The Philippine Peso—Us Dollar Exchange Rate: the Impact of Strengthening Currency

The foreign exchange market is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. (wiki. org) The exchange rate is the price of a unit of foreign currency in terms of the domestic currency.

In the Philippines, for instance, the exchange rate is conventionally expressed as the value of one US dollar in peso equivalent. The value of any particular currency is determined by market forces based on trade, investment, tourism, and geo-political risk. Every time a tourist visits a country, for example, he or she must pay for goods and services using the currency of the host country. Therefore, a tourist must exchange the currency of his or her home country for the local currency. Currency exchange of this kind is one of the demand factors for a particular currency.

Another important factor of demand occurs when a foreign company seeks to do business with a company in a specific country. Usually, the foreign company will have to pay the local company in their local currency. At other times, it may be desirable for an investor from one country to invest in another, and that investment would have to be made in the local currency as well. All of these requirements produce a need for foreign exchange and are the reasons why foreign exchange markets are so large. (investopia. om) In this paper the researchers attempt to show the impact of strengthening peso against the US dollar and what are the consequences behind it. It also attempt to show where should the government place itself when the opposing interest of the public are at stake. Background The Philippine peso has been one of the strongest currencies in Southeast Asian Region for the past two year. It appreciated for an about 5. 6 percent from year 2009 to 2010 where the exchange rate is 47. 6372 to 45. 1097 a dollar—that is based on the average data from BSP.

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This appreciation may attributed to the increasing inflows of remittances from the overseas Filipino workers (OFWs), the improvement in portfolio and direct investment, the deterioration of United States’ dollar economy for the past two years and the attractiveness of the Southeast Asian Region to the foreign investors. Peso appreciation would provide to a positive and negative effect on different sectors. The appreciation of Philippine peso would mean a reduction of debt servicing; this would also mean a reduction of prices of imported commodities in terms of peso when the product came here.

However, this appreciation will reduce the purchasing power of Dollar that OFWs send to their family here in the Philippines and it would also mean that exported product will be less competitive abroad or if ever the exporter’s income will diminish. In this situation, the government is stock between letting the peso appreciate for the purpose of lower importation cost and lower debt services—or maintaining it at a lower value for the sake of OFWs and export sector. According to Senator Ralph Recto, chairman of the Senate Committee on ways and means, the Philippine peso could further appreciate up to P34 a dollar this year (2011).

Inflow of remittances will continue to be strong and the outlook for foreign investments remains positive. The exchange rate is important for several reasons:  it serves as the basic link between the local and the overseas market for various goods, services and financial assets. Using the exchange rate, we are able to compare prices of goods, services, and assets quoted in different currencies.  Exchange rate movements can affect actual inflation as well as expectations about future price movements.

Changes in the exchange rate tend to directly affect domestic prices of imported goods and services. A stronger peso lowers the peso prices of imported goods as well as import-intensive services such as transport, thereby lowering the rate of inflation. Exchange rate movements can affect the country’s external sector through its impact on foreign trade. An appreciation of the peso, for instance, could lower the price competitiveness of our exports versus the products of those competitor countries whose currencies have not changed in value. The exchange rate affects the cost of servicing (principal and interest payments) on the country’s foreign debt. A peso appreciation reduces the amount of pesos needed to buy foreign exchange to pay interest and maturing obligations. Foreign exchange policy in the Philippines has evolved from a pegged system to a floating rate regime over the last 50 years. The period of pegged exchange rate regime witnessed an extensive use of a myriad of administrative rules that were set to restrict access of Philippine residents and corporations to foreign currency.

From 1949 to early 1970, foreign exchange policy was used to promote exports industries, to limit imports, and to try to change the orientation of the Philippine economy from agricultural to agro-industrial. Even after the floating rate system was adopted in 1970, it was not until late 1984 that the central bank stopped announcing a guiding rate and imposing a trading band. Moreover, it was a decade hence yet before the watershed set of reforms was issued. In 1993, the BSP liberalized capital flows and implemented a comprehensive set of foreign exchange market reforms.

Today, even as there remain some prudential regulations with respect to foreign currency transactions, market forces determine the exchange rate. Furthermore, mechanisms to allow the economy to absorb shocks that a freely floating currency entails have been the subject of recent economic discussions.

