Sapiandante, Goran Y.

SS12/B2

An Analysis about the Philippine Peso to US Dollar Exchange Rate

In this paper, I will try to analyze what happens to Peso to Dollar exchange rate. For example,
what does weak peso mean? When and how does it happen? Here is the current exchange rate and a
mini-chart.

The peso has weakened in value against the US dollar in recent weeks. Economists and analysts have
attributed this weakening to an impending increase in US interest rates, which has the effect of luring
funds to the world’s biggest economy and away from emerging markets such as ours.

The strengthening of the US dollar has been due to the increasing likelihood that the US Federal Reserve
Board will start raising interest rates next month. This has boosted demand for the greenback as
investors start buying US treasuries in anticipation of higher US interest rates. Other currencies from the
Euro to the Yuan have also been weakening against the dollar because of this.

For local consumers, a weaker peso means higher prices in peso terms for imported goods and services.
For example, a weak peso will negate the impact of falling crude oil prices abroad.

The pump-prices of gasoline and other petroleum products would have been lower had the peso not
depreciated against the dollar. Cheaper fuel prices, in turn, would have triggered a reduction in
transport fares and, consequently, food prices.

But for sectors whose earnings are denominated in dollars, a weaker peso is a positive thing. Exporters
and overseas Filipino workers and their dependents now receive more pesos for every dollar they
exchange. Thus, analysts are divided on whether a weak peso has a net positive or negative impact on
the country. Some believe that the net effect is negligible.

Beneficiaries of OFW remittances may at the outset be buoyed by a firm peso. As the peso depreciates
in value, they receive more pesos for every dollar sent to them. However, their pesos can buy less
products here because of higher inflation resulting from higher import costs due to the weaker local
currency.

With a peso depreciation, Philippine exporters also believe that they become more competitive in
foreign markets as their products become cheaper in dollar terms. But other currencies in the region
have also been weakening against the dollar, thus reducing or even offsetting the gain in price
competitiveness arising from the peso depreciation. Exporters who rely heavily on imported raw
material components will likewise be heavily affected as import costs also rise due to a weaker peso.

A weak peso also fuels inflation due to increases in the price of imported commodities, including milk,
wheat and oil. Imported goods and services are more expensive in peso terms whenever the dollar
strengthens and the peso gets weaker. This has the effect of increasing the prices of basic commodities
and services, a clear damper to all Filipino consumers, including OFWs and exporters.

For the government, a weaker peso translates to higher debt servicing. The depreciation of the local
currency increases the peso equivalent of foreign liabilities and the amount of pesos needed to buy the
foreign exchange required to settle maturing obligations. This should have been money that the
government could use to build more schools and roads or provide health services.

The impact of a declining peso varies for some sectors. The tourism sector may be affected both ways as
foreign tourists find it attractive to visit the Philippines with their dollars buying more pesos, while
domestic tourists find it expensive to visit places abroad because they will need more pesos to buy
dollars.

From a long-term perspective, the peso has remained stable, averaging P46.82 to $1 from 1998 to this
year. The weakest it has fallen to was P56.34 in October 2004, and the strongest was P37.84 in May
1999. At the start of the year, the exchange rate was P45.06 to $1, marginally slipping to P45.10 in June
and to the P47 to $1 levels this month.

As the impact of a weaker peso varies among sectors, the recent trend of the local currency cannot be
viewed as either positive or negative for the Philippines in general. The more important thing is for the
Bangko Sentral ng Pilipinas to ensure that any weakening or strengthening of the peso will not be too
sharp or too abrupt to disrupt normal trade or business operations. For OFW beneficiaries, it is best to
save those dollars than splurge on new gadgets this Christmas season as all indications point to a further
strengthening of the greenback against all currencies, including the peso.

But what will happen if peso is greater than us dollar? Then it will be a vice versa of the effects stated
above. It will have a negative impact on the OFWs because that’s why they are in the US to earn more
money but if it goes lower than peso, then they are earning less money than they might do in our
country. And it will be a positive thing to the importers because they will buy the products in a lesser
peso price and they can buy more than they used to be.