CAUSES AND EFFECTS OF STRONGER AND WEAKENED PESO IN THE PHILIPPINE ECONOMY

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I.

Introduction The Philippine peso has been considered one of the strongest currencies used in the Southeast Asia

for the past years. Analysis came out that it doubled digits as it accelerates for about 5.6 percent from year 2010 to 2011 where the market exchange rate was 47.6372 to 45.1097 a dollar based on the data given by Bangko Sentral ng Pilipinas. The whooping acceleration may be explained by the different factors such as increasing inflows of remittances from our very hardworking overseas Filipino workers (OFWs), the investments directly acquired mostly by banks, the improvement in the public and private sector, the decreased in value of United States’ dollar economy for the previous years and the drawing of attention of foreign investors all over Southeast Asian Region to the Philippines. This acceleration and improvement in the situation of our peso creates many changes in our economy be it on the positive or negative side. We will be directly affected on whatever impact it my caused since we rely most of our decisions especially with our buying behaviour in the market situation. In this regard, it is important for us to analyse the situation of our financial market since as individuals, we also take a role in the current situation of our economy.

II.

Theories and Principles of Foreign Exchange Foreign Exchange is simply defined as the exchange of one currency for another or the conversion of

one currency into another currency. It also refers to the global market where currencies are traded virtually around-the-clock. The term foreign exchange is usually abbreviated as "forex" and occasionally as "FX." It encompasses everything from the point of conversion of currency by a foreigner in banks up to the huge multinational corporate banks which utilize large transactions. The global foreign exchange market is by far the

largest

financial

market,

with

average

daily

volumes

in

the

trillions

of

dollars.

In the business world, an analysis of financial exchange entities is a vital factor in all transactions. Financial centers all over the world serves as anchors of business trading between different types of buyers and sellers involved in the transaction. The foreign exchange market determines the relative values of different currencies and the complex system of exchange rate. The exchange rate is the price of a unit of foreign currency in terms of the domestic currency. In the Philippines, the exchange rate is conventionally expressed as the value of one US dollar in peso equivalent. For this particular currency, the value is determined by market forces based on foreign and local investments, business trade, tourism, and geo-

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political risk. When a certain tourist visits a country, he must pay for all the goods and services he have used using the country’s existing currency. In this situation, a tourist will have to exchange the currency of his home country for the local currency he’s visiting. Currency exchange of this kind is one of the demand factors for a particular currency. Another usual thing when foreign exchange exists is that when a particular foreign entity wants to do business with a local company. Of course, that foreign company will have to pay the local company in their local currency. So there exists a simple exchange of currencies. These are just few of the examples that defined the importance of foreign exchange system in a certain country.

III. Nature of Financial Markets One of the important requisite for the accelerated development of an economy is the existence of a dynamic financial market. A financial market helps the economy in the transfer of resources, enhancing income, productive usage, capital formation, price determination, sale mechanism, price determinants and information. Thus it is important to understand the different behaviors of financial market in the Philippines by analysing its types and structures.

A. Types of Financial Market 1. Capital markets which consist of: 

Stock markets or those market which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof



Bond markets or a market which provide financing through the issuance of bonds, and enable the subsequent trading thereof

2. Commodity markets are those that facilitate the trading of commodities 3. Money markets or a market that provide short term debt financing and investment 4. Derivatives markets which provide instruments for the management of financial risk 5. Futures markets or those market which provide standardized forward contracts for trading products at some future date 6. Insurance markets or those that facilitate the redistribution of various risks 7. Foreign exchange markets which facilitate the trading of foreign exchange

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B. Structure of Philippine Financial Market Every country has its dynamic financial market where simple and complex transactions exist. In the Philippines, the Bangko Sentral ng Pilipinas (BSP) serves as the central bank of the Republic of the Philippines which maintains a floating exchange rate system. Exchange rates are determined on the basis of supply and demand in the foreign exchange market. The role of the BSP in the foreign exchange market is principally to ensure orderly conditions in the market. Moreover there are a number of participants involved in the complex system of financial market. These are: 

Banks: largest provider of funds to business houses and corporates through accepting deposits Insurance Companies: which issue contracts to individuals or firms with a promise to refund them in future in case of any event and thereby invest these funds in debt, equities, properties, etc.



