Should you buy dollars now?
As of last Friday, June 22, the peso-dollar exchange rate closed at P53.34. The past three weeks it has been trading at the range of P53 to P53.55 and from the volume and movement it looks like lower rate has become the bottom. This is the lowest annual average exchange rate for the peso in the past 18 years with the strongest in 2012 at P42.23. In a situation like this, there are always winners, losers and opportunities.
There are a number of reasons for the stronger dollar, some are economic and others political, although some say eventually everything is political economics. There are also proximate reasons and trends that cause movements and reinforce each other. The immediate causes are rising interest rates in the US, that attract back investments from the developing countries, the looming trade war between the US versus China, Europe, and Canada which will mean lower US imports from these countries, and the Philippines trade and Balance of Payments (BOP) deficit. The Philippines BOP deficit as of May 2018 was at $2.08 billion compared to May 2017's $136 million, a 1,430% increase. Our imports have been growing much faster than our exports due to the government's higher operational expenses, massive infrastructure building, and our expanding economy. OFW remittances and BPO earnings were not enough to cover the shortfall, we had to use some of our Gross International Reserves (GIR). As of end May our GIR is down to $79.2 billion, which is still 7.6 times worth of our imports and services, and 6.2 times our short-term external debt. This is still very adequate and comfortable but worrisome if it continues decreasing.
The long-term reasons are; structural condition of the Philippine economy, political condition, and international relation/perception of the Philippines. The economic structure of the country is very good considering the demographic advantage, balanced consumption and investment component of the Gross Domestic Product, and the strong foreign exchange remittances of OFWs. The political condition since the election of president Duterte have been a "mixed bag" due to his authoritarian pronouncements, his rhetoric against the US and some European countries, and perceptions of his capability. These affect the perception about the country and the consequent trade and investments from these countries, which impacts on the foreign exchange inflows.
A weaker peso is generally good for dollar earners like OFWs, exporters, and BPO workers. It is bad for importers as it means more dollars to import and higher product prices. As we are a net importer of fuel oil for power plants and vehicles, a weaker peso means higher transportation prices which have a chain effect on other goods. This will lead to a higher inflation which will be bad for ordinary workers, especially those below the poverty level. A moderate peso depreciation is tolerable and beneficial to the economy to deter unnecessary imports, but an abrupt and significant fall is disastrous. Aside from immediate high inflation, the psychological impact feeds on itself and it leads to further deterioration.
So, is time to buy dollars? If you have a time bounded $ obligation that is due in 90 days, you should hedge and buy half of your requirement. If you are a regular importer, it is also time to hedge and buy a forward cover for 180 days. If you are going abroad in the next 60 days, buy only what you need. If you are going to speculate just to make money, please do not buy dollars as you will just add to the problem of higher inflation.
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