Why you should know about exchange rate?

What you should know about ‘exchange rate?

The exchange rate is now being discussed on various social media platforms due to the depreciation of the peso against the dollar.

You have probably heard a lot of opinions about this. There are those who say it is not good because it affects the rising price of goods.

There are also those who believe that it is good, especially for families who depend on remittances or remittances from their relatives abroad.

But what exactly is the truth behind the depreciation of the peso?

What exactly is the exchange rate?

The exchange rate is the equivalent of a domestic currency against a foreign currency.

If we put it in the Philippine context, the current exchange rate of the peso against the dollar is at 54 pesos per US dollar (USD). This is the lowest recorded change in the last 12 years.

1. The data shows the average per month so it does not exceed P54 / USD.

For everyone's knowledge, the weakening of the peso against the dollar is not new to us.

In fact, in 2013 the peso against the dollar began to weaken, coinciding with the weakening of the various currencies of our neighboring countries in the ASEAN region.

But in 2016, most of them started to recover except for the Philippine peso (Figure 2). So it is not true that the depreciation of the peso is just a "global trend".

2. The Peso is the second weakest currency in ASEAN.

Why does the exchange rate fluctuate?

Currently, the Philippines implements a floating exchange rate, in which the value of the peso against the dollar depends on the movement of their respective demand and supply in the market.

For example, if we buy imported goods in the US, it should only be that the money we pay in this country is in US currency, or in dollars.

Therefore, excessive importation (importation) causes the dollar to release rapidly in our country. This leads to a decrease in the supply of dollars against the peso.

According to basic Economics, a decrease in supply causes an increase in the value of an object. For example, the price of rice is more expensive when its supply becomes limited during a crisis or disaster.

We can also use this concept in currencies. When the supply of the dollar becomes less or less relative to the peso, its value against the peso increases, resulting in a lower exchange rate or ‘high’ exchange rate.

According to Budget Secretary Benjamin Diokno himself, the depreciation of the peso is due to our rising imports caused by Build, Build, Build (BBB) ​​—the main economic program of the Duterte Administration.

BBB affiliate projects require materials (such as construction materials) that we still need to import from abroad.

Is the weakening of the peso bad or good?

One of the benefits of ‘high’ exchange rates is the increasing value of OFW remittances.

If your dad in California sends you 1,000 USD per month, increasing the exchange rate from 53 pesos to 54 pesos will give you an additional 1,000 pesos.

Although the rising exchange rate has a positive effect on families dependent on remittances, you should also know that it has an effect on rising commodity prices (inflation).

Many sectors of our economy depend on imported goods. One that is perhaps most affected by the high exchange rate is the transportation sector. When the peso weakens, petroleum products become more expensive in the global market, as well as the cost of drivers and drivers, so expect fares to increase.

One of the things we often hear about the good effect of the ‘high’ exchange rate is the possible increase in exports.

Based on the theory in Economics, when the value of domestic currency decreases compared to the value of foreign currency, the products of a domestic country become cheaper in the eyes of foreigners.

A good example of this is China. China has been accused several times of deliberately lowering the value of the Yuan to keep their exports strong.

But if you look at our exports data, you can see that our exports are not growing much even though the peso is falling (Figure 3).

What does this mean? That the theory of economics is wrong? Not so, because there are other factors — such as price and product quality — that can affect our faint exports in the global market.

Another disadvantage of the peso is the increase in the value of our external debt (or our external debt). According to the Central Bank of the Philippines, it has reached 72.2 billion USD.

Therefore, lowering the exchange rate has both positive and negative effects. Perhaps all we need to think about is what effect the whole country is dominating and feeling more.