Finance Companies: which engages in short to medium term financing for businesses by collecting funds by issuing debentures and borrowing from general public



Merchant Banks: funded by short term borrowings and lend mainly to corporations for foreign currency and commercial bills financing



Companies: where the surplus funds generated from business operations are majorly invested in money market instruments, commercial bills and stocks of other companies



Mutual Funds: those that acquire funds mainly from the general public and invest them in money market, commercial bills and shares



Government: which authorizes dealers basically look after the demand-supply operations in financial market. It also works to fill in the gap between the demand and supply of funds.

There are 907 banking institutions in total that existed in the Philippines. Universal banks includes domestic (12), foreign branches (3) and government banks (3). Commercial banks are composed of domestic (9), foreign bank subsidiaries (4) and foreign branches (11). Other banks that became part of the Philippine financial market include thrift or savings banks (89), rural banks (721), cooperative banks (44) and quasi banks (11).

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There are also a number of kinds of market which constitutes the Philippine financial market. These are the following: 

Primary market: a market for new issues or new financial claims. It deals with those securities which are issued to the public for the first time



Secondary market: a market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market



Money market: a market for dealing with financial assets and securities which have a maturity period of up to one year. In other words it’s a market for purely short term funds



Capital market: a market for financial assets which have a long or indefinite maturity. Generally it deals with long term securities which have a maturity period of above one year. It may be further divided in to: (a) industrial securities market (b) Govt. securities market and (c) long term loans market



Debt market: a market where funds are borrowed and lent is known as debt market Arrangements are made in such a way that the borrowers agree to pay the lender the original amount of the loan plus some specified amount of interest



Euro – Bond market: a market where bonds are denominated in currency other than that of the country in which they are issued is called euro bond market. A striking characteristic of euro-bond market is that bulk if these bonds are denominated in dollars



Equity markets: a market where ownership of securities are issued and subscribed is known as equity market. An example of a secondary equity market for shares is the Bombay stock exchange



Financial service market: a market that comprises participants such as commercial banks that provide various financial services like ATM. Credit cards, credit rating, stock broking etc. is known as financial service market. Individuals and firms use financial services markets, to purchase services that enhance the working of debt and equity markets



Depository markets: a market consist of depository institutions that accept deposit from individuals and firms and uses these funds to participate in the debt market, by giving loans or purchasing other debt instruments such as treasure bills



Non-Depository market: a market that carry out various functions in financial markets ranging from financial intermediary to selling, insurance, etc

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IV.

Causes of Strong and Weak Peso The peso is one of the key parameters that show whether our economy is stable and resilient. This

is the reason why we not only set our sights on the stock market and economic growth indicators, but on currencies as well. Hence, the stronger & more stable Philippine peso is another vote of confidence for the country. A. Strong Peso – certainly, as some economists have pointed out, a strong peso is a clear indication that investors' confidence, particularly from foreign sources, have returned to the Philippines. The strong performance of the Philippine peso was a direct result of the influx of foreign investment in emerging economies like the Philippines. Aside from the inflow of portfolio and foreign direct investments, the rise in the peso was also caused by increased dollar remittances from overseas Filipino workers (OFWs) and the deterioration of the U.S. economy, the Philippines' number one trading partner. B. Weak Peso - a currency crisis occurs as a nation’s currency suddenly and rapidly devalues. There are numerous factors that make the peso weak but the immediate cause would be the capital flight. This happens when an investor tries to get their money out of the country when they see the economy is not in a stable condition. Their confidence will be lessened in terms of investments. Other causes would be the mismanagement of political system in the country, the unfavorable macroeconomic conditions and regional instability obviously existing in our country.

V.

Effects of Strong and Weak Peso The appreciation of the Philippine peso to its highest level in three years has both good and bad effects on the country's economy and numerous measures have been implied to determine as to the extent of its effects.

