A strong dollar, not a weak peso

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As part of its customer service, my bank sends me a daily text message in the middle of the morning to inform me of the day’s exchange rate. I didn’t pay much attention to it until last Friday. The peso is finally at the rate of 55 P to $1.

I shouldn’t care. I don’t plan on traveling overseas anytime soon. I don’t plan on making any major purchases that might be affected by the exchange rate, other than a fill-up every once in a while.

Also, the new BSP Governor, Philip Medalla, said he was not losing sleep over the falling peso, so why should I? Philip is more focused on the inflation rate. Many of my economist friends think we need a weaker peso.

“It’s a strong dollar problem, not a weak peso problem… The reason the dollar is so strong is because their inflation rate is so high and therefore they’re going to raise their inflation rates. much more interest than us…” Boss Philip said in an interview with TV5’s “The Chiefs”.

It’s a strong dollar, not a weak peso problem. Repeat it over and over again until you believe it enough not to worry. So allow yourself a good sigh of relief.

But the non-economist in you tells you it’s the same effect. We import fuel and much of our food, as well as fertilizers and agricultural inputs to produce our food. When will the exchange rate influence our inflation rate to worry about? Aren’t we importing inflation?

Even OFW families pay inflated food prices among other living expenses. At best, their exchange rate gains pay a higher cost of living. Our exports should gain, except that they too depend on foreign inputs.

Remember that our debts denominated in dollars will have to be paid with more taxpayers’ pesos.

Ok for policymakers to say not to worry, but hopefully they are personally worried, thinking about what to do next if the rate is pushed to P60 and beyond.

Of course, there are advantages to having a weaker currency. Exporting countries like China and Japan would prefer a weaker yuan and yen to help their export sector. But we’re not exactly a big exporter. We import more.

Data from the Philippine Statistics Authority showed the country’s trade deficit jumped 54.1% to $4.77 billion in April from $3.1 billion in the same period of 2021. .

We spend dollars when we import, earn dollars when we export. We import more than we export.

Thus, our larger trade deficits have contributed to weakening the peso exchange rate against the US dollar, with more US dollars being purchased to finance increased amounts of imports.

What did we import? Double-digit gains in imports of cereals and cereal preparations, transport equipment, iron and steel and plastics. Other increases were seen in electronic products, other food and live animals, and telecommunications equipment.

China is our largest supplier of imported goods, accounting for 20.8% of our total imports.

On the other hand, exports edged up 6% in April, a three-month low.

Dollar revenues from electronics, the country’s top export, barely budged at $3.25 billion…and our value added, which is labor, is a small component. Other exports include coconut oil, mineral products, cathodes, gold, chemicals and bananas. Declines were observed in other manufactured goods, ignition harnesses, machinery and transport equipment.

India’s buoyant manufacturing and agricultural sectors explain why they didn’t do badly when their rupee rose above 60 to the dollar. It is now at 78 to the dollar. But this is India.

And remember, the US Fed isn’t done with its rate hikes yet.

Economist Toti Chikiamco, who heads the Foundation for Economic Freedom, responded to my comment in our Viber group with this assurance:

“Boo, I think the inflation rate passed on is only 0.4%. Also, we trade with many other countries, not just the United States. The Japanese yen has fallen more than the peso Phl, so Japanese goods like cars shouldn’t see their prices rise.The cheap peso will also lead to domestic substitution, helping domestic industries.Farmers crying protectionism will get protection from the exchange rate.

That should allay my fears… except for one thing… There is this psychological transmission effect that may have no basis in fact, but is still a reality when the value of the peso drops. Consumer prices are rising disproportionately to the dollar’s gain on almost everything we need on a daily basis.

But trust Philip to protect us against inflation. He is right when he said that following the Fed in raising interest rates every time it does would kill our economy which is just beginning to recover from the pandemic. It will be a poisonous drug, so if we use it at all, use it very carefully.

In addition, rising interest rates will also push up the prices of basic commodities…cost inflation. It doesn’t even necessarily make the peso that much stronger to really count. Let it find its own level while we work to strengthen our economy.

BSP’s year-to-date calculations show that food inflation has contributed one percentage point to the overall average inflation rate of 4.1%. Here are some ideas from Toti on how to deal with rising prices, especially food:

“The new administration is expected to respond to rising food prices by abolishing QRs on agri-food products and imposing a low tariff rate. The import of pork, chicken and maize should be liberalized. The volume of fish imports is also expected to increase as fish processors such as sardine manufacturers underutilize their factories.

“We should also ratify RCEP as soon as possible. Food-exporting countries would prefer to deal with RCEP members because of simplified customs procedures under RCEP.

“More competition should also bring prices down. The new administration should maximize the PSA and other reforms of the outgoing administration by quickly passing the IRR and inviting new entrants.

Toti has backed Junior during the campaign as he believes he will make bold moves. Let’s see how daring and adventurous Junior and his economic leaders will be.

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco.

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