The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

INTRODUCTION

The foreign exchange market is a worldwide decentralized over-the-

counter financial market for the trading of currencies. Financial centers around the world
function as anchors of trading between a wide range of different types of buyers and sellers
around the clock, with the exception of weekends. The foreign exchange market determines
the relative values of different currencies. (wiki.org)

The exchange rate is the price of a unit of foreign currency in terms of the domestic
currency. In the Philippines, for instance, the exchange rate is conventionally expressed as
the value of one US dollar in peso equivalent.

The value of any particular currency is determined by market forces based on trade,
investment, tourism, and geo-political risk. Every time a tourist visits a country, for example,
he or she must pay for goods and services using the currency of the host country. Therefore,
a tourist must exchange the currency of his or her home country for the local currency.
Currency exchange of this kind is one of the demand factors for a particular currency.
Another important factor of demand occurs when a foreign company seeks to do business
with a company in a specific country. Usually, the foreign company will have to pay the local
company in their local currency. At other times, it may be desirable for an investor from one
country to invest in another, and that investment would have to be made in the local
currency as well. All of these requirements produce a need for foreign exchange and are the
reasons why foreign exchange markets are so large. (investopia.com)

In this paper the researchers attempt to show the impact of strengthening peso
against the US dollar and what are the consequences behind it. It also attempt to show
where should the government place itself when the opposing interest of the public are at
stake.

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

BACKGROUND

The Philippine peso has been one of the strongest currencies in Southeast Asian
Region for the past two year. It appreciated for an about 5.6 percent from year 2009 to
2010 where the exchange rate is 47.6372 to 45.1097 a dollar—that is based on the average
data from BSP. This appreciation may attributed to the increasing inflows of remittances
from the overseas Filipino workers (OFWs), the improvement in portfolio and direct
investment, the deterioration of United States’ dollar economy for the past two years and
the attractiveness of the Southeast Asian Region to the foreign investors.

Peso appreciation would provide to a positive and negative effect on different

sectors. The appreciation of Philippine peso would mean a reduction of debt servicing; this
would also mean a reduction of prices of imported commodities in terms of peso when the
product came here. However, this appreciation will reduce the purchasing power of Dollar
that OFWs send to their family here in the Philippines and it would also mean that exported
product will be less competitive abroad or if ever the exporter’s income will diminish.

In this situation, the government is stock between letting the peso appreciate for the
purpose of lower importation cost and lower debt services—or maintaining it at a lower
value for the sake of OFWs and export sector. According to Senator Ralph Recto, chairman
of the Senate Committee on ways and means, the Philippine peso could further appreciate
up to P34 a dollar this year (2011). Inflow of remittances will continue to be strong and the
outlook for foreign investments remains positive.

The exchange rate is important for several reasons: (1) it serves as the basic link
between the local and the overseas market for various goods, services and financial assets.
Using the exchange rate, we are able to compare prices of goods, services, and assets
quoted in different currencies. (2) exchange rate movements can affect actual inflation as
well as expectations about future price movements. Changes in the exchange rate tend to
directly affect domestic prices of imported goods and services. A stronger peso lowers the
peso prices of imported goods as well as import-intensive services such as transport,
thereby lowering the rate of inflation. (3) exchange rate movements can affect the country’s
external sector through its impact on foreign trade. An appreciation of the peso, for
instance, could lower the price competitiveness of our exports versus the products of those

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

competitor countries whose currencies have not changed in value. (4) the exchange rate
affects the cost of servicing (principal and interest payments) on the country’s foreign debt.
A peso appreciation reduces the amount of pesos needed to buy foreign exchange to pay
interest and maturing obligations.
Foreign exchange policy in the Philippines has evolved from a pegged system to a
floating rate regime over the last 50 years. The period of pegged exchange rate regime
witnessed an extensive use of a myriad of administrative rules that were set to restrict
access of Philippine residents and corporations to foreign currency. From 1949 to early
1970, foreign exchange policy was used to promote exports industries, to limit imports, and
to try to change the orientation of the Philippine economy from agricultural to agro-
industrial. Even after the floating rate system was adopted in 1970, it was not until late 1984
that the central bank stopped announcing a guiding rate and imposing a trading band.
Moreover, it was a decade hence yet before the watershed set of reforms was issued. In
1993, the BSP liberalized capital flows and implemented a comprehensive set of foreign
exchange market reforms. Today, even as there remain some prudential regulations with
respect to foreign currency transactions, market forces determine the exchange rate.
Furthermore, mechanisms to allow the economy to absorb shocks that a freely floating
currency entails have been the subject of recent economic discussions. (BSP, 2008)

Table 1: Philippine Foreign Exchange Policy, 1949-2007

Period Milestones
3 January 1949 The CBP began operations. It adopted a fixed exchange rate system,
pegging the peso to the US dollar at P2.00/US$1.
December 1949 The CBP imposed a comprehensive system of foreign exchange controls,
which included a foreign exchange allocation scheme that gave
preference to export industries and the manufacturing and mining
sectors, and placed restrictions on buying of foreign exchange for
services-related imports. The restraints were an effective instrument in
carrying out the “Filipino First” policy of the government.
1959 The Philippines achieved its first ever post-war trade surplus.
1962 The Government launched an integrated socio-economic program that
almost entirely eliminated restrictions on trade and payments.
25 April 1960 The CBP launched a four-year program to dismantle the complicated