 Statement of the Problem

The general problem of the study, “The Philippine Peso-US Dollar Exchange Rate: The Impact of Strengthening Currency” is to determine the impact of the appreciation of Philippine peso during the year 2009-2010. Specifically, the problems are the following: Effects or impact of the appreciation of Philippine peso on consumption, government spending, investment, import-export and debt servicing;  What are the reasons for the appreciation of Philippine peso 2009-2010;  What is the role of the Bangko Central ng Pilipinas in the Foreign Exchange Market;  What are possible future movements on the Philippine peso against US dollar and how does it affect the country’s economy.

Objective of the Study

General Objective: To determine the economic impact of the appreciation of Philippine peso. Specifically, the study attempts to: Determine the effect of the appreciation of Philippine peso:  Consumption. Investment. Government spending. Import and export. Debt servicing . To examine the reasons behind the appreciation of the Philippine peso during 2009-2010 . To determine the role of the Bangko Sentral ng Pilipinas (BSP) on the Foreign Exchange Market . To determine the future movement of Philippine peso against the US dollar and its effect to the country’s economy.

Hypotheses

The researchers believe to the following hypothesis: The effects of appreciation has a great impact—positive and negative on consumption, government spending, investment, import-export and debt servicing; Philippine peso appreciation was caused by several factors such as the robust economy of the Philippine as well as the increasing amount of remittances from the overseas Filipino workers (OFWs).  The role of the Bangko Sentral ng Pilipinas(BSP) is to maintain the stability of Philippine peso against other currency. The Philippine peso will further appreciate in the near future against the US dollar and this appreciation will boost the economy through saving.

The study is conducted to determine the impact of peso appreciation on the economy. It shows the effect on different sectors of the economy. It attempts to show the impact of strengthening peso against the US dollar and what are the consequences behind it.

It also attempt to show where should the government place itself—through the use of Bangko Sentral ng Pilipinas—when the opposing interest of the public are at stake. It also attempts to show how to maximize the advantage of strengthening peso against the dollar on the term of government spending. And to some extent, to serve as guide in policy making through the use of recommendation.  The study “The Philippine Peso-US Dollar Exchange Rate: The Impact of Strengthening Currency” limit its scope on Philippine peso against US dollar from year 2000 to 2010.

 “The Indian Rupee--US Dollar Exchange Rate: The impact of Strengthening Currency” Reasons behind the appreciation of the Rupee in 2006-2007 Toward the end of 2006, foreign exchange inflows, especially of dollars, into India started rising sharply. This put upward pressure on the rupee’s exchange rate against the dollar. India’s steady economic growth offered several opportunities for foreign companies. Between April 2006 and March 2007, FDI of $16 billion flowed to India.

Foreign currency reserves, gold, special drawing rights (SDRs), foreign investments as well as the Reserve Position in the Fund (RPF) are main components of the Gross International Reserves (GIR). The GIR constitutes the foreign assets valued mark-to-market, which are readily available to and controlled by the BSP for direct financing of payments imbalances and for managing the magnitude of such imbalances. The BSP estimates the level of Overseas Filipino Worker (OFW) remittances, which props up the country’s foreign currency reserves.

Discussion (Impact on the Philippine Economy)

The appreciation of Philippine peso against the US dollar affects the consumption of Filipinos. Especially the families of overseas Filipino workers (OFWs) who receives remittances coming from abroad—which are commonly dollar denominated. According to BSP, the US dollar remittances of OFWs increase by 8. 16% from 2009 up to 2010. On the year 2010, the overseas Filipino workers remittances reflect 29. 55 percent of the Gross National Products (GNP). According to Bangko Sentral ng Pilipinas, on the year 2010 the peso appreciated at an about 5. % on average basis (see table 2). This means that the purchasing power of the dollar remittances lower for an about 5. 6% in the Philippines. On the letter written by the Filipino Community in Riyadh, Saudi Arabia, to the President in Malacanan in August 2006, they stated their predicament regarding appreciation of Philippine peso against the US dollar: the salaries remained the same while the cost of living have increased, which means less income to be available for remittances; which worsen when peso appreciated from Php55 to Php45 versus US dollar. the continued appreciation effectively reduced the value of remittances at an average 18%. The strengthening or appreciation of Philippine currency had a positive effect on consumption, it enable to somewhat, catch the effect of inflation of the commodities that are being imported from abroad. Ironically, disadvantage of a strong peso is that the beneficiaries of OFWs who contributes significantly in making the peso strong, get less of the remittances that their relatives send them since the Dollar loses its purchasing power by the peso appreciation.

And finally, a sector which for us is really getting the worst out of the situation are the domestic producers since a strong peso would make imported goods cheaper since the peso appreciates thus making it purchase imported goods more.

