(Last of three parts)
The peso-dollar exchange rate is, perhaps, best explained by the experiences of ordinary consumers, who unlike businesses do not have financial tools at their disposal to help them anticipate and lessen the effects of shifts in the value of the peso, and are, therefore, very sensitive to even small changes.
People in the Philippines may even be somewhat unique in this respect. With more than 10 million overseas workers supporting families back home and a sizeable foreign expat population (estimated to be about 200,000) drawing at least some of their incomes from their home countries, a considerable number of people—in some cases, even the families of The Times’ reporters and staff, which gives us a rare personal connection to the topic—are directly and personally affected by the exchange rate.
In turn, that has a significant effect on the larger economy; remittance income accounts for between 12 and 14 percent of gross domestic product, and the effects are further magnified by changes in consumption that result from income fluctuations.
As a good example, when this writer first came here in the third quarter of 2004, the peso was trading at nearly P56 to $1, and topped the mark the following month (the exchange rate reached an all-time high of P56.34 to $1 in October 2004).
Over the next three years the peso strengthened, hitting P40.35 to $1 in January 2008, largely thanks to the global financial crisis that severely weakened the dollar and other major currencies.
By November that year, the exchange rate had returned to the neighborhood of P50 to $1; since then it has gradually declined again, reaching P40 to $1 territory again at the beginning of 2013 before climbing back into the present fairly stable range of P42 to P44 to $1 it has been at for most of the past year.
At this writer’s level of income, a P0.15 change in the peso-dollar rate from month to month is equivalent to roughly P1,000; when the peso is weakening, the dollar received here from overseas grows in peso terms, and when the peso is gaining strength, the monthly stipend received here in peso terms is reduced.
On its own that degree of change is not critical, but when the inflation rate is taken into account, it can be significant. The inflation rate tends to track the exchange rate—i.e., it increases when the peso value declines—but not at all precisely (see graphic), and with a time lag of about a month on average.
That sometimes leads to a bit of a whipsaw effect: In months the peso is weaker, the household disposable income is slightly higher and spending increases; but by the following month when slightly higher inflation catches up to the earlier peso decline, if the peso has maintained its level or strengthened in the meantime, higher prices magnify the slight decline in peso income.
For some families, exchange rate changes usually mean nothing more discomforting than moderate changes in their month-to-month discretionary spending. For others, however, small changes in the exchange rate can have a big impact on even basic expenditures.
This final installment of the special report on the peso-dollar exchange rate takes a look at how a few remittance-receiving families cope with changes in the peso value, illustrating the historical trends and technical perspective of how exchange rates are determined and managed with real-life examples.
Despite the enormous amount of remittances pouring into the Philippines each year—remittance income hit a record high of $25.1 billion in 2013, and reached $10 billion in just the first five months of this year—they are not considered a critical factor in the Bangko Sentral ng Pilipinas’ (BSP) exchange rate management policy.
“I am not sure our heavy reliance on overseas remittances has posed some issue with exchange rate management,” said BSP Deputy Governor Diwa Guinigundo. “Remittances have been an old reliable BoP [balance of payments]component. They have remained generally resilient through two Gulf wars and a series of financial crises.”
The BSP instead directs more of its attention to supporting and strengthening structural flow factors, according to Guinigundo, things like service exports, the financial environment for the business process outsourcing (BPO) industry, and foreign direct investment.
“These are the so-called structural flows that have been supportive of a generally stable exchange rate,” Guinigundo explained.
That leaves remittance incomes at the mercy of two forces: The currency exchange market, which is affected by a number of domestic and external factors; and the BSP, which must accurately anticipate market trends and calibrate its policy response to maintain stability.
The Manila Times spoke to a wide variety of remittance-reliant families—families of overseas workers sending financial support back to the Philippines, the overseas workers supporting their Philippines-based families, and foreign expatriates living in the Philippines and supporting their households with pension or other income from their home countries, and found a number of remarkably common perceptions.
The most common is actually a misperception; because remittance beneficiaries tend to think of their incomes in terms of whatever the source currency is, a “stronger” peso from their point of view is actually a weaker one by definition.
The comments from Charito Magtaan, whose sister sends dollar remittances from the US, are fairly typical: “A stronger peso is good for us, because when we exchange my sister’s remittance into peso we get a higher value of her remittance [that is, more pesos]against the dollar . . . I’m hoping that [the]stronger peso will continue, so that we’re able to maximize my sister’s remittance . . . Malayo ang mararating ng piso ko (My peso goes much farther).”
Others are aware of the contradiction, however, and have mixed feelings. According to Maribel Barredo, a long-time OFW in Monaco, the good performance of the peso in exchange rate is a welcome development, but not necessarily to family finances. “It is nice to learn that our currency is going strong and it contributes to our economy but this has disadvantages for our part,” she told The Manila Times.
Although the strong peso has positive implications for the economy, Barredo said it also has adverse effects on the lives of Filipinos abroad, especially on remittances. She explained that if the exchange rate is low, they have to send more money to their families in the country.
“It affects us migrant workers because we have to send more money but our salaries are not increasing,” she said.
Maria Lourdes Lazo, whose daughter Stephanie works as a medical technologist in Saudi Arabia, explained, “The exchange rate doesn’t change from our perspective, because my daughter sends exactly the same amount in pesos every month. She monitors the forex, and then sends the correct amount.”