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

system of foreign exchange controls imposed in the 1950s. The most

important feature of the decontrol program was the adoption of a
multiple exchange rate system which paved the way for a de facto
devaluation of the peso.
January 1962 All restrictions on sales of foreign exchange were eliminated.
December 1949 The CBP imposed a comprehensive system of foreign exchange controls,
which included a foreign exchange allocation scheme that gave
preference to export industries and the manufacturing and mining
sectors, and placed restrictions on buying of foreign exchange for
services-related imports. The restraints were an effective instrument in
carrying out the “Filipino First” policy of the government.
1959 The Philippines achieved its first ever post-war trade surplus.
25 April 1960 The CBP launched a four-year program to dismantle the complicated
system of foreign exchange controls imposed in the 1950s. The most
important feature of the decontrol program was the adoption of a
multiple exchange rate system which paved the way for a de facto
devaluation of the peso.
1962 The Government launched an integrated socio-economic program that
almost entirely eliminated restrictions on trade and payments.
January 1962 All restrictions on sales of foreign exchange were eliminated.
22 January 1962 CB Circular No. 133 dated 22 January 1962 sought to establish a free
market for foreign exchange and transferred the function of allocating
exchange for most categories of payments from the administrative
machinery of the CBP to the free market.
5 November 1965 A new parity for the peso-dollar exchange rate was set at P3.90/US$1
21 February 1970 The CBP abandoned the fixed parity regime and adopted a floating rate
system. The competitive rate was applied on all foreign exchange
transactions except for 80 percent of export receipts from the country’s
major commodities (namely, logs, centrifugal sugar, copra and copper
concentrates) which were to be purchased at the rate of
P3.90/US$1.
1972 The CBP started lifting the majority of foreign exchange restrictions,
paving the way for partial liberalization in foreign trade and investment.
The liberalization efforts focused on the suspension of nationality
requirements in establishing industries, relaxation of repatriation

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

policies, simplification of the tariff structure, import liberalization, and

granting of various incentives to the export sector particularly on non-
traditional commodities, such as textiles, garments and electronics.
April 1972 The foreign exchange trading band was widened to 41 2 percent on
both sides of the guiding rate.
1982 “Operation Greenback” was launched to curb widespread illegal trading
in the black market as the CBP implemented liberal authorization of
establishments to operate as foreign exchange dealers.
October 1983 After consultation with the IMF and several foreign banks, Philippine
economic managers requested a 90-day moratorium on principal
payments of external debt owed to foreign commercial banks. With
scarcity of foreign exchange, a system of direct controls was put into
effect.
4 November 1983 Local commercial banks were required to sell to the CBP all foreign
exchange receipts for placement in a pool out of which payments were
made on the basis of officially set priorities.
June 1984 The foreign exchange market was reopened. By October 1984, a
measure of stability had been restored in the forex market and the CB
reopened the foreign exchange trading system. The previous trading
day’s completed transactions formed the basis for the Bankers
Association of the Philippines (BAP) reference rate. With this system,
the CBP stopped announcing an inter-bank guiding rate and imposing a
trading band.
August 1985 CBP lifted the ceiling in the amount of allowable foreign exchange
holdings.
1986 Import controls on a broad range of items were abolished. Likewise, the
tariff structure was made more uniform; and discriminatory aspects of
the domestic tax structure against imports were eliminated.
April 1992 Currency trading shifted from a short daily trading session to full off-
floor interbank foreign exchange trading with the operation of the
Philippine Dealing System (PDS).
13 April 1993 CB Circular No. 1389 was issued, setting forth foreign exchange
liberalization measures.
July 1993 The CBP was reorganized into the Bangko Sentral ng Pilipinas (BSP) by
virtue of the New Central Bank Act (R.A. No. 7653).

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

September 1995 The Philippines acquired Article VIII status with the IMF with the lifting
of all restrictions on current account transactions.
July 1997 Asian currency and financial crisis emerged. The BSP implemented
measures to rationalize the rules and regulations governing non-trade
related FX transactions to restore stability in the FX market and mitigate
the impact of the Asian crisis on the economy.
December 1997 Circular 149 implemented the Currency Rate Risk Protection Program
(CRPP).
2 October 2006 A new peso-dollar trading platform was launched, replacing the
Philippine Dealing System in providing the main reference rate for
dollar-peso conversions.
2 April 2007 Circular 561 s. 2007, dated 8 March 2007, took effect. In the face of
strong inflows, the BSP liberalized the foreign exchange regulations to
allow greater market access to foreign exchange for outward
investment and over-the-counter transactions.
January 2008 The second phase of reforms in the foreign exchange regulatory
framework (Circular 590 dated 27 December 2007) was implemented.
These reforms focus mainly on promoting greater integration with
international capital markets, diversifying risk supportive of an
expanding economy with global linkages, and streamlining the
documentation and reporting requirements on the sale of FX by banks.
Source: Bangko Sentral ng Pilipinas (BSP), Working Paper Series
I. STATEMENT OF THE PROBLEM

The general problem of the study, “The Philippine Peso-US Dollar Exchange Rate: The
Impact of Strengthening Currency” is to determine the impact of the appreciation of
Philippine peso during the year 2009-2010. Specifically, the problems are the following:

1. Effects or impact of the appreciation of Philippine peso on consumption, government

spending, investment, import-export and debt servicing;
2. What are the reasons for the appreciation of Philippine peso 2009-2010;
3. What is the role of the Bangko Central ng Pilipinas in the Foreign Exchange Market;
4. What are possible future movements on the Philippine peso against US dollar and how
does it affect the country’s economy.

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

II. OBJECTIVE OF THE STUDY

General Objective: To determine the economic impact of the appreciation of Philippine
peso.

