Good/ bad

At the rate the peso is going, it could become the world’s best performing currency by the close of the year. It is already the region’s best performing currency, having defied the dollar’s rise against most other currencies.

That might seem like good news for some. For others, it is a scourge.

The National Treasurer sounded quite pleased. For every P1 appreciation against the dollar, we actually save P5 billion is debt service annually.

The administration is definitely happy. In fact, ecstatic.

A combination of a slight drop in crude oil prices and a slight appreciation of the peso allowed us to actually bring down pump prices for fuels even with RVAT factored in. That allowed government to both increase revenues as well as avoid social tumult that a sharp spike in prices might have caused.

That, notwithstanding, the enforcement of the RVAT continued to erode the administration’s political capital. The most recent SWS survey shows approval ratings for the President continuing its fall.

With the peso at its strongest in two-and-a-half years, the administration could brag about the great dividends from its exercise of economic statesmanship. After all, the rise of the peso is partly due to the investment community’s vote of confidence in the administration’s political will in ensuring a viable fiscal situation.

Consumers will, no doubt, feel some relief.

The softening in fuel costs will be the most palpable consequence of the stronger peso. If the trend continues, the forthcoming increase in the price of power could be mitigated somehow. At the very least, higher power rates combined with lower fuel costs should improve Napocor’s profitability and allow this once ailing government firm to pay down some of its debt.

Most of the goodies we import for Christmas will not cost as much with the stronger peso. That might add to the cheer.

There is a bad side to the stronger peso too.

Our migrant workers coming home for the holidays will get lesser pesos for the hard-earned hard currencies they bring in. However, the 3.5 percent improvement in the value of the peso might not be dramatically evident to those changing hundred dollar bills at the malls.

Our exporters will not be earning as much as when the peso was weaker. In order to remain competitive, they will have to cut their margins.

Our appetite for exports will probably rise in roughly the same proportion as the peso’s appreciation. That will probably be bad news for Filipino manufacturers competing with imports, such as our garment makers.

Remember the time when the peso was kept overvalued? That was also the time that our economy hollowed out, with labor intensive manufacturers migrating to countries like China which works hard at keeping its currency artificially undervalued.

A strong peso will cut the attractiveness of Filipino wages even more, discouraging labor-intensive investments in our economy. That, of course, will prevent significant reductions in the number of the unemployed.

As you can see, the appreciation of the peso has both good and bad consequences.

Most of the economists in the e-group of the Foundation for Economic Freedom, true practitioners of the dismal science, mourn the peso’s rise. They see the good consequences as short-term and the bad consequences as strategic disadvantages for the economy.

Too, the peso’s incredible strength is probably short-lived.

The unique characteristic of our economy is the large role played by the remittances of our migrant worker population. The remittance flow tends to peak at year-end because this is the time contract cycles usually end and migrant workers hurry home to be with their families. It’s hell trying to book flights abroad and back during this time of the year, given the immense traffic of overseas Filipino workers.

Because of the seasonal characteristic of remittance flows, the peso’s current strength might not be sustained for too long after the holidays. But then, any retreat in the exchange value of our currency might not be substantial.

It is also true that the peso has been undervalued because of lingering political noise and a number of policy uncertainties. The biggest uncertainty, up until the start of November, was whether the administration would have enough fiscal statesmanship in it to actually try and improve revenues by enforcing the RVAT. When the RVAT was finally enforced at the beginning of last month, both the peso and the stock market rallied strongly.

As the peso began to correct after RVAT, it coincided with the annual avalanche of remittances. That most likely explains the over-correction and the incredibly strong performance of our currency.

At the moment, there seems to be a sense that the world’s main currencies are in a flux. The dollar’s strength is unwarranted. The values of most other currencies are probably tentative. Fore these reasons, investors have sought sanctuary in gold – thereby pushing up the price of the metal to levels not seen in many years.

Should we be happy about the peso’s incredible strength at this time?

Probably yes, considering the much-needed relief this brings to a situation burdened by the spike in oil prices.

Should we be confident the peso will maintain its gains against the dollar?

Probably not, considering both the seasonality of the remittance flows and the gust of exuberance brought about by the RVAT being finally enforced. The more the peso rises from this point on, the greater the economic resistance to that rise will be from those sectors that rely on a weaker peso for their vitality.