‘The peso is weak because  the dollar is strong’

“The peso is not weak because the peso is weak. The peso is weak because the dollar is strong.”

Sandro Marcos’ explanation on the peso’s performance against the dollar has now become the subject of memes and jokes on social media.

To a certain extent, he is correct because the dollar is indeed the strongest it’s been in two decades. But Sandro is oversimplifying the problem.

The peso is weak because the peso is weak

In reality and unfortunately, the peso is weak because the peso has been fundamentally weak.

This is due to our growing dependence on imports and declining exports; our lack of strong local industries to cushion the negative impact of the two-year debilitating pandemic; the weakened economies in the host countries of overseas Filipinos, which prevented them from sending more dollars home or worst, caused them their jobs and also the higher transaction costs of sending remittances home.

So, yes, Sandro is correct in saying that the dollar is strong, but what he failed to see is that the dollar’s strength against the peso is more pronounced now because the peso, in reality, has been fundamentally weak.

As I mentioned in my previous columns, this is because we have been so heavily dependent on imports while our exports aren’t able to catch up.

Look at Vietnam for example. Its exports have maintained double digit growth this year, up 18.2 percent year-on-year in the eight months to August to over $252 billion.

Its exports are forecast to rise 9.5 percent to $368 billion in the year, its government said, adding that its foreign direct investment inflows are seen rising 6.4 percent and 11.5 percent to  around $21 billion to $22 billion, according to Reuters.

On the other hand, the Philippines posted a wider trade deficit of $6 billion in August, almost double the $3.31-billion gap in the same month last year and also higher than the $5.989-billion trade shortfall in July.

This, as our imports rose by 26 percent while our exports dipped by two percent during the month.

All this, while the dollar has been strengthening because of the US Federal Reserve’s move to raise interest rates; it moved faster than other central banks in raising rates as it fights scorching hot inflation in the US.

Ghosts of the 1997 Asian financial crisis

Now what does this problem mean for the region?

Some are seeing the ghosts of the 1997 Asian financial crisis. But are they really back with a vengeance; are they back from the dead?

The good news is that Asian economies are fundamentally stronger now and that our currency markets are deeper, which essentially means the region can withstand shocks better than before.

No less than Malaysia’s former prime minister Mahathir Mohamad, one of the leaders who had to steer his country through the turmoil, believes that a repeat of the 1997 Asian financial crisis is less likely.

A proliferation of currency-trading hedge funds and other players has made it harder to stage the speculative attacks of the kind he blames for triggering mayhem 25 years ago. He said in a July 2022 interview with Nikkei Asia for an article marking the anniversary of the crisis.

Lessons learned

But at the same time, Mahathir said lessons had been learned from the crisis, such that a government needed to fully understand trading in its currency and build strong foreign exchange reserves to allow them to step in when necessary.

Indeed, as a country heavily dependent on imports, we need to keep our dollar reserves strong and in the long term, we need to strengthen our local industries so we can export more products to the global market. Government must help our local manufacturers become more competitive.

It’s good that the Philippine economy is in a much stronger position now than during the 2008 to 2009 global financial crisis, says Bangko Sentral ng Pilipinas Governor Felipe Medalla during the 2022 Annual Reception for the Banking Community last week.

He said measures made by predecessors, especially former BSP governors like Amando M. Tetangco Jr. or AMT, helped strengthen the central bank’s current position.

“To Say Tetangco, thank you for having the courage to buy $45 billion of foreign exchange…despite the fact that at that time, we were not yet allowed to buy from the public. He knew, deep inside, that allowing the currency to move too much would have killed the economy. He knew that we had to accumulate the reserves because times such as this would come,” Gov. Medalla said.

However, we must note that the pain isn’t any less for the most ordinary Filipinos, especially as the peso continues to weaken and prices of basic commodities continue to increase.

We need more and faster implementation of government interventions to improve supply, address logistical constraints, and curb inflation. In the long term, we need to help local industries to boost exports.

Our problems are big and are likely to get bigger. We need big and bold solutions instead of just simplifying the challenging times.

Iris Gonzales’ email address is [email protected]. Follow her on Twitter @eyesgonzales. Column archives at EyesWideOpen on FB.