Specifically, the study attempts to:

1. Determine the effect of the appreciation of Philippine peso:

a. Consumption
b. Investment
c. Government spending
d. Import and export
e. Debt servicing
2. To examine the reasons behind the appreciation of the Philippine peso during 2009-
2010
3. To determine the role of the Bangko Sentral ng Pilipinas (BSP) on the Foreign
Exchange Market
4. To determine the future movement of Philippine peso against the US dollar and its
effect to the country’s economy.

III. HYPOTHESES

The researchers believe to the following hypothesis:

1. The effects of appreciation has a great impact—positive and negative—on

consumption, government spending, investment, import-export and debt servicing;
2. Philippine peso appreciation was caused by several factors such as the robust
economy of the Philippine as well as the increasing amount of remittances from the
overseas Filipino workers (OFWs).
3. The role of the Bangko Sentral ng Pilipinas(BSP) is to maintain the stability of
Philippine peso against other currency
4. The Philippine peso will further appreciate in the near future against the US dollar
and this appreciation will boost the economy through saving.

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

IV. SIGNIFICANCE OF THE STUDY

The study is conducted to determine the impact of peso appreciation on the
economy. It shows the effect on different sectors of the economy.
It attempts to show the impact of strengthening peso against the US dollar and what
are the consequences behind it. It also attempt to show where should the government place
itself—through the use of Bangko Sentral ng Pilipinas—when the opposing interest of the
public are at stake.
It also attempts to show how to maximize the advantage of strengthening peso
against the dollar on the term of government spending.
And to some extent, to serve as guide in policy making through the use of
recommendation.

V. SCOPE AND LIMITATION

The study “The Philippine Peso-US Dollar Exchange Rate: The Impact of
Strengthening Currency” limit its scope on Philippine peso against US dollar from year 2000
to 2010.

VI. REVIEW OF RELATED LITERATURE

“The Indian Rupee--US Dollar Exchange Rate: The impact of Strengthening Currency”
Reasons behind the appreciation of the Rupee in 2006-2007
Toward the end of 2006, foreign exchange inflows, especially of dollars, into India
started rising sharply. This put upward pressure on the rupee’s exchange rate against the

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

dollar. India’s steady economic growth offered several opportunities for foreign companies.
Between April 2006 and March 2007, FDI of $16 billion flowed to India.

VII. RELATED STATISTICS

Foreign currency reserves, gold, special drawing rights (SDRs), foreign investments as
well as the Reserve Position in the Fund (RPF) are main components of the Gross
International Reserves (GIR).  The GIR constitutes the foreign assets valued mark-to-market,
which are readily available to and controlled by the BSP for direct financing of payments
imbalances and for managing the magnitude of such imbalances. The BSP estimates the
level of Overseas Filipino Worker (OFW) remittances, which props up the country’s foreign
currency reserves. (BSP website)

VIII. DISCUSSION (Impact on the Philippine economy)

A. Consumption

The appreciation of Philippine peso against the US dollar affects the consumption of
Filipinos. Especially the families of overseas Filipino workers (OFWs) who receives
remittances coming from abroad—which are commonly dollar denominated.

According to BSP, the US dollar remittances of OFWs increase by 8.16% from 2009
up to 2010. On the year 2010, the overseas Filipino workers remittances reflect 29.55
percent of the Gross National Products (GNP).

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

According to Bangko Sentral ng Pilipinas, on the year 2010 the peso appreciated at
an about 5.6% on average basis (see table 2). This means that the purchasing power of the
dollar remittances lower for an about 5.6% in the Philippines.

On the letter written by the Filipino Community in Riyadh, Saudi Arabia, to the
President in Malacañan in August 2006, they stated their predicament regarding
appreciation of Philippine peso against the US dollar: (a) the salaries remained the same
while the cost of living have increased, which means less income to be available for
remittances; which worsen when peso appreciated from Php55 to Php45 versus US dollar.
(b) the continued appreciation effectively reduced the value of remittances at an average
18%.

The strengthening or appreciation of Philippine currency had a positive effect on

consumption, it enable to somewhat, catch the effect of inflation of the commodities that
are being imported from abroad.

Ironically, disadvantage of a strong peso is that the beneficiaries of OFWs who

contributes significantly in making the peso strong, get less of the remittances that their
relatives send them since the Dollar loses its purchasing power by the peso appreciation.
And finally, a sector which for us is really getting the worst out of the situation are the
domestic producers since a strong peso would make imported goods cheaper since the peso
appreciates thus making it purchase imported goods more.

Table 2. The Philippine Peso – US Dollar Exchange Rate

CROSS RATE OF THE PESO

in pesos per unit of foreign currency
period averages
Period Dollar to Peso
2000 44.194
2001 50.993
2002 51.604
2003 54.203

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2004 56.040
2005 55.086
2006 51.314
2007 46.148
2008 44.475
2009 47.637
2010 45.110
Source: BSP (edited)

The table above shows how much a dollar worth in peso term during the year 2000
up to 2010.

