Xavier University Ateneo de Cagayan

School of Business and Management

School Year 2016 2017

WRITTEN ANALYSIS
OF
FINANCIAL ISSUES

Submitted by:
Mia Grace V. Ausmolo
Irish Ann C. Itaas
Michelle Ann S. Mabao
Danna May Q. Poblete
Charliez Jane R. Soriano
AC10 ACB Delectus Personae

Submitted to:
Mr. Pedro M. Bacadon Jr.

I.
II.
III.

Date:
Title:
Problem:

December 28, 2016

Exchange rate seen at P51:$1 in 2017
The main issue is how can the Philippines counter the fall of peso due to the slow
economic growth, deteriorating external position and higher inflation in 2017.

IV.

Alternative Courses of Action

Alternative 1: Use of Derivatives in US Transactions

As the UBS foresee the Philippine peso could fall to P 51.00 to one US dollar level in 2017 due to
slower economic growth, a deteriorating external position, and higher inflation rate, it is better for the
Philippines now to engage in using derivatives such as options, futures, and swaps to hedge to reduce
risk in the fluctuating US exchange rates with ours. To manage the volatility related to this exposure, this
must be evaluated on a global basis to take advantage of the direct netting opportunities and of currency,
interest rate, and commodity correlations that exist then enter into various derivative transactions in
accordance with our countrys hedging policies that are designed to partially, or entirely, offset changes in
the underlying exposures being hedged. The proponents termed such as risk management and it can
mean many things; but in business, it involves identifying events that could have adverse financial
consequences and then taking actions to prevent and/or minimize the damage caused by those events.
More recently, the scope of risk management has broadened to include such responsibilities as
controlling the costs of key inputs such as petroleum by purchasing oil futures or protecting against
changes in interest rates or exchange rates through dealings in the interest rate or foreign exchange
markets. Some of the reasons why it might make sense to manage such exchange rate risk are debt
capacity, maintaining the optimal capital budget over time, financial distress, and comparative advantages
in hedging, borrowing costs and tax effects. If the Philippines go in using derivatives, which are securities
whose values are determined by the market price of some other asset, in dealing US business
transactions, then even if the Philippine peso could fall next year, with such alternative course of action,
this will protect our country from too much exposure risk.
Alternative 2: Investment in infrastructure, education, and job creation
The economy faces two challenges going forward: it will need to defend itself against a global
slowdown, and it will also need to create a more inclusive growth patternone that creates more and
better jobs, because performance on job creation has not been part of the positive news coming from the
Philippines for quite a while now. Capital needs to come from government investing more in
infrastructure and education, and it needs to come from businesses investing more; businesses, both
large and small.
Yes, it is possible to invest more in such an inclusive growth pattern, while the world economy is
slumping because to prepare for a slowdown, or to invest in infrastructure and education, you need the
same things. First, you need to create fiscal space, i.e. you need to raise more revenues, so that you can
continue to spend more on infrastructure and public services even during a global downturn.
And second, to remain competitive you need an improved investment climate, so that firms of all
sizes can thrive and produce the jobs needed. For instance, the country still has its work cut out for itself
on reducing the cost of doing business and addressing infrastructure bottlenecks.
Alternative 3: Government will control inflation
Inflation is when the economy grows due to increased spending. When this happens, prices rise
and the currency within the economy is worth less than it was before. This basically means that the
currency wont buy as much as it would before. When a currency is worth less, its exchange
rate decreases compared to other currencies. There are many methods used to control inflation, including
some that work and some that dont work without damaging consequences such as a recession. For
example, controlling inflation through wage and price controls can cause a recession and hurt the people
whose jobs are lost because of it.
One popular method of controlling inflation is through contractionary monetary policy. The goal of
a contractionary policy is to reduce the money supply within an economy by decreasing bond prices and
increasing interest rates. This helps reduce spending because when there is less money to go around,
those who have money want to keep it and save it, instead of spending it. It also means less available
credit, which also reduces spending. Reducing spending is important during inflation because it helps
halt economic growth and, in turn, the rate of inflation.
There are three main ways to carry out a contractionary policy. The first is to increase interest
rates through the Federal Reserve. The Federal Reserve rate is the rate at which banks borrow money
from the government, but, in order to make money, they must lend it at higher rates. So, when the Federal
Reserve increases its interest rate, banks have no choice but to increase their rates as well. When banks

increase their rates, less people want to borrow money because it costs more to do so if that
money accrues interest. So, spending drops, prices drop and inflation slows.
The second method is to increase reserve requirements on the amount of money banks are
legally required to keep on hand to cover withdraws. The more money banks are required to hold back,
the less they have to lend to consumers. If they have less to lend, consumers will borrow less, which will
decrease spending.
The third method is to directly or indirectly reduce the money supply by enacting policies that
encourage reduction of the money supply. Two examples of this include calling in debts that are owed to
the government and increasing the interest paid on bonds so that more investors will buy them. The latter
policy raises the exchange rate of the currency due to higher demand and, in turn, increases imports and
decreases exports. Both of these policies will reduce the amount of money in circulation because the
money will be going from banks, companies and investors pockets and into the governments pocket
where they can control what happens to it.
V.

Recommendation

The proponents chose the third alternative course of action which is the most viable mean of
countering the fall of peso by 2017 due to the slow economic growth, deteriorating external position and
higher inflation. This action is to control inflation. The logic is to reduce the money supply within an
economy by decreasing bond prices and increasing interest rates. This helps reduce spending because
when there is less money to go around, those who have money want to keep it and save it, instead of
spending it.

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