Weakness of a strong peso

Boon because it encourages more imports of products and goods – mostly consumer – that could otherwise be produced here.

Bane because the same imports practically subsidize foreign producers.

The peso is made even stronger by the lack of demand for dollars, except for consumer goods. This is also a bane.

The naked reality is the strength of the peso is drawn mainly from the weakness of the dollar world-wide.

The heavy contributions of dollars from Filipino overseas workers strengthen the peso only in the sense that, as earlier said, the demand for the American currency is low.

None of these make the peso stable although it is remarkably strong against the dollar.

This is precisely the problem. Sooner than we think, the dollar will regain its strength against the peso.

Maybe not that soon, but there will come a time Philippine business will exert pressure on the reserves.

In a situation where the dollar becomes stronger and demand for them is heavier, the peso will be left weak and probably weakening. The heavy inflows from overseas workers can only temper the deterioration.

When that time comes it would be silly to expect the peso to remain strong as a function of remittances from Filipino workers abroad. The expected demand for dollars from the economy and its strengthening will weaken the peso.

Monetary authorities are happy that there has been no speculative attack on the reserves in spite of the political turmoil.

The only reason for this is precisely because the dollar is weak.

When the dollar gets stronger, there just might be speculative assaults. It is in anticipation of these possibilities that perhaps the Bangko Sentral should not allow the peso to become artificially strong as it is today.

The BSP should temper the "strength" by intervening in the Philippine Dealing System.

It has by issuing the so-called "special depositary accounts" sold as a sovereign debt but the purpose is to siphon off excess liquidity created by OFW remittances and foreign direct investments.

Whenever the peso becomes stronger than it should be, the BSP mops it up or buys dollars so that some semblance of stability of the rate may be established.

But then purchases of dollars translate into printing of new money that increases supply in the stream.

More important than that, buying dollars at the present low rate would enable the BSP to meet heavy demand for capital and consumption goods imports and also square up with speculative demand.

Depending on the demand, there is a upside to the weak peso. Let it weaken for as long as the reason, as mentioned, is a rising demand for capital assets.

The present strength of the peso has a heavy negative impact on the economy.
Cheaper dollars encourage heavy importation of consumer goods which benefits the consumers in the form of lower prices.

The downside is the weakening of manufacturing operations that produce the same consumer goods but cannot be sold at levels compared to the imported kind because production costs here are higher than nearly all of our Asean neighbors.

Overseas workers get less peso value for their remittances because the dollar is weak.

It is cheap prices of imported and smuggled goods that create a demand-led growth of the economy. There is nothing fundamentally wrong here if the pressure of demand is exerted on locally produced goods.

If such had been the situation, more jobs would have been created and more tax revenues would have been collected.

As it is, the demand is mostly for imported items encouraged by cheaper dollars and low tariff rates.

Before this country jumped headlong into membership in the World Trade Organization, higher tariff was believed to be an artificial protection to Philippine business.

I share the belief that higher tariffs promote inefficiency. However we might have made the mistake of drastically reducing tariff on practically all consumer goods at very low levels of around 5 per cent.

With lower tariffs and a weak dollar, local manufacturers do not have a chance against highly efficient economies like the United States, Japan, Europe and lately even Thailand, a key member of the Association of Southeast Asian Nations.

It is in this sense that the strong peso does not exactly benefit the economy. On the contrary, it creates opportunities to subsidize foreign manufacturers because their products can be bought with fewer dollars.