Wednesday, February 06, 2008 'Strong' Peso hurts OFWs, exporters By Karl G. Ombion
THE members of the local business sector last year chorused in praising the strengthening of peso as proof of President Gloria Macapagal Arroyo's efforts to consolidate the republic through a strong economy.
Recently, OFWs and their kin, including some business groups in the province are increasingly worried that the 'strong' peso is hurting them instead propping up their incomes and profits.
Sun.Star Bacolod random interviews with some local families of OFWs said that they have been losing an average of P9,000 to as much as P12,000 based on the monthly average remittance of US$350 to US$400.
If some reports are to be taken true that predicts peso to reach P38 to the dollar this year, the average OFW household will likely be losing an average of P3,800 to P6,000 a month based on the same average monthly remittance it gets.
As of December 2007, the peso has already fallen to P41.47 against the dollar, 18.5% stronger than the P49.47 recorded in December 2006.
Exporters also felt the bad effects of peso appreciation. A group of local handicrafts producer-exporters who begged not to be named, told SSB that they losing as the peso becomes stronger. "We are losing our earnings and if this continues, we might be forced to stop the export business and refocus on other local business," members of the group said.
They however said that the effects of the strong peso on large exporters and subcontractors for transnational corporations is mitigated by the cheaper cost of their imported inputs. They also benefit from tax and non-tax incentives, including duty-free importation for those operating within the country's export-processing zones, the group added.
IBON senior economist Sony Africa in a statement to SSB explained that the peso bonanza, while bloating moribund economic growth figures, has had its downside, namely the strengthening of the peso against the dollar.
Africa said the windfall of OFW remittances are not the only reason behind the strengthening peso. There is also the large increase in net foreign portfolio investments (also known as "hot money"), which for January to November 2007 reached US$3.7 billion, a 76.6 percent increase from the same period last year. And it is possible that the eventual full-year level could even exceed figures recorded in 1996 just before the Asian financial crisis. Although administration economic managers will undoubtedly spin these figures as indicative of continuing investor confidence in the economy, they should also remember that the increase in portfolio investments make the country more vulnerable to a financial crisis like the one that hit Asia in 1997.
Africa also stressed that the appreciation of the peso is mainly because the dollar itself is weakening, and not for any reasons related to the strengthening of the country's productive sectors. 2007 saw the bursting of the US 's most recent speculation- fueled boom, which was characterized by the start of the slow collapse of the property bubble, drops in construction and declines in consumer spending.
"The dollar has actually been weakening against currencies across the globe. As of December 2007, for example, the Canadian dollar appreciated 13% against the US dollar, the Brazilian real by 17 percent, the Indian rupee by 12% and the Thai baht by 16% from the past year," he added.
Africa predicts that the exchange rate will continue to be volatile this year. "The flattening of growth of OFW remittances could mean that the peso's appreciation will level off.
Growth rates of remittances have fallen from a peak of 25 percent in 2005 to 15 percent in 2006. But it's hard to say when and at what level; varying estimates have pegged the eventual level from between P37 to P41 per dollar."
He further said that another factor that could fuel volatility is when the real situation of the country's unresolved financial crisis surfaces, precipitating capital flight as "hot money" speculators flee the country in search of more profitable markets and as they get less confident about government's financial standing.
Africa said that addressing these concerns requires more than the mitigating measures government has so far implemented, such as the special hedge fund set up by the Development Bank of the Philippines to secure the earnings of OFWs, and the recently-launched fiscal stimulus program, whose funding will reportedly come from the sale of government stakes in San Miguel, Food Terminal Inc, etc.
Reigning in hot money and speculative behavior is an important part of any genuine attempt to address the country's exchange rate problems. This could be done by establishing a narrow peso-dollar band and using accumulated foreign exchange reserves and monetary policy to keep the exchange rate at reasonable levels, he said.
He added, that capital controls should also be instituted, such as those imposed by Thailand in December 2006 to rein in a surging baht. Initially, speculative flows should be taxed to temper their volatility as well as generate revenues.
Africa though warned that apart from such measures, government should realize the folly of its labor export policy, which now proves to be unsustainable as a development strategy in the long run. Indeed, the looming US recession has already threatened a slowdown in OFW deployments and remittances.
