting rather than affecting conditions in the economy.
The weak peso is a matter of some trepidation. However, Kritz states the decline of the Philippine peso does not currently indicate a faltering economy. In addition, despite popular belief, the peso’s fall is not especially beneficial.
The peso depreciation has more negative than positive consequences. Nevertheless, Kritz believes the value of the peso will, like water, find its own level if left alone.
In terms of negative effects, the weakened peso inflates import prices (that is, it takes more pesos to buy an import with a constant dollar price.) This tends to increase price inflation generally across the whole economy.
Inflation, indeed, is on the rise in the Philippines. The Bangko Sentral ng Pilipinas (Central Bank) expects inflation to average 4.3 percent in 2018. A tax reform package and expected oil price hikes are expected to drive the cost of living higher throughout the year.
The Philippine peso’s decline also inflates foreign debt. This results in some long-term higher interest costs since debt prepayments typically decline as the peso becomes weaker.
On the positive side, a weaker peso results in higher export revenues, albeit the effect is tempered by import-driven inflation.
The positive effect is reduced further by the Philippines’ consistent trade deficit as well. However, the net effect is still favorable.
The weaker peso also increases the local purchasing power of remittances, both from OFWs and BPO revenues.
Nevertheless, the positive impact is generally overstated, as higher inflation soaks up much of the surplus.
Philippines Peso: The Good, the Bad & the Ugly
In conclusion, Kritz deduces the net impact of a weaker peso on the economy tilts to the negative.
However, he reasons that the weakening of the peso is neither very bad for the country nor very good. The present situation, according to Kritz, is one that doesn’t warrant any serious anxiety one way or another.
As this post goes to press, the current Philippine peso to US dollar exchange rate is 52.25 PHP to 1 USD. The peso has fallen to an 11-year low over the past several months.
Graphic credit: Cinetropolis