Like Ms. Barredo, Mrs. Lazo recognizes that a stronger peso would be better for the economy but is a detriment to remittance-receiving families, particularly when inflation increases.
“The peso is weakening, and it’s benefiting us since we can have more value to every riyal we receive, but the commodities are now priced higher,” she explained.
“A year ago, our chicken cost less than P100 per kilo, now it’s already P120 per kilo. Before, we spent P3,000 on our groceries for basic home food and needs, but now it’s almost P5,000. So even if peso exchange rates are favorable to us, higher prices still overpower us and we tend to buy lesser products to meet our needs compared to a year ago.”
People on both sides of the remittance equation have ways of compensating for changes in exchange rates, particularly in the case of a strengthening peso.
Florida-based Warlito Vicente explained in an e-mail message, “When the peso is weak, my dollars go a longer way to pay for my children’s tuition, and I can afford to send some more for extras (snacks, a movie, or a treat for my extended family, and investments or operating capital infusions for the family business). When the peso is strong, however, I have to adjust my spending here in the US, so that I can send more dollars to cover the children’s expenses. I have to be more efficient in using my car to save fuel, cut down on food costs—no more eating out for lunch—and forego some entertainment and other little luxuries. I also have to be more discriminating about where and when I shop; I look for coupons and discount deals, special sales at the stores.”
John Cockell, an accountant by profession who with his with wife Norma retired from his native England to her home in the Philippines, explained how exchange rate changes lead to lifestyle adjustments on the receiving end of remittances.
“At the time we arrived from Britain in June 2006 the exchange rate was 95 pesos to £1. The peso then gradually increased in value to about 66 in early 2013, decreasing again to the current rate of 74. For us, this meant a reduction in income from the exchange rate variation of about 30 percent, slightly mollified by an increase of 10 percent over that time from the British cost of living increases being applied to our pensions. From early 2013 the increase in our purchasing power due to exchange rate movements has been about 10 percent,” he said.
The decline in the Cockell family’s peso purchasing power between 2006 and 2013 meant significant changes in lifestyle.
“Clearly, we had to adapt to the new reality, impossible as it seemed at first,” John explained, ticking off a list of expenses that could not be avoided or made to yield any savings, such as loan repayments, periodic immigration fees, and utility bills. “That left the more malleable areas of the budget.
“Food spending needed to be scrutinized. Expensive desserts, ice cream, yogurts, were replaced by fresh fruit. Fish and chicken are more economical than pork and beef. No more imported treats, wet markets are cheaper than supermarkets. We discovered just how much fruit and vegetables could be grown in a Philippine garden, and then the surplus swapped with others,” he continued.
“Non-food expenses were looked at as well. All of this seemed like a vicious imposition at first but we eventually realized we were just living more like locals, and no doubt reducing our carbon footprint in the bargain.”
John made one last telling observation. “Oddly enough, the recent decrease in the peso [exchange value]doesn’t seem to have had the reverse effect. My wife and all the neighbors complain incessantly about high prices in the shops. The reason for that I will leave with you,” he said.
What’s the bottom line?
In examining the various perspectives on the nature and effect of the peso exchange rate—from the market and monetary policy perspective, the business perspective, and the perspective of consumers—there is a sense that the peso-dollar exchange rate (or for that matter, the exchange between the peso and any other currency) is something that has a life of its own.
Given that the peso value is largely allowed to float on its own, monetary authorities at the BSP have adopted a reactive policy towards it: Sharp movements can be anticipated and controlled, but only in an extremely short forward-looking timeframe measured in days or hours, which obliges end-users among businesses and consumers to play catch-up in adapting their own finances to make the most of the currency’s buying power.
That being the case, the question that everyone would like the answer to is, “Where is the peso exchange rate headed?” Unfortunately, the answer is not very definitive, and perhaps cannot be. Most local analysts see the peso-dollar rate staying within the same P43-P45 to $1 range that is currently forecast by the BSP, with a slight downward bias toward the end of the year.
BPI Associate Economist Nicholas Antonio Mapa explained: “Our remittances can help keep the peso at its recent ranges, supplying much needed foreign currency, which will be countered by increased imports of food and energy but hopefully, some capital goods for expansion and reconstruction as well.
“We do expect some reprieve sometime in September as markets react to a possible BSP policy rate hike but the eventual pressure from the end of the Fed Taper in October and expectations of a Fed rate hike will foment a strong USD scenario. This may force the USD/PHP to settle at 44.20 by year-end,” Mapa added.
The Singapore office of Swiss banking giant UBS, on the other hand, sees those same factors driving the peso even lower to the range of P46 to P47 to $1 into 2015, according to an economic outlook published at the end of June.
Taken all together the various perspectives illustrate a certain disconnect between broad policy and day-to-day economic concerns. For the BSP and long-term investors, keeping the peso within a stable range is the best possible management of the overall economy; for businesses and consumers, keeping the peso value steady while preventing it from being adversely affected by inflation is the best possible outcome. That difference in frames of reference might be impossible to completely resolve, but how close monetary authorities can come to doing just that will be the metric by which the success of their policies is judged.
WITH KRISTYN NIKA M. LAZO, MAVELYN U. CARABALLO, RITCHIE A. HORARIO, AND ROSALIE PERIABRAS REPORTERS