B. Investment

Another advantage of a strong Philippine Peso is that it would reflect a robust

economy for the country, which could leverage itself to attract foreign investors in the
country which could provide significant inflows for investments to the country that further
improve the economy. A positive outlook is very important to a country to seek investors to
show confidence in investing to country since their outlook would be one of the
considerations investors would consider. The first thing that an investor would want to
know is that if they would get their desired rate of return at a certain period of time. Facing
uncertainties and risks, investors would like to gather as much information to aide them to
their decision making minimizing uncertainties and factors such as oil prices, stability of the
government and the economy are some of the preliminary facts to consider. If from these
preliminary factors as country fails to impress investors, important investment inflows
would be going to somewhere else. It affects the foreign exchange since as we have stated
earlier, foreign investments helps the Peso appreciate. The Philippine Daily Inquirer
published in their December 1 2006 paper that business confidence, which reflects
foreigners outlooks to the country, has soared to a 5 and a half year high of 49% compared
to just 22% a quarter ago. Another outlook factor that could affect the foreign exchange
market is the credit rating by firms such as S&P and filch. These firms are respected firms
and reliable so anything that they publish would be taken seriously by interested parties. A
credit downgrade by these agencies affects the Peso negatively as it gives of a bad image of
the country to interested investors but at the same time a positive rating would help the

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Peso strengthen. Just like the OFWs, investments from foreigners improve and help peso
appreciation and generally the economy as a whole. Having superb Dollar inflow allows the
BSP to increase international reserves of debt curbing down Peso devaluation and aiding to
Peso appreciation.

According to BSP, transactions during February 2011 resulted in a net inflow of

US$534 million, nearly thrice the US$193 million net inflow in January due to lower outflows
(US$935 million in February 2011 against US$1.3 billion in January 2011). The net inflow also
represented almost four times the US$139 million recorded a year ago due to more
registered investments this year, US$1.5 billion compared to only US$500 million last year. 
This year’s rise in registered investments is backed by a surge in investments in Peso-
denominated government securities (Peso GS), to US$730 million of total (or 49.6 percent)
against US$90 million in 2010.  Favorable yields have attracted foreign investor to Peso GS
placements.

Investments in PSE-listed shares amounted to US$740 million (or 50.4 percent of

total registered investments), twice the US$370 million recorded in February 2010. The
US$730 million balances of registered investments were in Peso GS and Peso time deposits
with minimum maturity of 90 days (nil in February this year against US$40 million last year). 
Singapore, the United States, the United Kingdom, Luxembourg and Hong Kong were the
top five (5) investor countries, collectively contributing 89.6 percent to total registered
investments.

Registration of inward foreign investments with the BSP is voluntary.  It entitles the
investor or his representative to buy foreign exchange from authorized agent banks or their
subsidiary/affiliate foreign exchange corporations for repatriation of capital and remittance
of dividends/profits/earnings that accrue on the registered investment.

For the first two months of the year, transactions netted an inflow of US$727 million,
135.6 percent higher than the figure recorded for the comparable period in 2010. 
Registered investments reached US$3.0 billion, or an increase of 179.3 percent from last
year’s performance.  Investments in PSE-listed shares of US$1.4 billion exceeded the 2010
figure by 68.3 percent.  Major beneficiaries were banks (US$336 million); holding firms

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(US$248 million); utility companies (US$241 million); property firms (US$182 million); and
telecommunication companies (US$167 million).

Portfolio funds have also been re-rating Asia as an investment destination and their
flows have reinforced the uptrend in Asian currencies. With developed markets weighed
down with debt and facing years of sluggish growth, fund managers are looking into Asia,
citing the region’s fast growth rates and strong corporate balance sheets.  (BSP, issuances)

Asia is set to continue being a strong destination of portfolio flows over the coming
months. The high Asian equity correlation with local currencies will help fuel further gains in
the Philippine peso and other Asian currencies.

C. Government Spending

We all know that the government’s responsibility is the acquisition of goods and
services for current use to directly satisfy individual or collective needs of the members of
the community. They allocate the fund for Personal Services, Maintenance and Other
Operating Expenses, Capital Outlays and Net Lending, Public Infrastructure and effectively
marginalized resources for the poor. But it’s not that easy because the government must be
aware of those risks that might affect their expenditures. One of it is the Philippine Peso
condition in exchange rate – if the currency appreciates or devaluate. Now therefore, how
thus the exchange rate may affect the government spending?

Paying Philippines’ debt will affect our Government’s spending. In fact, based on the
data from Bureau of Treasury, more than 77.6 percent of the P104.4 billion increase in the

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2011 budget came from the huge P80.99 billion rise in interest payment for government’s
spending. The Aquino administration is proposed interest payment of P357.09 billion in the
2011 budget, or 21.7 percent of its planned spending program. But the total debt burden for
this year could actually reach P823.27 billion. Thus, debt burden represents 38.9 percent of
what the Aquino administration is willing to spend this year.

If peso appreciates, it has a good impact in our external debt since our debt will
decrease in peso terms. We will pay less and that will affect our spending. The remaining
money that allocated for payment of external debt will be used for government spending.
More resources are available to spend for social and economic development of our country.
On the other hand, peso depreciates has a bad effect. Our debt will increase so we will pay
more, that is, in peso terms. Little amount of money will be allocate for government
spending. The government will force to minimize their expenditure. Such a heavy debt
burden means fewer resources are available to spend for social and economic services badly
needed by the people.

Let’s now look at the effect of peso condition in trade. Strong peso has a negative
effect in exporters. They will lose income since there was less peso in exchange of their
dollar earnings or a strong peso translates to lesser value for their dollar-denominated
revenues. Prices of their products may also become less competitive in the world market.
The smaller the earnings or profit of exporters, the smaller tax they will pay in the
government. That will affect the governments’ spending. If there are small fund comes from
tax, government need to minimize their expenditure. On the other hand, strong peso has a
positive effect on importers. They will pay less in foreign products. They will earn more and
pay more tax. Again, the tax will proceed in government’s fund so more tax, more funds that
government may spend for the people’s benefits.

Weak peso has good effects in exporters. Prices of their products become more
competitively in the world market. They will receive more peso in exchange of their earnings
so they will pay more tax. More tax, more funds that government may spend for the
benefits of the people. When peso depreciates importers will force to pay more for foreign
products. That is bad for them and for government spending. Since the smaller the earnings

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or profit of importers, the smaller tax they will pay. Government will force to minimize their
expenditures.