A. Strong Peso - in the obvious thought, a strong peso is favorable to our country. It just indicate that the confidence of foreign investors have return to our country. The stronger peso helps dampens inflationary pressures. But a strong peso has also negative impact on many aspects. A strong peso will make our exports like agricultural products expensive and imports cheap. This can drain foreign reserves such as the deposits and bonds held by the different banks and monetary authorities. Also the beneficiaries of OFWs who contributes significantly in making the peso strong, get less of the remittances that their relatives send them since the

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dollar loses its purchasing power by the peso appreciation. Furthermore, it can worsen balance of trade as it brings complication to our foreign transactions. B. Weak Peso – in the public view, the weakening of our peso will not help in the improvement of the economy. But many have favored with this devaluation of our currency. First, a weak peso will benefit our local exporters by making their products cheaper abroad. It would mean that Philippine exports would be more competitive abroad and the income of exporters would accumulate faster.

It

will

also

raise the amount

being received by families

of overseas Filipino workers. We will also need less pesos to service our external debt in dollars. There will be more investors coming because they can earn more than when the peso is weak.

VI.

Conclusion Financial market takes a vital role in the economic growth of an economy. It influence public

perception and shape the economic landscape. For an emerging country like the Philippines, financial market

is

badly

needed

since

this

serves

as

a

center

where

people

and

entities

can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Both firms and individuals rely upon the efficient operation of these markets for obtaining capital for investment purposes or money to meet their financial needs in everyday transactions. And with these system comes the complexities of peso depreciation and appreciation. The appreciation and devaluation of the Philippine peso has both good and bad effects on the country's economy. A situation like this would put the Philippine government in a worse situation. Peso appreciation would mean a reduction of the country's debt servicing as well as reduction of prices of imported commodities. However, this appreciation will also reduce the purchasing power of the dollars that OFWs send to their families in the Philippines. For some, it means dipping into their savings abroad; for others it may mean going into debt. A strong peso is a curse on the families of overseas Filipino workers (OFWs), exporters and workers in the export sector, business process outsourcing (BPO) firm owners and mostly on workers but it is a blessing to the government sector as it provides lower interest and principal payments, making it cheaper for the government to service debt. When the government makes lower debt payments, more funds are devoted to investments like infrastructure and social projects

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like increasing social security benefits and building schools. There will also be less pressure to raise taxes which means more affordable housing and car loans. It also means that companies can reduce their borrowing costs. It is really a complicated matter when the issue of peso appreciation and devaluation arises since all members of the society will be affected against each other. Both mean sacrificing. For now, perhaps we would be much thankful that the peso appreciates. We are an importing country. Since birth we have been conditioned to believe that anything imported is excellent. With the appreciating pesos, all imported luxuries will now be within the reach of the locals. Because when peso depreciates, the incoming dollars will go out again. Our overseas workers will have to stay longer if not forever just to keep our economy afloat. While economy is on the rise, we do not institute measures to keep it up.

VII.

Recommendation Because of the complexity that comes in analysing the position of peso in economic growth,

suggestions and recommendation have to be stipulated to sustain this conflict. Right now, the government is borrowing money from abroad to service its foreign debt obligations. But every time loan proceeds are brought into the country, the peso appreciates. In order to service its foreign debt obligations, the government should simply borrow in pesos, and then go to BSP and convert the pesos into dollars. All forms of loan restructuring should stop. The government should pay all loans that are due and demandable so that it we can make a fresh start. Again, borrow in pesos and convert the same into dollars. Furthermore, they should also properly evaluate the existing financial market and make a strategic plan out of the structure since it is interconnected with the system of the government. Moreover, our economic planners must pull their acts together. We are still not aware of the extent of impact that comes with the appreciation and depreciation of peso. If there is any benefit from the surging currency, the influence must be felt locally in any way otherwise the natives will never be able to benefit from the situation.

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VIII. Bibliography http://en.wikipedia.org/wiki/Financial_market http://www.bsp.gov.ph/ http://www.portcalls.com/strong-peso-keeps-a-nation-poor/ http://www.scribd.com/doc/17632597/The-Philippine-Financial-System-An-Overview http://www.tribuneonline.org/index.php/business/item/2983-peso-weakening-natural-%E2%80%94-bsp http://www.investopedia.com/articles/economics/08/currency-crises.asp#axzz26WotaTmu http://ezinearticles.com/?Effects-of-a-Strong-Or-Weak-Philippine-Peso-Currency&id=5040796 http://www.ehow.com/info_8222307_causes-peso-devaluation.html http://fglinc.tripod.com/knowfinmkt.htm