Why peso is appreciating

When Filipinos lost their jobs and incomes because of the pandemic, they refrained from buying stuff from abroad. This dampened the total demand for dollars that can be used to pay for such imported goods. More significantly, imports of capital goods and raw materials — essential for production — have also been derailed by the pandemic.

Figure 2 shows that the growth of imports plunged to Trade bounced back since, but as of September imports are still By contrast, exports have recovered in September, growing again by 2. This reflects the general recovery of international trade, as well as the gradual reopening of our trading partners. But for as long as imports remain depressed because of the ongoing economic downturn, the demand for dollars will continue to weaken, and the peso to strengthen. For example, we saw a record contraction of remittances from overseas Filipinos OFs.

Figure 3 shows that, for the first time in many decades, the period moving average of remittances has shrunk. Of course, this is on account of the fact that some , OFs have been displaced and repatriated since the start of the pandemic.

Thousands others have found themselves jobless and stranded abroad. The resulting drop in the supply of dollars tends to weaken the peso. On balance, the supply of dollars has generally gone up. This is supported by the balance of payments surplus recorded by the Bangko Sentral ng Pilipinas in the first half of this year, as well as the steady rise in gross international reserves.

This, together with the tremendous decline in the demand for dollars due mainly to weak import demand , invariably led to a stronger peso. Hence, for such to happen, the domestic currency cannot be made to strengthen beyond its true economic fundamentals. Where the situation requires recovery from economic crises, such as the one facing the nation today, the exchange rate needs to reflect the realities of the market. In the last days [inclusive between April 1 to Sept. On April 16, the peso exchange rate was It reached its lowest rate at Last Sunday, Sept.

If we chart the daily movements of the exchange rate, we see the ups and downs of the value of the peso. We can also surmise that from April 16 to last Sunday Sept. Peso appreciation during the pandemic lockdown period. Should we be surprised with the appreciation of the peso at a time when the economy is weak and is weakening? Perhaps not, because not all the parts of the economy are in equal weakening status — that is, some sectors or activities are moving in different directions.

For instance, when the lockdown happened, many economic activities stopped and so this reduced not only income and employment, but also caused a big drop in demand and supply of goods — of imports and of exports. It turned out that during a period of falling activity, Philippine imports fell much more than the fall in exports. Hence there was a relative gain in impact because this situation produced a movement toward a trade surplus.

Such a fact would relatively improve or strengthen the currency, hence the impact on appreciation. Also, take the trade in services. The fall in remittances from OFWs and in earnings from tourism and BPO services were ranged against outward remittances on imports and other services that also became weaker because of the lockdown consequences.

There is still another factor that helped to strengthen fiscal management, which in turn strengthens the Balance of Payments BOP position in the immediate term. The government successfully launched a dollar bond issue which brought in fiscal proceeds of significant value, propping up the BOP. Still, some factors might be at play on the rate of interest in the domestic economy and in the world economy.

This led to adjustments in many central banks. Our own BSP took advantage of these opportunities to reduce interest rates. One could ask if the domestic interest rates are still too high to invite inward remittances into the Philippine financial system of foreign funds for speculation and placement. If hot money comes in, a net appreciation effect on the peso could result. The peso exchange rate, A review of the peso exchange rate from to the present is useful to relate the present discussion on the appreciation of the peso.

The first decade from marked a period of relative depreciation of the peso. It started in year at The loss of value of the peso was precipitated by political turbulence. This happened during the short presidency of Joseph Estrada, his removal from power and succession by Gloria Macapagal Arroyo.

The exchange rate stabilized and later began a slow appreciation toward The middle period — to , during the Benigno Aquino III presidency — marked a period of relative stability of the exchange rate in the range of 44 to 45 pesos-to-the-dollar, with the rate even appreciating to The improvement in the exchange rate was marked by reigning in government expansion. The weakening of the dollar will strengthen US exports and force down its heavy dependence on imports, thereby reinforcing economic recovery.

The results of this comparative review will help instruct on how all the countries are managing their exchange rate policies. On July 31, the end of the period , the per dollar exchange rates of the same countries were: China, 6.

Looking at these exchange rates in terms of the indexes and relative to the beginning period, we find that on July 31, , the following currency rates have these index numbers all measured in percent: China, If the index number is below , it means that the currency has appreciated. If they have risen above , the currency has depreciated.

Judging from the viewpoint of export encouragement, the currencies that have depreciated have gained an advantage over those that have appreciated. These numbers are telling to any economist and businessman. They have both appreciated, with the Chinese yuan only slightly so. By July 31, , a rough calculation of the export edge of other countries relative to the Philippines is clear. To arrive at these numbers, I simply deducted the index value of the exchange rates of the respective country from the peso index of The Bangko Sentral has a lot of work to do to give the domestic economy much greater room for growth, to promote improved structural health, and to raise export performance.

This is unthinkable but true. My email is: gpsicat gmail.