Some Positive Effects of Peso Appreciation
Posted by butalidnl on 18 January 2008
The negative aspects of the dollar’s decline vis-a-vis the 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 dollar’s depreciation 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.
Let us name some positive effects of the dollar depreciation.
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 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. heavy construction equipment, computers, etc. This would help stimulate the economy, and could also lead to decreased prices for consumers.
see also Peso-Dollar Rate