Strong Peso

The Peso’s strength against the Dollar is increasing.

So, what is the hullabaloo all about?

For those (they are surprisingly in the majority) who have no idea on the significance of the peso exchange rate to the lives of ordinary Filipinos, let me take a leaf from the Bangko Sentral ng Pilpinas.

The appreciation of a currency against other currencies is generally viewed as good as this is a reflection of improved economic fundamentals, that is, lower inflation rate, high balance of payments surplus, etc.

On the other hand, to the extent that the depreciation of the peso against other currencies was due to deteriorating economic or other negative conditions in the Philippines, then a depreciating peso is not good news.

Certain parties, however, may not welcome this increase in the value of the currency. For instance, our exporters and overseas workers get fewer pesos from their foreign exchange earnings every time the peso appreciates.

If the peso’s exchange rate against the US dollar appreciates to P48 from a previous P50 to one dollar, a family which receives $1,000 monthly from their breadwinner-father employed as a computer programmer in New York will get only P48,000. For a ready-to-wear exporter to the USA, the appreciation of the peso by P2 will not be welcome news also. If she sells $100,000 monthly, her total peso sales equivalent will be lower by P2 million.

For foreign exchange earners, an appreciating peso will also be good for a country as a whole if the people prefer imported goods over those locally available, especially if these goods are non-essentials. This is so since less pesos are needed to purchase imported items.

In a situation where the Philippines is getting more connected with the rest of the world, it is more important to see the peso moving along with major currencies, and its trading partners and competitors.

Moreover, it is also significant to consider whether these ups and downs in the peso’s value proceed in a stable manner or at wider fluctuations. Wider fluctuations or greater volatility are disruptive, whether for business planning or for individuals who need other currencies in their transactions. Thus, the Bangko Sentral pays more attention on how the peso moves, causing it to intervene in the market to cushion or smoothen abrupt changes in its value.

As regards to some people who think that government can manipulate a country’s currency value, it may be possible through export subsidies. However, this distorts trade more than any other measure. Undervaluation of a currency through this measure constitutes a prohibited subsidy under international law because the exchange rate does not reflect market conditions.

Export subsidy is the only type of subsidy that the World Trade Organization prohibits outright because this is very damaging to competing economies.