As we observed, peso condition has different effects in different factors. That is the
reason why it’s hard for the government to ask the Bangko Sentral ng Pilipinas (BSP) to
intervene the strengthening peso. We cannot easily believe that a strong peso means a
strong republic. So government must look at different factors and learn before engaging the
country in different risk. As we also observed, the effect of peso condition in the sources of
government funds is the same in the impact of peso condition in government spending. If
the effect in the sources of funds is negative, the impact in the government spending is also
negative. When the effect is positive, the impact in government spending is also positive.

Overview: Import and Export

Since World War II, the Philippines experienced frequent trade deficits, aggravated
by inflationary pressures. Deficits were counterbalanced by US government expenditures,
transfer of payments from abroad, official loans (US Export-Import Bank, IBRD, and private
US banks), net inflow of private investment, tourist receipts, remittances from Filipino
workers overseas, and contributions from the IMF.

In 1996, trade liberalization policies helped to push imports up by 22% while exports
rose by only 18%. The result was a widening trade deficit that amounted to 13% of GDP.
Foreign investment in the stock market and remittances from overseas workers helped to
offset the deficit and avert a balance-of payments crisis. In 1998, the Philippines recorded a

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trade surplus at about 2% of GNP in the current account due to high electronics exports and
low imports due to the devaluation of the peso. This was the first surplus in 12 years.

Merchandise exports, in double digits through most of the 1990s, slowed to a single-
digit growth pace in 2000, reflecting fewer export receipts from electronics and
telecommunications parts and equipment. This decline was attributed by the electronics
industry to weaker prices for maturing products and technologies, and to the decline in
electronic industry investments from the 1994–97 boom years (when investment averaged
$1.5 billion a year).

Traditionally, exports of primary products failed to balance imports, leading the

government to restrict imports. Structural change accelerated in the 1970s, as the
contribution of industry (including construction) to GDP rose from 29.5% in 1970 to 36.5%
by 1980, primarily as a result of export-oriented industrialization promoted by the Marcos
government. The Aquino assassination in August 1983 had immediate economic
consequences for the Marcos government, as did the broader Third World Debt Crisis.
Hundreds of millions of dollars in private capital fled the Philippines, leaving the country
with insufficient foreign exchange reserves to meet its payments obligations. The
government turned to the IMF and its creditor banks for assistance in rescheduling the
nation's foreign debt, and an austerity program was set up during 1984–85. In December
1986, under IMF guidance, the Aquino government launched a privatization program with
the establishment of the Assets Privatization Trust (APT). Monopolies established under the
Marcos administration in coconuts, sugar, meat, grains, and fertilizer were dismantled and a
ban on copra exports was lifted. All export taxes were abolished; and the government
allowed free access to lower-cost or higher-quality imports as a means of improving the
cost-competitiveness of domestic producers.

Many difficulties remained, however. The prices of commodity exports, such as

sugar, copper, and coconut products, were still weak, while demand for nontraditional
manufactured products, such as clothing and electronic components, failed to rise. The
structural reforms produced an initial recovery between 1986 and 1989, but this was
arrested by the series of natural disasters in 1990–1991. In 1986, Aquino had also embarked
on a Comprehensive Agrarian Reform Programme, but its goals remain unfulfilled.

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In the 1990s, the government concluded three additional financial arrangements

with the IMF—a stand-by agreement signed 20 February 1991 for about $240 million (all
drawn); an arrangement under the Extended Fund Facility (EFF) signed 24 June 1994 for
about $554 million (all drawn), and a stand-by agreement signed 1 April 1998 for about
$715 million (76.7% drawn down as of 31 December 2002). At the end of 2002, the
Philippines owed over 140% of its quota to the Fund. Scheduled debt repayments to the IMF
for 2003 are about $330 million, and outstanding loans and purchases are not due to be
retired until at least 2007. The country also had five debt reschedulings in the period 1984
to 1991 with the Paris Club—for official debt owed to aid donor countries—on which some
payments are still owing. In January 2003, the Trade and Development Department
announced at least a partial retreat from its 15 years of trade and investment liberalization,
stating that it plans to bring tariff rates to the maximum allowed by the WTO for industrial
imports, particularly petroleum imports, and for products produced in the Philippines.
(Tradechakra.com)

D. Import

The Philippine economy is largely import oriented in terms of the value of

merchandise trade. A sizable trade deficit continues primarily because of merchandise
imported to meet the strong demand for raw materials, intermediate goods, industrial
upgrades and infrastructure related capital goods.

An emerging market, the Philippine economy continues to recover from the political
instability of the 1980s, a series of natural disasters in the 1990s. Many of the products
being imported are for improvement of the country's production capabilities. The
development of industry has been hindered by such factors as electric power shortages and
a still developing infrastructure.

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The Philippine government has taken several significant steps to reduce bureaucratic
regulations and foster competition. In recent years it has revised and enacted tax, labor,
health, safety environmental and other laws and policies with the aim of regulating industry.

The Philippines import commodities such as electronic products, mineral fuels,

machinery and transport equipment, iron, and textile fabric. Philippines’ trading partners
are Japan 15.32%, US 11.47%, Singapore 9.54%, China 8.93%, Taiwan 8.27% (2009).

Year Imports
(Billion US
dollars)
2001 35
2002 30
2003 33.5
2004 35.97
2005 37.5
2006 42.66
2007 51.6
2008 57.56
2009 60.78
2010 46.39

70

60

50

40

30

20

10

0
1 2 3 4 5 6 7 8 9 10

Source: International Trade Center - UNCTAD / WTO

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

Source: CIA World Factbook - Unless otherwise noted, information in this page is accurate as
of March 11, 2010

The table and graph above show that Year 2009 has the highest imports recorded
with $60.78B. On the other hand, the lowest imports recorded in the past ten years was on
2002 having $30B.

