Strong dollar,  not weak peso

DEMAND AND SUPPLY - Boo Chanco - The Philippine Star

As part of its service to clients, my bank sends me an SMS message by midmorning daily to inform me of the day’s exchange rate. I hardly gave it much attention until last Friday. The peso finally is at the P55 to $1 rate.

I shouldn’t worry about it. I am not planning to travel overseas anytime soon. I am not planning to make any large purchases that could be affected by the exchange rate, other than a tankful of gasoline now and then.

Besides, incoming BSP Governor Philip Medalla said he is not losing sleep over the falling peso, so why should I? Philip is more focused on the inflation rate. Many of my economist friends believe we need a weaker peso.

“This is a strong dollar problem, not a weak peso problem…The reason the dollar is so strong is their inflation rate is so high and, as a result, they will jump up their interest rates much more than we will…” said Boss Philip in an interview with TV5’s “The Chiefs.”

It is a strong dollar, not a weak peso problem. Say it over and over until you believe it enough not to worry. Then allow yourself a good sigh of relief.

But the non-economist in you tells you it’s the same effect. We import fuel and a lot of our food, and the fertilizer and farm inputs to grow our food. At what point will the exchange rate influence our inflation rate to make us worry? Wouldn’t we be importing inflation?

Even families of OFWs pay inflated food prices among other living expenses. At best, their gains in exchange rate pays for higher cost of living. Our exports should gain, except they too are dependent on foreign inputs.

Don’t forget that our dollar denominated debts will have to be paid with more pesos from the taxpayers.

Ok for policy makers to say not to worry, but we hope they are privately worried, thinking of what to do next if  the rate gets shoved to P60 and beyond.

Sure there are benefits to having a weaker currency. Exporting countries like China and Japan would rather have the yuan and the yen weaker to help their export sector. But we aren’t exactly a big exporter. We import more.

Data from the Philippine Statistics Authority showed that the country’s trade gap surged 54.1 percent to reach $4.77 billion in April from the $3.1 billion in the same period in 2021.

We spend dollars when we import, earn dollars when we export. We import more than we export.

So, our wider trade deficits helped weaken the peso exchange rate versus the US dollar, with more US dollars purchased to finance increased amounts of imports.

What have we been importing? Double-digit import gains in cereals and cereal preparations, transport equipment, iron and steel, and plastics. Other increases were noted in electronic products, other food and live animals, and telecommunications equipment.

China is our biggest supplier of imported goods, cornering 20.8 percent of our total imports.

On the other hand, exports inched up six percent in April, a three-month low.

Dollar earnings from electronic products, the country’s top export, barely moved at $3.25 billion… and our value added, which is labor, is a small component. Other exports  include coconut oil, mineral products, cathodes, gold, chemicals and bananas. Declines were noted in other manufactured goods, ignition wiring sets, and machinery and transport equipment.

India’s vibrant manufacturing and agricultural sectors are why they didn’t do badly when their rupee exceeded 60 to the dollar. It is now at 78 to the dollar. But that’s India.

And remember that the US Fed isn’t done yet with their rate hikes.

Economist Toti Chikiamco, who heads the Foundation  for Economic Freedom, reacted to my comment in our Viber group with this assurance:

“Boo, I think the pass-through inflation rate is only 0.4 percent. Besides, we trade with a lot of other countries, not just the US. The Japanese yen has plummeted more than the Phl peso, so Japanese goods like cars shouldn’t see price increases.  The cheap peso will also cause domestic substitution, helping domestic industries.  Those farmers crying for protectionism will get exchange rate protection.”

That should calm my fears… except for one thing… There is this psychological pass-through effect that may have no basis in fact, but is a reality anyway when the peso’s value plummets. Consumer prices rise disproportionately to the dollar’s gain on almost everything we need daily.

But trust Philip to protect us against inflation. He is right when he said following the Fed by increasing interest rates every time they do it will kill our economy that’s just starting to recover from the pandemic. That will be toxic medicine, which if we use at all, use it very cautiously.

Besides, raising interest rates will also push prices of prime commodities higher… cost-push inflation. It may not even necessarily make the peso significantly stronger to really matter. Just let it seek its own level while we work to strengthen our economy.

Year to date calculations of BSP show that food inflation contributed a full percentage point to the 4.1 percent average headline inflation rate. Here are some ideas from Toti on how to deal with rising prices, specially food:

“The new administration should respond to the increasing food prices by abolishing QRs on agri goods and impose a low tariff rate.  Pork, chicken, and corn importation should be liberalized.  Volume for fish imports should also be increased since fish processors like sardine makers are underutilizing their factories.

“We should also ratify RCEP as soon as possible. Food exporting countries would prefer to deal with RCEP members because of the simplified customs procedures under RCEP.

“More competition should also bring down prices. The new administration should maximize the PSA and other reforms of the outgoing administration by quickly passing   the IRR and inviting new entrants.”

Toti was supportive of Junior during the campaign because he thinks he will make bold moves. Let us see how bold and adventurous Junior and his economic managers will be.



Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco.


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