The ‘Strong Peso’ and the Folly of OFW Export

Addressing the impact of the lowering peso value requires more than the mitigating measures government has so far implemented, including the hedge fund set up by the DBP, and Malacañang’s fiscal stimulus program

By Sonny Africa

IBON Features – 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 country’s economic frontrunners.

Strong Economy?

Undoubtedly OFWs remittances have been key to Pres. Arroyo’s 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 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%, 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.