The table above shows how much a dollar worth in peso term during the year 2000 up to 2010. B. Investment Another advantage of a strong Philippine Peso is that it would reflect a robust economy for the country, which could leverage itself to attract foreign investors in the country which could provide significant inflows for investments to the country that further improve the economy. A positive outlook is very important to a country to seek investors to show confidence in investing to country since their outlook would be one of the considerations investors would consider.

The first thing that an investor would want to know is that if they would get their desired rate of return at a certain period of time. Facing uncertainties and risks, investors would like to gather as much information to aide them to their decision making minimizing uncertainties and factors such as oil prices, stability of the government and the economy are some of the preliminary facts to consider. If from these preliminary factors as country fails to impress investors, important investment inflows would be going to somewhere else.

It affects the foreign exchange since as we have stated earlier, foreign investments helps the Peso appreciate. The Philippine Daily Inquirer published in their December 1 2006 paper that business confidence, which reflects foreigners outlooks to the country, has soared to a 5 and a half year high of 49% compared to just 22% a quarter ago. Another outlook factor that could affect the foreign exchange market is the credit rating by firms such as S&P and filch. These firms are respected firms and reliable so anything that they publish would be taken seriously by interested parties.

A credit downgrade by these agencies affects the Peso negatively as it gives of a bad image of the country to interested investors but at the same time a positive rating would help the Peso strengthen. Just like the OFWs, investments from foreigners improve and help peso appreciation and generally the economy as a whole. Having superb Dollar inflow allows the BSP to increase international reserves of debt curbing down Peso devaluation and aiding to Peso appreciation.

According to BSP, transactions during February 2011 resulted in a net inflow of US$534 million, nearly thrice the US$193 million net inflow in January due to lower outflows (US$935 million in February 2011 against US$1. 3 billion in January 2011). The net inflow also represented almost four times the US$139 million recorded a year ago due to more registered investments this year, US$1. 5 billion compared to only US$500 million last year. This year’s rise in registered investments is backed by a surge in investments in Peso-denominated government securities (Peso GS), to US$730 million of total (or 49. percent) against US$90 million in 2010. Favorable yields have attracted foreign investor to Peso GS placements. Investments in PSE-listed shares amounted to US$740 million (or 50. 4 percent of total registered investments), twice the US$370 million recorded in February 2010. The US$730 million balances of registered investments were in Peso GS and Peso time deposits with minimum maturity of 90 days (nil in February this year against US$40 million last year). Singapore, the United States, the United Kingdom, Luxembourg and Hong Kong were the top five (5) investor countries, collectively contributing 89. percent to total registered investments. Registration of inward foreign investments with the BSP is voluntary. It entitles the investor or his representative to buy foreign exchange from authorized agent banks or their subsidiary/affiliate foreign exchange corporations for repatriation of capital and remittance of dividends/profits/earnings that accrue on the registered investment. For the first two months of the year, transactions netted an inflow of US$727 million, 135. 6 percent higher than the figure recorded for the comparable period in 2010.

Registered investments reached US$3. 0 billion, or an increase of 179. 3 percent from last year’s performance. Investments in PSE-listed shares of US$1. 4 billion exceeded the 2010 figure by 68. 3 percent. Major beneficiaries were banks (US$336 million); holding firms (US$248 million); utility companies (US$241 million); property firms (US$182 million); and telecommunication companies (US$167 million). Portfolio funds have also been re-rating Asia as an investment destination and their flows have reinforced the uptrend in Asian currencies.

With developed markets weighed down with debt and facing years of sluggish growth, fund managers are looking into Asia, citing the region’s fast growth rates and strong corporate balance sheets. (BSP, issuances) Asia is set to continue being a strong destination of portfolio flows over the coming months. The high Asian equity correlation with local currencies will help fuel further gains in the Philippine peso and other Asian currencies. C. Government Spending

We all know that the government’s responsibility is the acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community. They allocate the fund for Personal Services, Maintenance and Other Operating Expenses, Capital Outlays and Net Lending, Public Infrastructure and effectively marginalized resources for the poor. But it’s not that easy because the government must be aware of those risks that might affect their expenditures. One of it is the Philippine Peso condition in exchange rate – if the currency appreciates or evaluate. Now therefore, how thus the exchange rate may affect the government spending? Paying Philippines’ debt will affect our Government’s spending. In fact, based on the data from Bureau of Treasury, more than 77. 6 percent of the P104. 4 billion increase in the 2011 budget came from the huge P80. 99 billion rise in interest payment for government’s spending. The Aquino administration is proposed interest payment of P357. 09 billion in the 2011 budget, or 21. 7 percent of its planned spending program. But the total debt burden for this year could actually reach P823. 27 billion.

