Winners and losers from peso depreciation

The depreciation of the peso has continued from the last time I wrote about it (Sept. 14 column). The latest rate of exchange was P58.99 to the dollar. This represents a 15 percent depreciation since the start of the Ukraine-Russia war.

My focus in the previous column was to stress that the depreciation of the national currency was a common experience with many countries. I limited my demonstration to our immediate East Asian neighbors for illustration.

The depreciation was a reaction to the US Fed’s policy move to raise domestic interest rates to fight America’s own inflation. Such a policy undertaking shook the relative economic balance among trading currencies. The US dollar strengthened relative to all currencies. But each and every country adjusted according to their specific situations and economic policies.

Winners and losers in peso depreciation. When the peso depreciates in value with respect to another currency like the US dollar, it takes more pesos to exchange against the dollar.

The meaning of this in real economic activity is that foreign goods and services that we import become more expensive to Filipinos. On the other hand, the goods and services we sell to foreigners become cheaper to them.

The effect of this is that depreciation discourages imports and encourages exports for a country.

Losers: those dependent on imports. Depreciation hurts those dependent on imports for their lifestyle (if they are consumers) and those industries that depend on imports (if they are producers).

Collaterally, all those businesses and activities that depend on imports to support them also suffer. We can list them: workers employed in these industries, retailers, and distributors who depend on imported goods and services, and factories that depend on imported inputs for their local production of goods and services.

The imports of consumer goods also are affected, with their prices rising. Here, the implication is across a broad spectrum of citizens from different income classes – the rich, the middle class and also the poor. A lot of imported goods are consumed not only by those with money, but also by the poor.

Intermediate materials like imported energy and important raw materials sourced from foreign countries also get a hit from a peso depreciation.

In general, however, depreciation only adds to the cost of imported goods. In this sense, the peso depreciation is also a driver of inflation in the economy.

One side-effect of such increases in the costs of foreign goods is to replace them with local substitutes. If this is done well, it could encourage the local production of import substitutes. The development of local industry can be induced by peso depreciation.

Winners: exporters and sellers of services to foreigners. The peso depreciation gives a spark to exporters of goods and services within the economy. The response of the economy to an increase in export activity depends also on the policies that the government adopts to help the process further.

Even if it does not lead to a large inducement of export orientation of an economy, depreciation of the currency can play a role in maintaining economic balance if the economy is prone to import more than it exports. By simply reducing imports and causing some increase in exports, a currency depreciation could help to improve the country’s balance of payments (BOP) position.

A significant depreciation of the currency can have winners in the economy among those industries that rely on exports as an industry.

In the Philippine context today, the export industries are varied. They have a foothold still in some major agricultural exports, some of them traditional, like coconut oil and coconut products, bananas, pineapple. From manufacturing, exports of semiconductors are significant and could still expand. There is a large segment of industries operating in the export processing zones that would be encouraged to expand their production. Many of these are foreign enterprises that have taken advantage of the incentives in these zones. The export base of these industries, however, is that they use principally labor inputs and are import dependent for their raw materials.

The BPO-export services sector still has room for further expansion. The pandemic has affected the working arrangements in the segment of the labor market they tap – the skilled, educated young manpower base of the country. The BPO industry has expanded even during the pandemic period when mixed work-from-home and work-from-office arrangements was allowed. The innovation that allows this work arrangement to continue is favorable to the further expansion of BPO services from the Philippines.

Two potential winners from the current depreciation of the peso are foreign tourism in-the-country. The influx of foreign tourists is a big potential dollar earner spent on our domestic tourism enterprises, which include hotels, restaurants, and service industries.

The mining industry can expand quickly, too.

Filipinos who work abroad and who send part of their earnings as remittances to help their families in the country are winners. Their remittances increase in peso values and their families in the country improve their consumption standards.

The other winners arising from the depreciation are those sectors whose activities are stimulated by the expansion of the export-related sectors. These are the many tertiary local service industries that depend on the expansion of the export-oriented enterprises. Also, the wages and secondary expenditures of those prospering from exports spill over to the service industries within the country.

A structural economic defect. In the history of our country, we have experienced many episodes of peso depreciation. The earlier ones were adjustments resulting from serious BOP difficulties.

Many of the adjustments made by previous administrations since independence were able to solve the momentary BOP problems. But all the time, the structural adjustments were incomplete so that the highly protective industrial regime that was in place were retained. The main reason was that the constitutional economic restrictions linked to the participation of foreign direct investments were always in place.

In the current framework, the protection guardrails against foreign investments have largely been removed, thanks to the previous reforms undertaken during the closing months of the Duterte administration. Today, many of these protective clauses have been clarified by law and no longer hold.

It is, therefore, possible that under the new Marcos administration, these barriers will no longer become stumbling blocks.

Thus, an improved performance can be expected which strengthens the overall economic response as a result of the current peso depreciation.

(To be continued.)

For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/