Does a weakening peso mirror weakening economic fundamentals?

A number of weeks ago, Filipino netizens reacted explosively towards Ilocos Norte Representative Sandro Marcos’s comments regarding the weakening Philippine Peso (PHP) against the US Dollar (USD). Quoting the neophyte congressman, “The peso is weak, not because that it is weak, but because the dollar is strong.”. These words became meme fodder for Filipino netizens, denigrating what they’ve decided is the younger Marcos’s limited intellectual abilities. In hindsight, are these tirades true, or can they be thrown back to these pundits who seem to have no degree of comprehension as to how monetary policy works? Nevertheless, this graduate of London School of Economics definitely knows what he is saying about economic policies and foreign exchange rates.

Monetary policy is an economic policy that is in the hands of the Central Bank. Its key lever one that is used to control of interest rates. These interest rates directly affect the ease of borrowing money, where it would also affect how easy it would be to pay credit card bills and housing mortgages. From a macroeconomic perspective, low interest rates incentivize creation of businesses and generation of employment opportunities. Technically, this is called quantitative easing, where money is virtually created out of thin air through the central bank. On the other hand, high interest rates aid in curbing inflation and is a traditional tool in attempts to control an overheating economy. This would be called quantitative tightening, where money supply becomes more regulated by the central bank.

Central banks all over the world bear responsibility for monitoring and controlling inflation of their respective currencies. Generally, a 2% inflation rate is ideal, where money moves relatively well in an economy that grows under optimal conditions. When the inflation rate go below 0%, the situation is called deflation, where basic commodities become cheaper through time. It sounds tempting to have more affordable items in the market, but deflating currencies discourage consumers from purchasing goods and services, which can lead to unemployment and may hamper economic growth. This can be observed with the Japanese Yen (JPY), where its economy seems to have floundered since the 1990’s. The Bank of Japan continually attempts to intervene through quantitative easing measures, where they increase the supply of JPY in the market by issuing zero or near-zero interest rates, even until now. Despite this, consumer price indices all over the world, which serve to measure inflation, have consistently risen in numerous countries for the past months.

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Rising global inflation rates can be attributed to three possible reasons. The first reason would be the massive programs instituted to stimulate the economy during the pandemic, which compelled finance ministries and central banks to engage in quantitative easing measures. This increased money supply were paired with economies that didn’t deliver the promises of productivity, thus spurring up inflation rates. Supply chain bottlenecks, specially for semiconductors and electronic gadgets can be the second reason. With Beijing still applying their Zero-Covid policy, the world’s factory has become more unpredictable, thus raising prices of those products. Finally, the geopolitical conflict in Eastern Europe is also causing inflation because Russia is a significant global energy player as a hydrocarbon exporting country. With Western Europe weaning itself from Russian hydrocarbons, they engage in bidding wars with other countries in the purchase of oil and gas from alternative sources in Qatar, Algeria, and the United States. This auction-like situation in the global hydrocarbon market contributes to these inflation rates.

National governments can generally act on inflation rates by recalibrating fiscal policies that influence the movements of the market. However, this entails tremendous amounts of political maneuvers, consensus-building, and concessions, which can be both time-consuming and politically unpopular. This can be observed when the British pound slumped when then-UK Prime Minister Liz Truss and her then-Chancellor of the Exchequer announced their mini-budget program, which attempted to cut taxes, in the hopes of spurring economic growth. Such counterproductive measures in their fiscal policy witnessed the careers of these two Members of the Parliament flounder, as UK Prime Minister Rishi Sunak ended up becoming the newest resident of 10 Downing Street.

Recalling how divisive fiscal policies can be in the realm of politics, the Central Banks’ action of raising interest rates seems to be the easiest path. However, they have another power under their sleeves to prop-up the value of their respective currencies, and it is by selling foreign exchange reserves. In the case of the Bank of Japan, which has been hesitant to raise interest rates, they ended up purchasing JPY from the international market by selling a portion of its foreign exchange reserves. This intervention temporarily increased the value of the JPY vis-à-vis the USD. However, a notable currency that had strengthened is the Russian ruble (RUB). Despite international economic sanctions slapped on Russia that greatly devalued its currency for a few weeks, massive interventions by the Bank of Russia were put in place, which generated demand for the Russian currency. These interventions include limiting capital flight from Moscow, and ensuring that purchasing Russian hydrocarbons would utilize the RUB. Notwithstanding its strong currency, Russia’s economic outlook still looks bleak.