Thus, debt burden represents 38. 9 percent of what the Aquino administration is willing to spend this year. If peso appreciates, it has a good impact in our external debt since our debt will decrease in peso terms. We will pay less and that will affect our spending. The remaining money that allocated for payment of external debt will be used for government spending. More resources are available to spend for social and economic development of our country. On the other hand, peso depreciates has a bad effect. Our debt will increase so we will pay more, that is, in peso terms.

Little amount of money will be allocate for government spending. The government will force to minimize their expenditure. Such a heavy debt burden means fewer resources are available to spend for social and economic services badly needed by the people. Let’s now look at the effect of peso condition in trade. Strong peso has a negative effect in exporters. They will lose income since there was less peso in exchange of their dollar earnings or a strong peso translates to lesser value for their dollar-denominated revenues. Prices of their products may also become less competitive in the world market.

The smaller the earnings or profit of exporters, the smaller tax they will pay in the government. That will affect the governments’ spending. If there are small fund comes from tax, government need to minimize their expenditure. On the other hand, strong peso has a positive effect on importers. They will pay less in foreign products. They will earn more and pay more tax. Again, the tax will proceed in government’s fund so more tax, more funds that government may spend for the people’s benefits. Weak peso has good effects in exporters.

Prices of their products become more competitively in the world market. They will receive more peso in exchange of their earnings so they will pay more tax. More tax, more funds that government may spend for the benefits of the people. When peso depreciates importers will force to pay more for foreign products. That is bad for them and for government spending. Since the smaller the earnings or profit of importers, the smaller tax they will pay. Government will force to minimize their expenditures. As we observed, peso condition has different effects in different factors.

That is the reason why it’s hard for the government to ask the Bangko Sentral ng Pilipinas (BSP) to intervene the strengthening peso. We cannot easily believe that a strong peso means a strong republic. So government must look at different factors and learn before engaging the country in different risk. As we also observed, the effect of peso condition in the sources of government funds is the same in the impact of peso condition in government spending. If the effect in the sources of funds is negative, the impact in the government spending is also negative.

When the effect is positive, the impact in government spending is also positive. Overview: Import and Export Since World War II, the Philippines experienced frequent trade deficits, aggravated by inflationary pressures. Deficits were counterbalanced by US government expenditures, transfer of payments from abroad, official loans (US Export-Import Bank, IBRD, and private US banks), net inflow of private investment, tourist receipts, remittances from Filipino workers overseas, and contributions from the IMF. In 1996, trade liberalization policies helped to push imports up by 22% while exports rose by only 18%.

The result was a widening trade deficit that amounted to 13% of GDP. Foreign investment in the stock market and remittances from overseas workers helped to offset the deficit and avert a balance-of payments crisis. In 1998, the Philippines recorded a trade surplus at about 2% of GNP in the current account due to high electronics exports and low imports due to the devaluation of the peso. This was the first surplus in 12 years. Merchandise exports, in double digits through most of the 1990s, slowed to a single-digit growth pace in 2000, reflecting fewer export receipts from electronics and telecommunications parts and equipment.

This decline was attributed by the electronics industry to weaker prices for maturing products and technologies, and to the decline in electronic industry investments from the 1994–97 boom years (when investment averaged $1. 5 billion a year). Traditionally, exports of primary products failed to balance imports, leading the government to restrict imports. Structural change accelerated in the 1970s, as the contribution of industry (including construction) to GDP rose from 29. 5% in 1970 to 36. % by 1980, primarily as a result of export-oriented industrialization promoted by the Marcos government. The Aquino assassination in August 1983 had immediate economic consequences for the Marcos government, as did the broader Third World Debt Crisis. Hundreds of millions of dollars in private capital fled the Philippines, leaving the country with insufficient foreign exchange reserves to meet its payments obligations. The government turned to the IMF and its creditor banks for assistance in rescheduling the nation's foreign debt, and an austerity program was set up during 1984–85.

In December 1986, under IMF guidance, the Aquino government launched a privatization program with the establishment of the Assets Privatization Trust (APT). Monopolies established under the Marcos administration in coconuts, sugar, meat, grains, and fertilizer were dismantled and a ban on copra exports was lifted. All export taxes were abolished; and the government allowed free access to lower-cost or higher-quality imports as a means of improving the cost-competitiveness of domestic producers.

