Philippines reels under peso
strength By Joel D Adriano
MANILA - Philippine President Gloria
Macapagal-Arroyo couldn’t be happier these days.
The Philippines’ gross domestic product (GDP) grew
7.3% in 2007, its fastest rate in 31 years and
quicker than many of its Southeast Asian
neighbors.
But with the local peso’s gain,
there is no rejoicing for Filipino exporters and
migrant workers, who contribute around one-third
to total GDP and are fast losing competitiveness
and spending power from their dollar-denominated
foreign remittances.
The peso gained
almost 19% last year, pushing the local unit to
its highest in nearly eight years and making it
Asia’s best performing currency. In less than
three years, the peso has climbed from 56.40 to
the US dollar to around 40.50. This year the
currency
is expected to appreciate to 37 to the US dollar,
according to financial analysts.
That
appreciation is taking a heavy toll on Filipino
exporters, particularly in low value-added
industries. The National Statistical Coordinating
Board recently estimated that "in peso terms,
total exports plummeted to negative 4.9% last year
from the previous year’s growth of 9.2%".
Investment bank UBS last year warned that
the lack of diversification in Philippine export
products meant that the country was the most
vulnerable among Asian countries to a slowdown in
global demand. Electronics and semiconductors
account for 60% of Philippine exports, with
garments and footwear as a category a distant
second accounting for around 14%.
Fred
Escalona, executive director of the Confederation
of Philippine Exporters Foundation Inc, a local
industry group, said the problem was more serious
than has been reported. "A lot of export companies
are already closing or streamlining, especially
the small and medium-sized ones. More than 41
furniture companies have either consolidated or
closed down" because of the peso’s appreciation,
Escalona said.
Interior Basics, a
furniture company based in Mactan, off Cebu
island, and which exports to the US and Middle
East, reported that it had to cut staff from 400
to just 12. Another furniture company, which
Escalona declined to mention by name due to a
confidentiality agreement the confederation has
with its members, recently slashed its staff from
800 to just 80. Philexport, another trade group,
estimates that some 50,000 workers in small and
medium-sized businesses have lost their jobs since
2007 due to the peso’s appreciation against the
dollar.
Several foreign-invested firms
have been hit, reducing shifts from three to just
one a day in special export processing zones. US
electronic giant Fairchild, watchmaker Timex and
printer company Lexmark have all complained that
the peso’s near 20% appreciation in 2007 has
adversely affected their retooling and plant
expansion plans.
Families of overseas
workers, who annually receive and spend locally
billions of dollars worth of foreign remittances,
are also feeling the pinch as the same dollar
amount sent home is now buying less in peso terms.
The government estimates that overseas workers
lost 24 billion pesos (US$590 million) worth of
income last year due to the appreciation. The
central bank earlier estimated that migrant
workers would send home at least $14 billion in
2007, according to Associated Press.
Structural woes The
Philippines, of course, is not alone. Nearly all
regional currencies have recently appreciated
strongly against the fast depreciating US dollar.
The Thai baht, Malaysian ringgit and the
Singapore dollar all recently hit their highest
levels in a decade against the US dollar. Many
economies in the region are, like the Philippines,
struggling to stimulate more domestic demand-led
growth and gradually wean their economies from
their historical over-reliance on exports.
The Chinese yuan, which trades within a
narrow band to the US dollar, appreciated about 7%
and may strengthen about 8.5% to 10% in the next
12 months given forecasts for continued robust
economic growth and last year’s announcement by
the China’s Ministry of Commerce that a certain
degree of currency appreciation is tolerable. The
yuan has already advanced around 1.6% so far this
year.
Escalona said Philippine exporters
are watching closely at currency developments in
China because many Chinese products compete on
price with local exports, including furniture,
garments, footwear, low-end fashion accessories,
gifts, toys and home decorations. Low-cost Chinese
producers are now even pirating Filipino designers
so that they can compete in mid- to high-end range
products especially on furniture, fashion
accessories and decorations, he said.
"Even without the peso’s surge, it was
already difficult to compete with the Chinese," he
said.
