Peso to strengthen

The peso-dollar exchange rate has deteriorated to almost 50:1 in the last week. This is largely caused by the financial crisis that has gripped the world recently. And it is natural for many to wonder if this trend will continue; perhaps even reaching 55:1 or thereabouts.I believe that the trend of the dollar strengthening, vis-a-vis the peso and most other currencies, is about to come to an end. Here are some of the factors behind the coming resurgence of the peso.

Rush of funds to the dollar ending
In the last weeks of panic, US’ stockmarket and other portfolio investments have been divested, and when these investments are taken back into the US, they raise the value of the dollar. As long as the panic continues, the dollar will continue to strengthen.
When the stock and capital markets calm down, this flow of dollars into the US will also slow. This would result in the dollar stabilizing ,and then weakening vis-a-vis other currencies.

Overseas Filipino remittances
An additional factor for the peso is that remittances from Overseas Filipinos is expected to increase in November – December, as it usually does. This Christmas peak in remittances usually causes the peso to strengthen vis-a-vis the US dollar.
The present crisis will not negatively affect the jobs of Overseas Filipinos.

Increased Foreign Investments
The Philippine financial system, and as a result the overall economy will not suffer too much from the crisis. The main negative effect will be a possible decline in exports due to the lower demand from the US and other countries. This makes the Philippines a good destination for foreign investments. Already, Middle Eastern companies are increasing their investments in the Philippines. Companies from other countries will likely follow.

The combination of the above factors will result in the strengthen of the peso vis-a-vis the US Dollar.

US recession will benefit the Philippines

The US recession, which has spilled over into causing a global financial crisis, could not help but affect the Philippine stock and financial markets. The global financial market crisis affects the country through the dollar-peso exchange rate (the peso has weakened) and a withdrawal of some foreign investments. At the same time, we could expect the demand for Philippine exports from the US to decrease as a result of their recession.

The crisis is bad, but I think that in the end the Philippines stands to benefit from it. We are quite used to banking crises, and to the credit of our monetary authorities and banks, the Philippine economy will not suffer too much from even the present crisis. The Philippines will benefit from the US recession in the following ways:

Increased Investments

With the US in recession, international investors will be wary of putting their money in US companies. Many will shift their investments to the third world, such as those in Asia. The Philippines, with its relatively stable economy, will surely benefit from this increased investment.
China, which is getting wary of putting most of its foreign reserves in American bonds, will probably put more of its export earnings into investments in neighbouring countries. It is also expected to stimulate its domestic economy – and this in turn, will open market opportunities for the Philippines.

The Business Process Outsourcing industry stands to gain from a recession in the US. With a recession, US companies will be looking for ways to lessen their operating expenses, and outsourcing some of their operations is one of these. It is not only call center operations, but operations like accounting, data entry, etc. which will find their way to the third world including the Philippines.

Stronger Peso

When the financial crisis is over, the relatively large margin between interest rates in the US and the Philippines will encourage “carry-on” investors – those who borrow money in one country and invest in bonds in another. The Philippines benefited from this in the last few years, causing a big influx of dollars, which in turn strengthened the Philippine peso.
The United States’ national debt has exceeded $10 trillion, and the recession will mean that their government will end up borrowing even more – mostly from foreign sources. This heavy debt burden will result in the dollar weakening vis-a-vis most currencies.
The increased investment flows, plus the weakening of the US dollar, will mean that the peso will strengthen. This is a good thing, especially since the Philippines is a net importing nation.

Cheaper Imported Commodities

The US recession will cause the prices of many commodities e.g. oil, steel, wheat etc. to decrease. Already, we see that the price of oil has declined from almost $150/barrel to around $70 today. This will result in a lower cost of doing business, and lower cost of living for Filipinos. This in turn will help to stimulate the Philippine economy.

Global Crisis? Not for the Netherlands

The stock markets are crashing today, mainly as a result of the international credit crisis. This would make many people think – but from what I see in the Netherlands, people don’t seem too worried. Except, of course, those Dutch who had put their savings with Icelandic company IceSave (the Dutch government assured depositors that they are working to ensure that peoples deposits up to Euro 100 thousand will be refunded). True, a drop in the stock market will eventually affect pensions and pension contributions – but this will only kick in after the stock market is down for a year or two – so there is plenty of time for the stock prices to recover and leave pensions alone.

The Fortis Bank affair ended well for the Netherlands. The Dutch government ended up buying Fortis-Netherlands and the ABN AMRO bank (Fortis bought the Netherlands operations of ABN AMRO in 2007 for Euro 24 billion) for a total of Euro 16 billion. The Dutch are happy about this, because it returns ABN AMRO to Dutch ownership, and at a relative bargain at that.
The subprime mortgage crisis has left Dutch banks relatively untouched. ING bank had bought none of the “toxic”stuff, and other banks had written off all of what they had (which was not much) in one go (unlike the US banks which did this slowly).
The Dutch have a lot of confidence in the stability of their banks, and that their money in these banks are safe. (Just in case, the Dutch government has declared that it insures deposits up to Euro 100 thousand.)

The Dutch housing market is not affected by the crisis. While some developers are complaining that they are affected by high borrowing costs; this has not affected the prices of houses. One should also note that mortgage costs etc affect the Dutch much less than Americans, since a smaller percentage of the people own houses. Also, it is next to impossible to get mortgages here that are beyond one’s capacity to pay – the banks will only cover a maximum of 70% of the cost of the house (requiring the home buyer to make a 30% down payment), and the price of the house should not exceed 4 1/2 times one’s annual income. Thus, a subprime mortgage problem is quite impossible here.

The other crisis – that of the “real economy” is also not too much of a problem. The US recession will affect this country a bit; but despite this the IMF projects that the Dutch GDP in 2009 will grow by 1% (compared to 2.3% growth in 2008). Imports by the US will fall somewhat, but the bulk of the country’s trade is with other EU countries. And the expected reduction in jobs is also not too alarming; the country is expecting many people to retire in the next few years, and the “crisis” will help avert a labor shortage.

Petroleum prices have risen, as elsewhere, but by only a little. The gasoline price rose from about Euro 1.40/liter 2 years ago, to about Euro 1.70/liter when oil was almost US$ 150/barrel. People with cars felt the price rise, but there was no real pain. Now, the price of gasoline is going down.

All in all, the Netherlands is going to only feel the crisis a little.