Did you know? that your one-peso coin isn’t really worth one peso or tantamount to its face value? As our country experiences inflation, the value of the Philippine peso continues to fall. Your peso is currently worth 0.87 centavos. This means that your one peso has lost purchasing power and that you can only buy fewer goods with that value. Moreover, the Philippine Statistics Authority (PSA) also stated that the peso’s purchasing power fell to P0.87 in June, the lowest level since the Consumer Price Index (CPI) was rebased to 2018.
What is Foreign Exchange Rate?
As a matter of fact, there are always two currencies involved in every exchange rate quotation. According to Bangko Sentral ng Pilipinas (BSP), “The exchange rate is the price of a unit of foreign currency in terms of the domestic currency”. In the Philippines, as of this writing, the exchange rate is expressed as one United States of America (USA) dollar equals fifty-six pesos (P56) in Philippine peso value. It can change on a daily basis due to changing market forces of currency supply and demand from one country to the next. A country’s foreign exchange rate provides a window into its economic stability, which is why it is closely monitored and researched.
Historically, four years ago, our one peso was worth much better than it is today.
June 2018: P1.01
June 2019: P0.98
June 2020: P0.96
June 2021: P0.92
June 2022: P0.87
Currency exchange rate influencing factors are important for a variety of reasons. These variables can influence how countries trade with one another and how much money an individual can obtain when exchanging one currency for another. In this article, we will give a general overview of the factors that are causing the Philippine peso to drop in value.
Oil Price Hikes
The conflict between Russia and Ukraine had a knock-on effect on the global economy. The conflict’s resolution appears to be speculative at the moment, and it may take longer than expected. Although neither country is a direct major supplier to the Philippines, the negative impact of their conflict is felt throughout the country. Russia is a major exporter of natural gas and wheat, while Ukraine is the fourth largest corn exporter. These countries’ major trading partners, such as the European Union (EU), will seek to trade with other countries, such as the United States of America (USA) and China, with whom we have direct trade relations. As a result, demand will rise, and so will prices.
Because 90% of gasoline in the Philippines is imported, there are constant price increases, with a barrel of oil costing around $100. Diesel and unleaded fuel prices have risen to around 80-90 pesos as of this writing. Furthermore, the government does not waive the value added tax (VAT) and excise taxes on natural oils, due to the fact that these revenues are required to pay our massive debts.
Inflation, or year-on-year price increases, had been one of the repercussions of the rising of oil prices. Logistics is one of the industries that suffers the most during an oil crisis because it transports people’s wants and needs. When oil prices rise, shipping and transportation costs rise as well, causing commodities to rise in price. Furthermore, authorities mentioned that Food and non-alcoholic beverage inflation was 6% in June, the highest since the peak of the pork supply shortage early last year, while transport inflation was 17.1%, the highest since August 2008, when the Philippine economy was severely impacted by the global financial crisis.
Furthermore, nine of the 13 commodity groups in the consumer price index (CPI) basket of goods posted higher prices in June. Price increases were also present in all 17 regions of the country that month.
Dropping of Local Stock Market
The Philippine Stock Exchange Composite Index (PSEi) continues to fall as investors sell off in response to inflationary and government policy making uncertainty. The PSEi fell 1.86 percent, or 117.19 points, to 6,168, while the All Shares index dropped 1.2 percent, or 40.32 points, to 3,328.35. PSEi has dropped nearly 18% from its recent high of 7,552.20, bringing it much closer to bear market territory at 6,041.76. Furthermore, one of the factors contributing to falling prices is the US Federal Reserve’s aggressive monetary tightening.
The global market is one of the contributing factors why our local market is experiencing a bearish downward trend. The Philippine peso value fell which is due to the $23.6 million in net foreign selling on the local stock exchange after the Organisation for Economic Co-operation and Development (OECD) reduced its global economic growth forecasts, a day after the World Bank did the same.
Performance of Trade
The balance of trade or terms of trade refers to the relative difference between a country’s imports and exports. A positive trade balance indicates that a country’s exports outnumber its imports. In this case, the inflow of foreign currency exceeds the outflow. When this happens, a country’s foreign exchange reserves grow, allowing it to lower interest rates while also boosting economic development and the local currency exchange rate.
Furthermore, Philippine international trade value doubled in April 2022, with both exports and imports of merchandise goods reaching new highs, according to the Philippine Statistics Authority (PSA). According to preliminary PSA data, the country’s total external trade in goods — the sum of merchandise exports and imports — was $14.16 billion in April, more than doubling the $6.83 billion recorded in the same month last year.
Another reason for the Philippine peso’s devaluation is the government’s ballooned debt. The Philippines’ newly elected president, Ferdinand Marcos Jr, is eager to continue former President Duterte’s ‘Build, Build, Build’ infrastructure initiative. Various loans from the World Bank and other countries were initiated to fund the projects as quickly as possible. Because it is a loan, it has onerous policies such as interest payments, which are still difficult to meet given that we are only just reopening our economy and the pandemic is not yet officially over. However, The Philippines’ GDP is expected to rise by 7.5 percent this year, falling within the government’s target range of 7 to 9 percent.
Reviving Economy from Covid-19
Despite the Philippine Peso losing value, the number of covid-19 cases has decreased, and the economy is expected to reopen as movement restrictions are now being eased. Meanwhile, Benjamin Diokno, the Philippines’ central bank chief, said he was unconcerned about the peso’s recent decline against the dollar because the country is not reliant on foreign debt and has a large reserve pool. Foreign remittances from overseas Filipino workers (OFWs) totaled $2.888 billion in March 2022, up 3.1 percent from the same month the previous year, according to BSP data. In the first quarter of this year, total cash remittances increased by 2.4 percent year on year (YoY) to $7.771 billion.
Overall, the Philippine peso is expected to continue losing value as we recover from the effects of the pandemic, the Russia-Ukraine conflict, and other global economic situations. As our government undergoes a new transition led by President Marcos, we must remain vigilant about the country’s long-term plans, particularly in economics.