This entry provides the total US dollar amount of merchandise imports on a c.i.f.
(cost, insurance, and freight) or f.o.b. (free on board) basis. These figures are calculated on
an exchange rate basis. i.e. not in purchasing power parity (PPP) terms.

E. Export

An export-oriented economic policy had boosted the economies of the newly

industrialized countries of Asia. Philippines policy makers have also realized that the
Philippines cannot achieve its aim of becoming the next “economic tiger” of Asia without
shifting to an export-oriented economic programme. Export promotion programmes are
public policy measures which actually or potentially enhance exporting activity at the
company, industry or national level.

Ideally, an export promotion policy should be backed up with an appropriate

political and economic philosophy of the government. Export promotion policies should take
into account the nature, size, and distribution of the individual exporting firms.

As a developing country, the Philippines really does not have much choice in the
matter. It needs to increase its export volume as a matter of economic survival, and within
its national context, only the public sector has the resources to provide export promotion
services to small and medium-sized businesses in a cost-effective way. It was evident by the
end of the 1970s, that the institutional reforms did not go far enough in achieving the major
objectives of development.

Typical of most small developing country trades, Philippines export trade has been
characterized by a high degree of commodity and geographic concentration. As late as 1970,
ten principal traditional export commodities comprised three quarters of total exports

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

value. The first three top dollar earners (sugar, logs and lumber and copper concentrates)
easily accounted for a little more than half of total export earnings.

A definite shift to export promotion was observed in the decade of the 1970s. In
spite of the export orientation reflected in exchange rate and industrial promotion policies,
the structure of protection accorded by tariff policy remained basically inward looking. The
general picture that emerges from the above discussion is that while foreign exchange,
trade and industrial incentive policies in the seventies had taken an unmistakable shift
toward export promotion, they had stopped short of completely eliminating the biases
against export sales.

Philippines’ export partners are US 15.35%, Japan 14.19%, China 13.19%, Singapore
9.44%, Hong Kong 9%, South Korea 5.12%, Germany 4.1% (2009).

Year Exports
(Billion US
dollars)
2001 2.677
2002 2.929
2003 2.748
2004 3.303
2005 3.431
2006 4.243
2007 3.899
2008 4.081
2009 3.189
2010 4.288*

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1 2 3 4 5 6 7 8 9 10

*Source: International Trade Center - UNCTAD / WTO

Source: CIA World Factbook - Unless otherwise noted, information in this page is accurate
as of March 11, 2010
The graph and table show the Philippine exports to all countries. The highest export
reported in the past ten years was during on 2010 having S4.288B while the lowest was on
2003 having S2.73B

A strong peso is generally favorable to the economy as a whole but there are certain
sectors of the industry and society that are affected by a strong peso. Weakened by a strong
peso since their good would become offensive since the peso appreciates which makes
them less competitive in the export market. Although may be affected, all is not lost since
there are financial solutions to at least mitigate the handicap they are facing because
exporters could enter into hedging agreement or derivatives where they could enter into a
contract to protect them from the Peso appreciation. The tourism industry weakens as well
since a strong peso makes staying for a vacation in a country would make it more expensive.
The effect of a strong peso on tourism industry also affects the hotel industry since it is
some what related as a strong tourism industry means more bookings with hotels for a
place to stay. An ironic advantage of a strong peso is that the beneficiaries of the OFWs who
contribute significantly in making the peso strong, get less of the remittances that their
relatives send them since the dollar loses its purchasing power by the peso appreciation.
And finally, in sector which for us is really getting the worst out of the situations are the

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

domestic producers since a strong peso appreciates thus making it purchase imported goods
more. The industry is for direct investments.

The negative aspects of a strengthening peso is very much in the news, what with
OFW families getting into financial trouble, and exporters complaining about their products
getting to be too expensive for foreign buyers. What often gets overlooked is the fact that
the Peso appreciation also has a positive side, and if one takes a good look at this, it is at
least equally important as the negative side to this trend.

These are some of the positive effects of strengthening peso:

Increases in the world market prices of imported goods have lesser effect. Oil prices have
shot up in dollar terms, and thanks to the increased value of the peso, the actual effect on
the prices of oil products have not been as much as otherwise would have been the case.
The same could be said of wheat prices, etc. which have also risen.

Dollar-denominated foreign debts can be repaid with less pesos. The Philippine
government has saved billions of pesos as a result of the dollar’s drop in value. Philippine
companies with foreign debts have likewise benefited.

Capital flight from the Philippines has lessened. The strengthening peso means that it is no
longer a wise financial move to move funds to a foreign dollar account. It would be much
more profitable to keep the money in pesos. At the same time, there is some kind of poetic
justice that corrupt officials with funds abroad suffer from a severe cut in the value of their
“loot”.

Skyrocketing real estate prices would be dampened. Many Overseas Filipinos (mostly in the
dollar area) have driven up prices of real estate throughout the country. The decreased
value of their dollars may result in the cooling down of the buying frenzy for land by OFs.

Increased attention to the domestic market from investors and (former) exporters. Some
exporters are coping with the decreased demand for their products in the US by either
shifting to other countries or to selling domestically. The increased supply of products to the

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

domestic market would help to lessen prices and improve the product quality of
domestically available goods. At the same time, the value of the local market for foreign
investors has increased. Since the peso’s value has increased, the potential sales and profits
offered by the domestic market has increased in terms of dollars.