Many difficulties remained, however. The prices of commodity exports, such as sugar, copper, and coconut products, were still weak, while demand for nontraditional manufactured products, such as clothing and electronic components, failed to rise. The structural reforms produced an initial recovery between 1986 and 1989, but this was arrested by the series of natural disasters in 1990–1991. In 1986, Aquino had also embarked on a Comprehensive Agrarian Reform Programme, but its goals remain unfulfilled.

In the 1990s, the government concluded three additional financial arrangements with the IMF—a stand-by agreement signed 20 February 1991 for about $240 million (all drawn); an arrangement under the Extended Fund Facility (EFF) signed 24 June 1994 for about $554 million (all drawn), and a stand-by agreement signed 1 April 1998 for about $715 million (76. 7% drawn down as of 31 December 2002). At the end of 2002, the Philippines owed over 140% of its quota to the Fund. Scheduled debt repayments to the IMF for 2003 are about $330 million, and outstanding loans and purchases are not due to be retired until at least 2007.

The country also had five debt reschedulings in the period 1984 to 1991 with the Paris Club—for official debt owed to aid donor countries—on which some payments are still owing. In January 2003, the Trade and Development Department announced at least a partial retreat from its 15 years of trade and investment liberalization, stating that it plans to bring tariff rates to the maximum allowed by the WTO for industrial imports, particularly petroleum imports, and for products produced in the Philippines. The Philippine economy is largely import oriented in terms of the value of merchandise trade.

A sizable trade deficit continues primarily because of merchandise imported to meet the strong demand for raw materials, intermediate goods, industrial upgrades and infrastructure related capital goods. An emerging market, the Philippine economy continues to recover from the political instability of the 1980s, a series of natural disasters in the 1990s. Many of the products being imported are for improvement of the country's production capabilities. The development of industry has been hindered by such factors as electric power shortages and a still developing infrastructure.

The Philippine government has taken several significant steps to reduce bureaucratic regulations and foster competition. In recent years it has revised and enacted tax, labor, health, safety environmental and other laws and policies with the aim of regulating industry. The Philippines import commodities such as electronic products, mineral fuels, machinery and transport equipment, iron, and textile fabric. Philippines’ trading partners are Japan 15. 32%, US 11. 47%, Singapore 9. 54%, China 8. 93%, Taiwan 8. 27% (2009).  This entry provides the total US dollar amount of merchandise imports on a c. i. f. (cost, insurance, and freight) or f. o. b. free on board) basis. These figures are calculated on an exchange rate basis. i. e. not in purchasing power parity (PPP) terms. E. Export An export-oriented economic policy had boosted the economies of the newly industrialized countries of Asia. Philippines policy makers have also realized that the Philippines cannot achieve its aim of becoming the next “economic tiger” of Asia without shifting to an export-oriented economic programme. Export promotion programmes are public policy measures which actually or potentially enhance exporting activity at the company, industry or national level.

Ideally, an export promotion policy should be backed up with an appropriate political and economic philosophy of the government. Export promotion policies should take into account the nature, size, and distribution of the individual exporting firms. As a developing country, the Philippines really does not have much choice in the matter. It needs to increase its export volume as a matter of economic survival, and within its national context, only the public sector has the resources to provide export promotion services to small and medium-sized businesses in a cost-effective way.

It was evident by the end of the 1970s, that the institutional reforms did not go far enough in achieving the major objectives of development. Typical of most small developing country trades, Philippines export trade has been characterized by a high degree of commodity and geographic concentration. As late as 1970, ten principal traditional export commodities comprised three quarters of total exports value. The first three top dollar earners (sugar, logs and lumber and copper concentrates) easily accounted for a little more than half of total export earnings.

A definite shift to export promotion was observed in the decade of the 1970s. In spite of the export orientation reflected in exchange rate and industrial promotion policies, the structure of protection accorded by tariff policy remained basically inward looking. The general picture that emerges from the above discussion is that while foreign exchange, trade and industrial incentive policies in the seventies had taken an unmistakable shift toward export promotion, they had stopped short of completely eliminating the biases against export sales. Philippines’ export partners are US 15. 35%, Japan 14. 19%, China 13. 9%, Singapore 9. 44%, Hong Kong 9%, South Korea 5. 12%, Germany 4. 1% (2009). The highest export reported in the past ten years was during on 2010 having S4. 288B while the lowest was on 2003 having S2. 3B A strong peso is generally favorable to the economy as a whole but there are certain sectors of the industry and society that are affected by a strong peso. Weakened by a strong peso since their good would become offensive since the peso appreciates which makes them less competitive in the export market. Although may be affected, all is not lost since there are financial solutions to at least mitigate the handicap they are facing because exporters could enter into hedging agreement or derivatives where they could enter into a contract to protect them from the Peso appreciation.

