Addressing the impact of the lowering peso value requires more than the mitigating measures government has so far implemented, including the hedge fund set up by the DBP, and Malacañang’s fiscal stimulus program

By Sonny Africa

IBON Features – A year ago, Pres.Gloria Arroyo was hyping the strengthening peso as a validation of her efforts to build a “strong economy”. These days, it is becoming clearer that the “strong” peso is not a sign of a strengthening economy. In fact, it is even hurting overseas Filipinos workers (OFWs), lauded by the administration as the country’s economic frontrunners.

Strong Economy?

Undoubtedly OFWs remittances have been key to Pres. Arroyo’s much-hyped economic growth. Remittances in nominal terms grew 111.6% between 2001 and 2006. For the first eleven months of 2007 alone, remittances already hit $13.1 billion, 3.1% more than the whole year 2006 figure. Remittance figures for year-end 2007 are expected to hit $14 billion. Further, as of 2006, remittances are 27% of merchandise exports, 612% of net foreign exchange investment and 465% of portfolio investment.

But this bonanza, while bloating moribund economic growth figures, has had its downside, namely the strengthening of the peso against the dollar. As of December 2007, the peso has already fallen to P41.47 against the dollar, 18.5% stronger than the P49.47 recorded in December 2006.

Of course, the windfall of OFW remittances are not the only reason behind the strengthening peso. There is also the large increase in net foreign portfolio investments (also known as “hot money”), which for January to November 2007 reached US$3.7 billion, a 76.6% increase from the same period last year. And it is possible that the eventual full-year level could even exceed figures recorded in 1996 just before the Asian financial crisis. Although administration economic managers will undoubtedly spin these figures as indicative of continuing investor confidence in the economy, they should also remember that the increase in portfolio investments make the country more vulnerable to a financial crisis like the one that hit Asia in 1997.

But the appreciation of the peso is mainly because the dollar itself is weakening, and not for any reasons related to the strengthening of the country’s productive sectors. 2007 saw the bursting of the US’s most recent speculation-fueled boom, which was characterized by the start of the slow collapse of the property bubble, drops in construction and declines in consumer spending. The dollar has actually been weakening against currencies across the globe. As of December 2007, for example, the Canadian dollar appreciated 13% against the US dollar, the Brazilian real by 17%, the Indian rupee by 12% and the Thai baht by 16% from the past year.

Bad News for OFWs, Exporters

Ironically, the peso appreciation caused by the influx of remittances has hurt OFWs and their families by lowering the peso value of their income. Based on an average monthly remittance of US$340, a household with one OFW family member lost some P11,290 last year if the monthly changes in the exchange rate throughout the year are considered.

The roughly 15% increase in OFW remittances in 2007 was not enough to offset the 16% peso appreciation over the same period. If the prediction that the peso may reach P38 to the dollar by the end of 2008 materializes then the average OFW household will be losing some P3,710 a month compared to the start of 2007 or an annual loss of between P30,000 to P45,000.

The peso appreciation is also hurting exporters, who are complaining about losses as the strong peso cuts into their earnings. This is particularly so for small exporters whose exports are relatively more grounded in the domestic economy, such as those in the handicrafts and furniture sector.

However, it should be noted that the effects of the strong peso on large exporters and subcontractors for transnational corporations is mitigated by the cheaper cost of their imported inputs. In any case, they already benefit from tax and non-tax incentives, including duty-free importation for those operating within the country’s export-processing zones.

No Relief in Sight

For the coming year, the exchange rate will continue to be volatile. However, the flattening of growth of OFW remittances could mean that the peso’s appreciation will level off. Growth rates of remittances have fallen from a peak of 25% in 2005 to 15% in 2006. But it’s hard to say when and at what level; varying estimates have pegged the eventual level from between P37 to P41 per dollar.

Another factor that could fuel volatility is when the real situation of the country’s unresolved financial crisis surfaces, precipitating capital flight as “hot money” speculators flee the country in search of more profitable markets and as they get less confident about government’s financial standing.

Addressing these concerns requires more than the mitigating measures government has so far implemented, such as the special hedge fund set up by the Development Bank of the Philippines to secure the earnings of OFWs, and the recently-launched fiscal stimulus program, whose funding will reportedly come from the sale of government stakes in San Miguel, Food Terminal Inc, etc.

Reining in hot money and speculative behavior is an important part of any genuine attempt to address the country’s exchange rate problems. This could be done by establishing a narrow peso-dollar band and using accumulated foreign exchange reserves and monetary policy to keep the exchange rate at reasonable levels.

Capital controls should also be instituted, such as those imposed by Thailand in December 2006 to rein in a surging baht. Initially, speculative flows should be taxed to temper their volatility as well as generate revenues.

But apart from such measures, government should realize the folly of its labor export policy, which now proves to be unsustainable as a development strategy in the long run. Indeed, the looming US recession has already threatened a slowdown in OFW deployments and remittances.

Even if the US economic slowdown does not materialize, a slowdown in deployments and remittances is inevitable simply because an increasing number of Third World countries are pushing their workers to go abroad. This expands the stock of cheap global labor, reducing opportunities as more workers compete for a limited number of jobs and consequently pushing down wages and salaries.

According to the 2003 Family Income and Expenditure Survey, the main income of 1.3 million families nationwide came from abroad. What will happen once fewer OFWs can find work abroad, especially with local jobs increasingly scarce?


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