America’s Federal Reserve (Fed) has been pretty aggressive in observing the consumer price index of the United States as Chairman Jerome Powell is seeking to hike interest rates, which will further increase demand for USD in the international market. Until US inflation hovers around 5%, the Fed will most likely continue to increase interest rates, and with the USD’s preponderance in global trade, its reverberations will be felt all across the world. With such, the PHP will continue to weaken against the USD, unless the Bangko Sentral ng Pilipinas will incrementally raise interest rates by a few basis points that would not shock the local Philippine economy.

Beyond these turbulent times, the current standing of the Philippine economy seems to be relatively stable. Unemployment rates seem to be manageable, and inflation rates in the Philippines are lower in comparison to other major countries, albeit a little higher from its target of 2%. The country’s solid foreign exchange reserves also serve as a good cushion, which is currently valued at 8-10 months worth of imports, and is even expected to increase further as international remittances to the Philippines are expected to flood the country come December. Needless to say, the Marcos Jr. administration must adopt a conservative fiscal policy by reducing dependency on issuing government bonds, and by continuously investing in areas that will make the Philippine economy more productive in the near future.

Analyzing these observations from other countries, the young congressman from Ilocos Norte does understand his political economy way more than these professional Filipino charlatans, who are only good at sensationalizing content without the necessary contexts. Indeed, ignorance is bliss.

10 Replies to “Does a weakening peso mirror weakening economic fundamentals?”

  1. The common Filipinos would NOT really understand the nature of economics because our educational system is not met on the global standards, therefore they become more dumb, ignorant and lacking of common sense.

    As for the quote of Cong Sandro Marcos, I’ll gonna make my own but this time on the dysfunctional education and lack of common sense of our kababayans: ” The Filipinos are weak that’s because the Filipinos are not weak but the Filipinos are too dumb because our educational system in the Philippines are somewhat too obsolete and too lax for teaching to their Filipino students and they’re intellectual went bankrupt.”

    There you go, problem solve.

    1. The question about the weakening of peso ended up on Filipinos being dumb? What kind of opinion is that? The article is about economic fundamentals in relation to the fluctuating or weakening of peso and you came up with that dumb opinion?

      Want to try again and make yourself clear?

  2. Fortunately, education by Youtube is here. From the following quick primer on economics, we can understand the basics:
    Economy = production + consumption + capital investments
    3:00 – 9:00 min

    Financial literacy is a choice: would you rather watch educational videos, or just waste your hours away playing video games? Education is practically almost free already. But many Filipinos have made the easy and fun choice of being entertained rather than getting educated.

  3. The only way to compare the Marcos statement is to compare the peso to many different currencies. The peso is doing terrible against the dollar, but it seems to be relative stable vs other currencies.

    This whole article is just about economic theory of various world powers with little analysis of the Philippines positions.

    The average filipino does not care about the economies of any other country. They care that very little is produced in the country so everything is more expensive.

    What is Sandro Marcos’ plan to improve the country?
    People like this author seem to think someone put into power because of nepotism is someone to listen to….. so it would be nice to read the plans

    1. @Tim Well the only thing that the Filipnos could produce it are lousy telenobelas, joining the Miss Universe or joining in sports with “Pinoy Pride” tagline.

      And how cheap is that? We’re already in bankrupt not only in our pockets but also in our brains as well!

      1. In general I think the people are relatively intelligent, but 80percent (my guess) of the country has not been able to overcome the hurdle of voting for family dynasties.

        One family finally loses favor in a city/town and another family just takes its place. It is truly sad how the people let that happen.

        A country/town/city ran by one or two families will rarely be successful ( yes I know Singapore was successful, and I can name 100 examples of places that were not).

        I long for the day where the people in the Philippines vote for the content of the character instead of the name or how much money the candidate is giving…….

        It is the true flaw of the Philippines

  4. Here’s an economic theory: There’s probably a good number of people who just don’t want to join in the game of greed. And it’s not because of a lack of ability or weakness…or stupidity.

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