The tourism industry weakens as well since a strong peso makes staying for a vacation in a country would make it more expensive. The effect of a strong peso on tourism industry also affects the hotel industry since it is some what related as a strong tourism industry means more bookings with hotels for a place to stay. An ironic advantage of a strong peso is that the beneficiaries of the OFWs who contribute significantly in making the peso strong, get less of the remittances that their relatives send them since the dollar loses its purchasing power by the peso appreciation.

And finally, in sector which for us is really getting the worst out of the situations are the domestic producers since a strong peso appreciates thus making it purchase imported goods more. The industry is for direct investments. The negative aspects of a strengthening peso is very much in the news, what with OFW families getting into financial trouble, and exporters complaining about their products getting to be too expensive for foreign buyers. What often gets overlooked is the fact that the Peso appreciation also has a positive side, and if one takes a good look at this, it is at least equally important as the negative side to this trend.

These are some of the positive effects of strengthening peso: Increases in the world market prices of imported goods have lesser effect. Oil prices have shot up in dollar terms, and thanks to the increased value of the peso, the actual effect on the prices of oil products have not been as much as otherwise would have been the case. The same could be said of wheat prices, etc. which have also risen. Dollar-denominated foreign debts can be repaid with less pesos. The Philippine government has saved billions of pesos as a result of the dollar’s drop in value. Philippine companies with foreign debts have likewise benefited.

Capital flight from the Philippines has lessened. The strengthening peso means that it is no longer a wise financial move to move funds to a foreign dollar account. It would be much more profitable to keep the money in pesos. At the same time, there is some kind of poetic justice that corrupt officials with funds abroad suffer from a severe cut in the value of their “loot”. Skyrocketing real estate prices would be dampened. Many Overseas Filipinos (mostly in the dollar area) have driven up prices of real estate throughout the country. The decreased value of their dollars may result in the cooling down of the buying frenzy for land by OFs.

Increased attention to the domestic market from investors and (former) exporters. Some exporters are coping with the decreased demand for their products in the US by either shifting to other countries or to selling domestically. The increased supply of products to the domestic market would help to lessen prices and improve the product quality of domestically available goods. At the same time, the value of the local market for foreign investors has increased. Since the peso’s value has increased, the potential sales and profits offered by the domestic market has increased in terms of dollars.

Lower interest rates. The steadily depreciating dollar is pushing the US Fed to decrease their interest rates – in response, countries like the Philippines decrease their interest rates accordingly, in order to avoid the interest rate differential to get too high. Low interest rates are good because it stimulates business, and also consumer spending, both of which are good for the economy. Lower cost of imported capital goods. For example, the peso value of new airplanes is now much less than it was even a year ago. This is the same for other items e. g. heavyconstruction equipment, computers, etc.

This would help stimulate the economy, and could also lead to decreased prices for consumers. Posted: by butalidnl on 18 January 2008 F. Debt Payment As we all know, Philippine peso had appreciated in these past few years against the US dollar and implies high advantage to our economy. One of the advantage of the peso appreciation is the lower debt servicing, in which, it lessen the external debt of the country. As of December 2010, the National Government debt was recorded at P4, 718 billion, lower by P1 billion from end November 2010 level of P4, 719 billion.

Of the total debt, P2, 000 billion or 42. 4% is owed to foreign creditors and P2, 718 billion or 57. 6% to domestic creditors. The decrease in NG’s foreign debt of P2 billion from the level as of end November 2010 was brought about by the P5 billion net repayment and P16B appreciation of the peso against the US dollar. This however was partially offset by the P18 billion net appreciation of the third currencies against the US dollar and P1 billion adjustment resulting from late receipt of notices of availment.

The domestic debt increased by P1 billion from the previous month’s level resulting from the net issuance of government securities by NG. On the other hand, the contingent debt of the National Government, composed mainly of guarantees issued by the National Government, increased to 550 billion, lower by P10 billion from end November 2010 level of P560 billion. The decrease in domestic contingent obligations was due to the misclassification of the P12 billion HGC guaranteed PAGIBIG bonds as NG direct guaranteed loan.

