The weak peso

BIZLINKS - Rey Gamboa - The Philippine Star

At the current peso-dollar exchange rate, Filipinos working abroad or receiving foreign currency for wages are only too thankful of the additional pesos that they can get. It certainly helps families in the Philippines cope with the high cost of goods triggered by the almost doubling of crude oil.

Last Friday, the peso closed at 53.75 to $1, a level last seen in October 2018, which economists explained to be influenced by certain policy statements at that time of President Duterte, as well as from the strengthening of the dollar in anticipation of a US Federal Reserve rate hike.

While the weak peso level that time was short-lived, and in fact reverted to a stronger level of within the 50 to $1 in succeeding years, the peso this time around may continue to falter at its depreciated state well into next year, and possibly extending to 2024.

The main premise for this prediction is the continued high cost of fuels and other imported goods that began as the many countries restarted their economies but was exacerbated by the Russian invasion of Ukraine, which many now believe could drag on for a few more months.

For an oil importing country like ours, this means more pesos are needed to buy the fuels to keep the economic engine running. And at the rate prices of fuel products have been rising, the higher cost of living has become a major concern by Filipinos now.

Unfortunately, oil is not the only commodity that the Philippines needs to buy from abroad. We need dollars to buy food and other products, quite a number of them to augment poor local production. We need to import construction materials for the government’s flagship infrastructure program. Businesses need raw materials that can be found only in other countries.

Taking stock of short-term advantages

All these mean eking out additional pesos for the same commodities in the next two years, the cost of which fortunately is somewhat cushioned by an economy that remains fundamentally strong, with remittances from OFWs and earnings from the business process outsourcing (BPO) sector as major contributors.

The volatility of currencies experienced in Asia and of our immediate neighbors likewise provides for some assurance that the peso is not being singularly clobbered. The Thai baht and the Korean won both registered over seven percent slippages as inflation worries continued to bother their respective governments.

A weak peso, though, is not fundamentally an economic frailty even it persists for the longer term. Japan and China are countries that have mastered the long-term instrumentation of their respective currencies’ weak levels to spur trade and industrial growth.

While the Philippines has never seriously considered mapping out economic growth based on strong export-oriented industries or sectors, the next two years of a weak peso should give our few exporters some precious opportunities to earn reasonably more.

A number of Philippine agricultural goods and manufactured products that have gained a foothold in the export market are now very competitive resulting from the more than five percent slide in the peso value compared to a-year-ago data.

Our tourism industry should also be poised to reap the benefits accruing from the weaker peso. For prospective tourists looking to make up for two years of travel deprivation because of the pandemic, their currencies can afford them cheaper travel fares, accommodation, and local purchases if traveling to the Philippines.

Long road to stabilization

The new government as well as its economic team have time to come up with new measures that would take advantage of the prevailing weakness in the pesos until 2024 or even longer until the global supply chains stabilize and oil pricing returns to a more normal and predictable keeling.

While the Philippines may continue to confidently boast of continued economic growth despite all the disruptive headwinds brought about by the pandemic, its ending, and the further displacement of global supply chains because of the war in Ukraine, stability can only be truly achieved later in the decade.

The price of oil will remain a major indicator to determine when most of the world can return to relatively normal business. It is currently in a tug of war with renewable energies to fuel global economic growth, and while pressure is building up for countries to shift to sustainable energy sources, it will take time even taking into account the huge subsidies pledged by major economies to renewable energy.

The world is truly at a crossroads of weaning away from fossil fuels, and this will not happen quickly, nor will it immediately translate to cheaper sources of energy. The shift to electric vehicles, for example, has been on the blueprint for decades, and while developed economies may be able to move away from gasoline and diesel as fuel within the decade, the rest of the world may need a longer time.

Global uncertainties

More uncertainties lie await in the coming years for the world, and these have a profound effect on how oil can keep its clout on the global economy. How climate disruptions and the threat of more virulent diseases would play in these transitional times is something that can only be theoretically discussed.

We are seeing worsening floods and extreme droughts never seen before. Pestilence and famine are becoming all too familiar for many parts of the world. Wars have erupted too in more countries causing almost instantaneous destruction that will take decades to rebuild.

When can we really look forward to business-as-usual? Your guess is as good as mine.

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.



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