Editorial

The peso under pressure

The Philippine peso is suffering the brunt of an economic slowdown and the deep recession in major economies, including those of the United States and Japan.

Falling exports and weaker tourism earnings and remittances from migrant Filipino workers have dampened the peso, which closed at 48.30 against the US dollar on Friday. The peso?s performance was in stark contrast just a year ago when it edged near 40 against the greenback.

Things have dramatically changed in the last 12 months. Foreign investors have developed risk aversion to emerging economies like the Philippines, following the sub-prime crisis in the US and the global credit crunch that ensued. Portfolio investments, mainly on Asian regional stocks, dried up as foreign investors sought safer havens like gold and US treasury bills.

With less foreign investments coming in, the peso and other regional currencies slowly faltered. Taiwan?s dollar fell to as low as NT$35.008 on Friday, the weakest since April 2003, while South Korea?s won lost more than 18 percent this year on worries that sliding exports would reduce the supply of dollars.

A weaker peso, meanwhile, will push manufacturing costs higher, especially for those with imported components, and erode further the profitability of companies. It will raise the cost of imported crude oil and hike domestic pump prices as well as electricity rates.

Fears of the global economy weakening further will exert further pressure on the local currency. The Bangko Sentral now expects remittances of workers, which had greatly shored up the value of the peso in the past, to stay flat in 2009, after expanding nearly 14 percent last year. Weaker remittances may damp consumer spending and economic growth, capping tax revenue and resulting in ?a fiscal challenge,? says Bangko Sentral deputy governor Diwa Guinigundo.

Adds Bangko Sentral Gov. Amando Tetangco Jr.: ?There is a very real danger that the global economy would weaken more and the Philippines has to face this. We might be an island of calm but we are at risk of a negative feedback loop if credit markets freeze up and economic activities grind to a halt.? The US just on Friday reported that its economy contracted a stronger-than-expected 6.2 percent in the fourth quarter, the sharpest drop since the first quarter of 1982.

It may take a while before the peso regains its strength. Its weakness, however, should give companies the opportunity to use or develop substitute products for imports. The Philippines, after all, has a strong domestic market base that can drive the economy.