The increase in foreign contingent obligations was due to the combined effects of the P3 billion appreciation of the peso against the US dollar, P2 billion net repayment and P7 billion net appreciation of the third currencies against the US dollar. (Bureau of Treasury, Press Release) Source: Bureau of treasury Source: Bureau of treasury G. Reasons for the appreciation on 2009-2010 One of the key reasons why the Philippine currency had experienced a significant increase on its value during the last two years was because of the increasing number of Filipino dollar remittances from abroad.

The strengthening of the value of Philippine peso during 2008 was attributed to the recession that the America had experienced during the last quarter of that year. However, the Philippine currency had experienced depreciation on the year 2009; because that is the year the country receive the impact of recession from 2008 that America had experienced. This has same effect on the ASEAN region where the Philippine is belong; their currency had also experienced depreciation. The Philippine had set a cushioning effect against the recession due to its dollar remittances coming from OFW’s in different part of the work.

 The role of Bangko Sentral ng Pilipinas The Bangko Sentral ng Pilipinas (BSP) maintains a floating exchange rate system. Exchange rates are determined on the basis of supply and demand in the foreign exchange market. The role of the BSP in the foreign exchange market is principally to ensure orderly conditions in the market. The market-determination of the exchange rate is consistent with the Government’s commitment to market-oriented reforms and outward-looking strategies of achieving competitiveness through price stability and efficiency.

In the Philippines, peso-dollar trading among Bankers Association of the Philippines (BAP) member-banks and between these banks and the BSP are done through the Philippine Dealing System (PDS). Most of the BAP-member banks which participate in the peso-dollar trading use an electronic platform called the Philippine Dealing and Exchange Corp. (PDEx). The BAP appointed PDEx as the official service provider for the USD/PHP spot trading (which involve the purchase or sale of the US dollar for immediate delivery, i. e. , within one day for US dollars), and Reuters, as the exclusive distributor of all PDEx data.

Trading through the PDEx allows nearly instantaneous transmission of price information and trade confirmations. I. The future movement of Philippine Peso Against US dollar Remittances from overseas Filipinos workers (OF) coursed through banks continued to show strength at the start of 2011, rising year-on-year by 7. 6 percent to  US$1. 48 billion, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. announced. This positive development reflected increased remittances from both sea-based and land-based workers, with their ransfers rising by 13. 3 percent and 6. 2 percent, respectively. Remittance flows into the country remained resilient on the back of sustained demand for skilled overseas Filipino workers in different destinations worldwide. The Philippine Overseas Employment Administration (POEA) reported that, of the total approved 99,926 job orders for land-based workers for the period   1 January - 28 February 2011, more than two-fifths represented processed job orders for service, production, and professional, technical and related workers.

The processed job orders are intended for the manpower requirements in Saudi Arabia, UAE, Qatar, Taiwan, and Kuwait. In its market update, the POEA stated that the Department of Labor and Employment's Philippine Overseas Labor Office in Rome, Italy, reported that a new quota decree has been signed in November 2010, which will allow the entry of 100,000 foreign workers in Italy, of which 4,000 new hires are allotted to the Philippines. Meanwhile, the POEA also reported that the country's seafaring industry is aggressively targeting to capture at least 50 percent of the global requirement for seafarers in the future.

To achieve this, the seafaring industry has invested in world-class training modules and facilities to upgrade the quality of skills of Filipino seafarers. The continued enhancement of financial services worldwide through tie-ups with foreign financial institutions, establishment of remittance centers and marketing offices abroad, as well as the stronger partnerships forged with correspondent banks and branches/representative offices abroad also helped shore up the flow of remittances into the country.

The expansion of the remittance network indicated the continuing efforts of local banks and other financial institutions to capture a larger market share of the global remittance industry and provide safe, affordable and accessible fund transfer system for the overseas Filipino workers and their beneficiaries.

The peso strengthened in the first trading day of the week as beliefs that the economy would grow in 2011 given its positive fundamentals offset concerns over the ill-effects of adverse offshore developments, such as the earthquake in Japan and lingering unrest in selected countries in the Middle East and North Africa. The local currency closed at 43. 59 against the US dollar on Monday, up by 6 centavos from Friday’s finish of 43. 65. Intraday high hit 43. 56:$1, while intraday low settled at 43. 72:$1. Volume of trade inched up to $1. 023 billion from $772. 8 million previously. Traders said external factors had been weighing down on the peso and other Asian currencies. Nonetheless, they said, the peso has been expected not to depreciate and that domestic factors have beefed up sentiment on the economy. Traders and other economic players still expect the Philippines to post a decent growth this year, aided by remittances and improving business and consumer sentiment. In 2010, the economy grew by 7. 3 percent, the fastest pace registered in over three decades. (inquire. net)