Lower interest rates. The steadily depreciating dollar is pushing the US Fed to decrease
their interest rates – in response, countries like the Philippines decrease their interest rates
accordingly, in order to avoid the interest rate differential to get too high. Low interest rates
are good because it stimulates business, and also consumer spending, both of which are
good for the economy.

Lower cost of imported capital goods. For example, the peso value of new airplanes is now
much less than it was even a year ago. This is the same for other items e.g.
heavyconstruction equipment, computers, etc. This would help stimulate the economy, and
could also lead to decreased prices for consumers.

Posted: by butalidnl on 18 January 2008

F. Debt Payment

As we all know, Philippine peso had appreciated in these past few years against the
US dollar and implies high advantage to our economy. One of the advantage of the peso
appreciation is the lower debt servicing, in which, it lessen the external debt of the country.

As of December 2010, the National Government debt was recorded at P4, 718
billion, lower by P1 billion from end November 2010 level of P4, 719 billion. Of the total
debt, P2, 000 billion or 42.4% is owed to foreign creditors and P2, 718 billion or 57.6% to
domestic creditors.
The decrease in NG’s foreign debt of P2 billion from the level as of end November
2010 was brought about by the P5 billion net repayment and P16B appreciation of the peso
against the US dollar. This however was partially offset by the P18 billion net appreciation of

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

the third currencies against the US dollar and P1 billion adjustment resulting from late
receipt of notices of availment.
The domestic debt increased by P1 billion from the previous month’s level resulting
from the net issuance of government securities by NG.
On the other hand, the contingent debt of the National Government, composed
mainly of guarantees issued by the National Government, increased to 550 billion, lower by
P10 billion from end November 2010 level of P560 billion. The decrease in domestic
contingent obligations was due to the misclassification of the P12 billion HGC guaranteed
PAGIBIG bonds as NG direct guaranteed loan. The increase in foreign contingent obligations
was due to the combined effects of the P3 billion appreciation of the peso against the US
dollar, P2 billion net repayment and P7 billion net appreciation of the third currencies
against the US dollar. (Bureau of Treasury, Press Release)

Source: Bureau of treasury

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

Source: Bureau of treasury

G. Reasons for the appreciation on 2009-2010

One of the key reasons why the Philippine currency had experienced a significant
increase on its value during the last two years was because of the increasing number of
Filipino dollar remittances from abroad.

The strengthening of the value of Philippine peso during 2008 was attributed to the
recession that the America had experienced during the last quarter of that year. However,
the Philippine currency had experienced depreciation on the year 2009; because that is the
year the country receive the impact of recession from 2008 that America had experienced.
This has same effect on the ASEAN region where the Philippine is belong; their currency had
also experienced depreciation.

The Philippine had set a cushioning effect against the recession due to its dollar
remittances coming from OFW’s in different part of the work.

H. The role of Bangko Sentral ng Pilipinas

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

The Bangko Sentral ng Pilipinas (BSP) 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. The market-determination of the exchange rate is consistent with
the Government’s commitment to market-oriented reforms and outward-looking strategies
of achieving competitiveness through price stability and efficiency.

In the Philippines, peso-dollar trading among Bankers Association of the Philippines

(BAP) member-banks and between these banks and the BSP are done through the Philippine
Dealing System (PDS). Most of the BAP-member banks which participate in the peso-dollar
trading use an electronic platform called the Philippine Dealing and Exchange Corp. (PDEx).
The BAP appointed PDEx as the official service provider for the USD/PHP spot trading (which
involve the purchase or sale of the US dollar for immediate delivery, i.e., within one day for
US dollars), and Reuters, as the exclusive distributor of all PDEx data. Trading through the
PDEx allows nearly instantaneous transmission of price information and trade
confirmations.

I. The future movement of Philippine Peso Against US dollar

Remittances from overseas Filipinos workers (OF) coursed through banks continued
to show strength at the start of 2011, rising year-on-year by 7.6 percent to  US$1.48 billion,
Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. announced. This
positive development reflected increased remittances from both sea-based and land-based
workers, with their transfers rising by 13.3 percent and 6.2 percent, respectively.

Remittance flows into the country remained resilient on the back of sustained
demand for skilled overseas Filipino workers in different destinations worldwide. The
Philippine Overseas Employment Administration (POEA) reported that, of the total approved
99,926 job orders for land-based workers for the period   1 January - 28 February 2011,
more than two-fifths represented processed job orders for service, production, and
professional, technical and related workers. The processed job orders are intended for the
manpower requirements in Saudi Arabia, UAE, Qatar, Taiwan, and Kuwait.  In its market
update, the POEA stated that the Department of Labor and Employment's Philippine

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

Overseas Labor Office in Rome, Italy, reported that a new quota decree has been signed in
November 2010, which will allow the entry of 100,000 foreign workers in Italy, of which
4,000 new hires are allotted to the Philippines. Meanwhile, the POEA also reported that the
country's seafaring industry is aggressively targeting to capture at least 50 percent of the
global requirement for seafarers in the future. To achieve this, the seafaring industry has
invested in world-class training modules and facilities to upgrade the quality of skills of
Filipino seafarers. 

The continued enhancement of financial services worldwide through tie-ups with

foreign financial institutions, establishment of remittance centers and marketing offices
abroad, as well as the stronger partnerships forged with correspondent banks and
branches/representative offices abroad also helped shore up the flow of remittances into
the country. The expansion of the remittance network indicated the continuing efforts of
local banks and other financial institutions to capture a larger market share of the global
remittance industry and provide safe, affordable and accessible fund transfer system for the
overseas Filipino workers and their beneficiaries.

