The ‘strong peso’ and the folly of OFW export

Feb. 03, 2008

MANILA A year ago, Pres.Gloria Arroyo was hyping the strengthening peso as a validation of her efforts to build a strong economy. These days, it is becoming clearer that the strong peso is not a sign of a strengthening economy. In fact, it is even hurting overseas Filipinos workers (OFWs), lauded by the administration as the countrys economic frontrunners.

Strong Economy?

Undoubtedly OFWs remittances have been key to Pres. Arroyos much-hyped economic growth. Remittances in nominal terms grew 111.6% between 2001 and 2006. For the first eleven months of 2007 alone, remittances already hit $13.1 billion, 3.1% more than the whole year 2006 figure. Remittance figures for year-end 2007 are expected to hit $14 billion. Further, as of 2006, remittances are 27% of merchandise exports, 612% of net foreign exchange investment and 465% of portfolio investment.

But this bonanza, while bloating moribund economic growth figures, has had its downside, namely the strengthening of the peso against the dollar. 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.

Of course, 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% 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.

But the appreciation of the peso is mainly because the dollar itself is weakening, and not for any reasons related to the strengthening of the countrys productive sectors. 2007 saw the bursting of the USs 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%, the Indian rupee by 12% and the Thai baht by 16% from the past year.

Bad News for OFWs, Exporters

Ironically, the peso appreciation caused by the influx of remittances has hurt OFWs and their families by lowering the peso value of their income. Based on an average monthly remittance of US$340, a household with one OFW family member lost some P11,290 last year if the monthly changes in the exchange rate throughout the year are considered.

The roughly 15% increase in OFW remittances in 2007 was not enough to offset the 16% peso appreciation over the same period. If the prediction that the peso may reach P38 to the dollar by the end of 2008 materializes then the average OFW household will be losing some P3,710 a month compared to the start of 2007 or an annual loss of between P30,000 to P45,000.

The peso appreciation is also hurting exporters, who are complaining about losses as the strong peso cuts into their earnings. This is particularly so for small exporters whose exports are relatively more grounded in the domestic economy, such as those in the handicrafts and furniture sector.

However, it should be noted 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. In any case, they already benefit from tax and non-tax incentives, including duty-free importation for those operating within the countrys export-processing zones.

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