Financial analysts point out that
the peso’s appreciation - unlike in several other
countries which have seen currency appreciations -
is actually a reflection of far-reaching
structural problems in the Philippine economy.
They say that peso’s rise has notably not been
attended by a surge in dollar inflows into the
Philippines, due to anemic imports, low capital
industrial spending and dismal foreign direct
investments.
Foreign investment flows into
the Philippines are currently the lowest in
Southeast Asia.
That differs from regional
competitors like Vietnam, where there is a high
demand for dollars both by exporters and
importers, including for capital equipment.
Thailand, on the other hand, recorded strong
export growth last year, due partially to the
country’s ability to diversify its exports away
from reliance on the US in recent years.
Business consultant and columnist Peter
Wallace chalks it up to the difference between
"real" and "virtual" strength in the economy.
Unless economic growth goes towards expansion or
new projects, and unless it creates jobs as
manufacturing-oriented export industries tend to -
neither of which transpired with the country’s
recent growth spurt - the benefits of GDP growth
are marginal to the broad working population, said
Wallace.
And because Philippine domestic
demand is significantly driven by remittances from
overseas workers, the peso’s appreciation is
simultaneously dampening exports and domestic
demand.
Central interventions For its part, the government is playing down
the adverse economic impacts of the peso’s rise.
According to central bank deputy governor Diwa
Guinigundo, the stronger currency has cushioned
the blow of rising oil prices and helped to keep
inflation down. He emphasized that gas prices
would have been higher by 2.32 pesos per liter if
not for the currency's gain. The central bank
recently reported that it spent around 41 billion
pesos in open market transactions to buy US
dollars last year in a largely failed attempt to
temper the rise of the Asian currency. Those
offshore transactions beefed up national reserves
to an all-time high of more than US$33 billion at
the end of 2007; Guinigundo said reserves would
have reached $43 billion if the central bank’s
foreign exchange swaps were included in the
calculation.
Still, Escalona and other
exporters insist that the rise has been too steep,
too fast and that export industries have not had
enough time to make the necessary adjustments to
remain competitive. "In fact, it is a triple
whammy for Filipino exporters: a strong peso, high
crude prices and the slowdown in the US economy,"
he said. The US at present purchases 79% of
garment and footwear and 20% of woodcraft and
furniture exports from the Philippines.
The government has so far tried to bridge
the gap through stop-gap measures, including a
state-supported currency hedging program. Escalona
said a foreign buyer usually pays only 10% for an
order to be delivered in the next three months,
but with the new program the 90% balance will be
sold forward to a bank with hedging facilities,
such as the government-owned Development Bank of
the Philippines, at the present exchange rate to
help protect their margins.
The government
has also canceled or reduced certain trade-related
taxes and fees, such as a 1,620-peso "travel tax"
and export fees for clearances, inspections,
permits and other documentation requirements. Fees
for quarantine and x-rays levied by the Bureau of
Customs were recently reduced from $50 to $10,
while charges administered by the Philippine Ports
Authority were reduced by as much as 90% from 400
pesos per container to 40 pesos.
At the
same time, Escalona said his organization is
trying to further wean Filipino exporters from
their traditional reliance on US markets, which
accounted for 35% of total exports in 1997 but was
down to 18.3% in 2006. Supported by the Dutch
government, his organization aims help exporters
to better tap the EU market, which accounts for
only 2% of the Philippines’ total exports, due to
the EU’s more stringent import standards and
various non-tariff barriers.
But it's
unclear if those government efforts will be able
to bridge the emerging economic gap, particularly
considering many Philippine exporters were already
losing competitiveness to mass producers in China
and India before the peso’s rise. The Philippines,
more than most, seems set to suffer from the new
global currency order emerging in the wake of the
dollar’s depreciation.
Joel D
Adriano is an independent consultant and award
winning freelance journalist. He was a sub-editor
for the business section of The Manila Times and
writes for Asean BizTimes, Entrepreneur
Philippines, Masigasig and People’s Tonight.
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