The peso strengthened in the first trading day of the week as beliefs that the
economy would grow in 2011 given its positive fundamentals offset concerns over the ill-
effects of adverse offshore developments, such as the earthquake in Japan and lingering
unrest in selected countries in the Middle East and North Africa.

The local currency closed at 43.59 against the US dollar on Monday, up by 6 centavos
from Friday’s finish of 43.65.

Intraday high hit 43.56:$1, while intraday low settled at 43.72:$1. Volume of trade inched up
to $1.023 billion from $772.28 million previously.

Traders said external factors had been weighing down on the peso and other Asian
currencies. Nonetheless, they said, the peso has been expected not to depreciate and that
domestic factors have beefed up sentiment on the economy.

Traders and other economic players still expect the Philippines to post a decent
growth this year, aided by remittances and improving business and consumer sentiment.

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

In 2010, the economy grew by 7.3 percent, the fastest pace registered in over three
decades. (inquire.net)

IX. GENERALIZATION

The study, “The Philippine Peso-US dollar Exchange Rate: The impact of
Strengthening Currency”, aimed the following objectives: 1) to determine the economic
impact of the appreciation of Philippine peso; 2) determine the effect of the appreciation of
Philippine peso (consumption, investment, government spending, import, export, debt
servicing); 3)to determine the reasons behind the appreciation of the Philippine peso during
2009-2010; 4) to determine the role of the Bangko Sentral ng Pilipinas (BSP) on the Foreign
Exchange Market; 5) to determine the future movement of Philippine peso against the US
dollar. The significance of this study was to determine the impact of peso appreciation on
the economy. It shows the effect on different sectors of the economy.

It attempts to show the impact of strengthening peso against the US dollar and what
are the consequences behind it. It also attempt to show where should the government place
itself when the opposing interest of the public are at stake through Bangko Sentral ng
Pilipinas.

Based on the date gathered, the first hypothesis is accepted. The effects of
appreciation have a great impact consumption, government spending, investment, import-
export and debt servicing. There were two impacts on consumption, first is the value of
imported commodities are cheaper in terms of peso. Second, the purchasing power of dollar
remittances will decrease. In government spending, If peso appreciates, it has a good impact
in our external debt since our debt will decrease. We will pay less and that will affect our
spending. The remaining money that allocated for payment of external debt will be used for
government spending. More resources are available to spend for social and economic
development of our country. Peso appreciation will cause the exports become less
competitive in the international market that will result to less revenues in terms of exports.
Imported products will become cheaper that can cause the people to purchase more of it.
Another advantage of a strong Philippine Peso is that it would reflect a robust economy for
the country which could leverage itself to attract foreign investors in the country which

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

could provide significant inflows for investments to the country furthering improving the
economy. A positive outlook is very important to a country to seek investors to show
confidence in investing to country since their outlook would be one of the considerations
investors would consider. One of the advantage of the peso appreciation is the lower debt
servicing, in which, it lessen the external debt of the country.

The second hypothesis is also accepted. Philippine peso appreciation was caused by
several factors such as the robust economy of the Philippine as well as the increasing
amount of remittances from the overseas Filipino workers (OFWs).

The Bangko Sentral ng Pilipinas has the role of maintaining the inflation and has the
power to intervene in Foreign Exchange market. It is the tool being used by the government
in monetary policy.

Based on the information that was released by the BSP the peso is expected to
appreciate, prior to the events that struck one of the major Economic Partner of the
Philippines—Japan—and prior to the political instability from Arab nations, which is one of
the major source of dollar remittances of the country.

X. RECOMMENDATION
The researchers’ believe that the government should maintain the peso appreciate
so that it will lessen the burden of paying excessive debt--principal and interest. And to
maintain the prices of the commodity that are being imported at a low price, such as oil
which is vital in the daily economic activity and other commodity that is not produce in the
county.

On the other hand, the government should provide a OFWs remittance stabilization
fund—from the money that the government had saved in debt servicing—that pegged the
exchange rate between peso and dollar, because OFWs’ remittances are crucial in
maintaining the high value of the peso against the dollar and the effects that it will brought
to the economy. .

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 The Philippine Peso—US Dollar Exchange Rate: The Impact of Strengthening Currency

We cannot easily believe that a strong peso means a strong republic. So government
must look at different factors and learn before engaging the country in different risk. As we
also observed, the effect of peso condition in the sources of government funds is the same
in the impact of peso condition in government spending. If the effect in the sources of funds
is negative, the impact in the government spending is also negative. When the effect is
positive, the impact in government spending is also positive.

XI. REFERENCES
1. Bangko Sentral ng Pilipinas. (2008). Adjustments in the Face of Peso Volatility:
Perspective from the Past and Policy Directions.: Retrieved February 21, 2011
retrieved from
   http://www.bsp.gov.ph/downloads/Publications/2008/WPS200802.pdf
2. http://www.investopedia.com/ask/answers/08/what-is-foreign-exchange.asp
3. http://en.wikipedia.org/wiki/Foreign_exchange_market

4. http://www.bsp.gov.ph/financial/forex.asp
5. http://business.inquirer.net/money/breakingnews/view/20110314-325428/Peso-

rises-against-dollar-as-positive-view-of-local-economy-stays
6. http://www.philstar.com/Article.aspx?

articleId=565592&publicationSubCategoryId=66
7. Monetary Stability Sector of the Bangko Sentral ng Pilipinas (2006).The Exchange
Rate. Retrieved from
http://www.bsp.gov.ph/dowloads/publication/FAQs/exchangerate.pdf

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