“The Peso is not weak because the Peso is weak; the Peso is weak because the Dollar is strong.” This phrase which is currently trending and has been poked fun of in social media sites, was uttered by none other than London School of Economic and Political Science Graduate and Senior Deputy Majority Leader Rep. Sandro Marcos in an interview about the weakening of the Peso and the impact of Dollar. The phrase hopes to shed light on the complicated subject of Dollar vs. Peso but fell short in part of the lack of contextualization and simplification. A very complex explanation that has only led to confusion and more questions from the public. Economics is a pretty hard subject, and at times, even the simplest terms are very hard to comprehend. This unfortunate situation leads to ordinary Filipinos taking the worsening crisis of inflation without understanding its complications and the factors that brought upon it. As such, this article give you an introductory explanation of the Dollar vs. Peso conversation, inflation, the impact of Dollar on the Philippine economy, and its effect on Filipinos.
Read Also: The Effect of Inflation on Real Estate
What are the Dollar and its effect on the Peso?
The United States Dollar is the official currency of the United States of America. Before, US Dollars is linked to valuable commodities (silver or gold reserves) to determine their value. However, this system was abolished in 1971, and the Dollar became known as fiat money, which means there would be no external resources linked to the Dollar, and its value will solely be determined by government policy through the Federal Reserve.
As of now, the current policy of the Federal Reserve is aimed at curbing the inflation that is happening on US soil. Inflation happens when there is an increase in the prices of goods and services. Primarily, it is the supply of money that is currently in circulation that determines inflation. If there is more money in circulation rather than the number of goods and services in the economy, then the demand for these goods and services would lead to an increase in prices.
Many factors played a role in the occurrence of inflation. However, there are two events that are considered the most significant. One is the sudden rebound of economic activity as we enter into a post-pandemic era led to a sudden increase in demand that outpaced the supply in the economy. This increase in demand for consumer goods prompted prices to increase generally. Another is the ongoing war in Ukraine that brought serious economic sanctions to Russia that limited the supply of oil and gas in the global market.
The inflation currently happening in the United States has prompted the Federal Reserve to increase interest rates, which would help decrease economic activity by making it harder to loan money from banks. This is to basically decrease the supply of money in circulation. In effect, this would discourage people from spending money and decrease demand, making the Dollar strong.
However, as this happens, it also affects the world as a result. The United States Dollar is the main currency for international and global markets. In the Philippines, it has some damaging effects, the most obvious of which was the depreciation of the Philippine Peso.
Why did the Peso become weak?
At the start of October, the Philippines reached its all-time weakest value against the United States Dollar. Now, our currency is worth 59Php against 1USD and could further go down to 65 to 68Php. We now understand that the Dollar’s strength echoes the Philippines, but how does it depreciate the Peso?
The weakening of the Peso occurs when the demand for the Dollar increases. The strong demand for the Dollar is what makes it strong. The inflation we have makes foreign goods and services much more expensive. For example, as gas prices continue to increase in the global market, the government would need to spend more Dollars than they take in, leading to a demand for the currency. This happens because the Philippines exchange rate system is ‘floating,’ which means that the exchange rate between the two currencies depends on the current supply and demand of the Dollar. Thus, if the Philippines continues to spend more Dollars due to the rising prices in the global market, then the Philippine Peso will not cease to depreciate in the near future.
The increase in interest rates, as discussed earlier, also depreciates the Peso. As interest rates increase, investors will pull out investments in the Philippines. When this happens, there would be more Philippine Pesos in circulation against the Dollar, which would further depreciate its value.
Dollar Vs. Peso: Impact on the Philippine economy and ordinary Filipinos
A strong Dollar, besides the weakening of the Peso, has other effects on the Philippine economy. This is in part to the fact that the monetary policies of the US echo that of the developing world.
The increase in the value of the US Dollar might bring good news, especially for Overseas Filipino Workers (OFWs) or other Filipinos who earn in Dollars. This is because their remittances will be much higher given the increase in exchange rates in the Dollar vs. Peso. This would encourage them to send money to their loved ones and increase the purchasing power of the recipient families.
Exporters also share the same sentiment with the increase in the Dollar. It is because the local products that will be sent abroad will become much cheaper to purchase and attractive to foreign consumers. However, there is an existing trade deficit in the Philippines, and the current increase in the prices of oil would only widen the deficit that is happening in the country. Its implications would mean higher prices of oil and consumer goods effects that we currently feel today.
Even if it means good news for OFWs and exporters, the government and ordinary Filipinos are not happy about this situation. The government, due to the higher prices of oil, would need to spend more Dollars. At the same time, the government also has to pay its debts which, given the depreciation of the Peso, would mean they would need more spending.
In the case of ordinary Filipinos, inflation would mean that the general prices of goods and services will increase. This will greatly affect low to middle-income households as they would be able to buy fewer products with the same amount of income that they had. Worse, this might even lead Filipinos to become poorer, given the economic woes we are facing today.
If it continues, what will happen?
Given that the crisis affects all of the developing countries, what the Philippine Government can only do is curb the financial squeeze through key monetary policies. Experts believe that the effects of off-cycle responses by the Bangko Sentral ng Pilipinas (BSP) would have effects that would be felt for the following years. Simultaneously, the increase in interest rate, although it would help cool down the economy, would mean less economic activity and, thus, less economic growth.
Many experts believe that if the United States continued to flex itself and do well than any other economy, then the US Dollar would not cease to lose its strength. If this continues to persist, then perhaps, the economic pressures that we face will not wane. At the same time, the Philippine Government and the current administration’s economic promises would not come to fruition anytime soon.
Written by Angelo Jade Caputolan