The study, “The Philippine Peso-US dollar Exchange Rate: The impact of Strengthening Currency”, aimed the following objectives:to determine the economic impact of the appreciation of Philippine peso;  determine the effect of the appreciation of Philippine peso (consumption, investment, government spending, import, export, debt servicing); to determine the reasons behind the appreciation of the Philippine peso during 2009-2010; to determine the role of the Bangko Sentral ng Pilipinas (BSP) on the Foreign Exchange Market; to determine the future movement of Philippine peso against the US dollar.

The significance of this study was to determine the impact of peso appreciation on the economy. It shows the effect on different sectors of the economy. It attempts to show the impact of strengthening peso against the US dollar and what are the consequences behind it. It also attempt to show where should the government place itself when the opposing interest of the public are at stake through Bangko Sentral ng Pilipinas. Based on the date gathered, the first hypothesis is accepted. The effects of appreciation have a great impact consumption, government spending, investment, import-export and debt servicing.

There were two impacts on consumption, first is the value of imported commodities are cheaper in terms of peso. Second, the purchasing power of dollar remittances will decrease. In government spending, If peso appreciates, it has a good impact in our external debt since our debt will decrease. We will pay less and that will affect our spending. The remaining money that allocated for payment of external debt will be used for government spending. More resources are available to spend for social and economic development of our country.

Peso appreciation will cause the exports become less competitive in the international market that will result to less revenues in terms of exports. Imported products will become cheaper that can cause the people to purchase more of it. Another advantage of a strong Philippine Peso is that it would reflect a robust economy for the country which could leverage itself to attract foreign investors in the country which could provide significant inflows for investments to the country furthering improving the economy.

A positive outlook is very important to a country to seek investors to show confidence in investing to country since their outlook would be one of the considerations investors would consider. One of the advantage of the peso appreciation is the lower debt servicing, in which, it lessen the external debt of the country. The second hypothesis is also accepted. Philippine peso appreciation was caused by several factors such as the robust economy of the Philippine as well as the increasing amount of remittances from the overseas Filipino workers (OFWs).

The Bangko Sentral ng Pilipinas has the role of maintaining the inflation and has the power to intervene in Foreign Exchange market. It is the tool being used by the government in monetary policy. Based on the information that was released by the BSP the peso is expected to appreciate, prior to the events that struck one of the major Economic Partner of the Philippines—Japan—and prior to the political instability from Arab nations, which is one of the major source of dollar remittances of the country.

The researchers’ believe that the government should maintain the peso appreciate so that it will lessen the burden of paying excessive debt--principal and interest. And to maintain the prices of the commodity that are being imported at a low price, such as oil which is vital in the daily economic activity and other commodity that is not produce in the county.

On the other hand, the government should provide a OFWs remittance stabilization fund—from the money that the government had saved in debt servicing—that pegged the exchange rate between peso and dollar, because OFWs’ remittances are crucial in maintaining the high value of the peso against the dollar and the effects that it will brought to the economy. We cannot easily believe that a strong peso means a strong republic. So government must look at different factors and learn before engaging the country in different risk.

As we also observed, the effect of peso condition in the sources of government funds is the same in the impact of peso condition in government spending. If the effect in the sources of funds is negative, the impact in the government spending is also negative. When the effect is positive, the impact in government spending is also positive.

References

• Bangko Sentral ng Pilipinas. (2008). Adjustments in the Face of Peso Volatility: Perspective from the Past and Policy Directions. : Retrieved February 21, 2011 retrieved from    http://www. bsp. gov. ph/downloads/Publications/2008/WPS200802. df
• http://www. investopedia. com/ask/answers/08/what-is-foreign-exchange. asp
• http://en. wikipedia. org/wiki/Foreign_exchange_market 4. http://www. bsp. gov. ph/financial/forex. asp
• http://business. inquirer. net/money/breakingnews/view/20110314-325428/Peso-rises-against-dollar-as-positive-view-of-local-economy-stays
• http://www. philstar. com/Article. aspx? articleId=565592&publicationSubCategoryId=66
• Monetary Stability Sector of the Bangko Sentral ng Pilipinas (2006). The Exchange Rate. Retrieved from http://www. bsp. gov. ph/dowloads/publication/FAQs/exchangerate. pdf

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