EXPLAINER: The Increasing Dollar-Peso Exchange

By Jude Aldrich S. Allaga

It takes only an American dollar to feed a child dinner, but a Philippine peso to leave them starving for the night. This is the plight of today’s Philippine Peso: how its value in the foreign market dictates which Filipinos can get by, but more so, who won’t.


The Peso’s Pedigree

What once was labeled as “salapi,” the Philippine currency was represented by gold bits used within the country’s rural island communities, until the Spaniards introduced the “Spanish Peso,” becoming the primary currency in 1565. The “salapi” was retained but seen only as a half-peso coin.

The “centavo” coin was introduced once the Philippines claimed its independence in 1898, but lost its usage during the American colonization. Spanning two world wars and Japanese occupation, the Philippines finally regained its independence in 1946 and established the Bangko Sentral ng Pilipinas three years later.

Now, we retain the “Peso” currency, with “centavo” as our “sentimo” or monetary subunit.

Explaining the External Exchange

The Philippine Peso maintains its foreign relations, however, as it can be exchanged into different values depending on other currencies; this is the “exchange rate,” which, described by Bangko Sentral ng Pilipinas, is “the price of a unit of foreign currency in terms of the domestic currency.” 

This exchange rate links international markets and investors and affects the price and inflation of basic commodities such as salt, rice, and sugar and imports such as crude oil. Its demand, or appreciation, alongside its depreciation, or devaluing, holds weight and cements the Philippines in the international bank. Furthermore, an appreciation or depreciation of the Peso impacts trade, service costs, and other external sectors.

Yet, despite the mandate that both the government and the Bangko Sentral ng Pilipinas may have on our monetary exchange, they cannot dictate the exchange rate, but the Philippine Peso’s participation in the foreign exchange market does.

For instance, when buying US dollars while demand for it is quite low, it would cost less than when buying US dollars for imports. Thus, an appreciation for the US dollar would mean a depreciation of the Philippine Peso. Aside from demand and devaluation, however, many other factors contribute to our current fluctuations in exchange rates.

Ties of Trade 

In relation to the demand for currency, demand for a country’s exports can likewise increase, making their currency more appreciated or “firmer.” In other words, an increase in Philippine exportation would require less Philippine Pesos per US Dollar. The Philippines, which heavily relies on imports however, suffers tremendously as a demand for the US Dollar rises instead.

     1) Socioeconomic Stability
  • A country with a stable economy attracts heaps of foreign investors seeking to invest their capital; economic stability equates to business stability. In addition, broader relations with foreign investors means that the demand for the Philippine Peso will rise. National crises however, dismay foreign investors from investing in a country, as socioeconomic issues such as politics could severely damage the economy, and in doing so, their investments. Such was seen as President-elect Ferdinand “BongBong” Marcos Jr. officially nabbed the presidency.
     2) Debts and Deficits

  • A “deficit,” says Investopedia, pertains to when a country “spends more on foreign trade than it is earning.” This impacts a country’s current account- or the balance of trade between said country and other nations -ultimately purchasing for what you cannot afford, landing countries into a cycle of debt wherein the poorer country is forced to purchase a foreign currency just to pay off said debt; the poorer country is indebted now to the nation it loaned from and the cycle continues. This creates a depreciation of the poorer country’s currency, while the demand for said foreign currency rises. The Philippines has not been new to this cycle, however, and has been trapped in a continuously aggravated debt of 12.68 trillion Philippine Pesos.

     3) Sizing its Significance

  • The Philippine Peso can fare either well or poorly, depending on its foreign exchange. A firmer Peso would help reverse, or at the very least, lower a rising inflation rate. Foreign debt would simultaneously lower, allowing us to create reserves for foreign currency and even prepay foreign liabilities. Although a firmer Peso would seem swell for Filipinos, it would, for instance, fend off foreign investors who would earn less Pesos for one Dollar. At the same time, it could potentially damage tourism- a field the Philippines excels at -as foreigners would essentially have to pay more to travel in the Philippines.

The Currency’s Current Cornucopia

As of writing, the exchange rate between the US Dollar and Philippine Peso is 1 : 56.35; the Peso is at an all-time low since the early 2000s and is expected to continuously decline due to the economic recession brought by the pandemic, the ongoing Russo-Ukrainian war, and unhinged corruption in our trading sector.

The predicament of the Philippine Peso further proves that the gap between the rich and the poor doesn’t just lie between nations; it blatantly divides those Filipinos who can stay afloat despite a falling currency, but more so, those who won’t.



References:

Q&A ON THE EXCHANGE RATE IMPACT: HOW MUCH, WHAT WE CAN DO, AND WHAT 'S NEXT. (2007). https://www.bsp.gov.ph/Media_and_Research/Primers%20Faqs/fximpact.pdf

Philippine Peso Slides to Three-Year Low as Support Caves In. (2022, June 2). Bloomberg.com. https://www.bloomberg.com/news/articles/2022-06-02/philippine-peso-slides-to-three-year-low-as-support-caves-in

Philippine Currency Guide: History, Exchange Rate, and Transfers. (2022, May 23). Remitly. https://blog.remitly.com/finance/philippine-peso-guide-peso-rates-exchanging-transferring/

Understanding Exchange Rates: A Guide for Anyone Sending Money in 2022. (2021, January 2). Remitly. https://blog.remitly.com/finance/exchange-rate-guide/

Domingo, R. W. (2022, April 7). Trade gap may weaken peso to 54:$1 this quarter. INQUIRER.net. https://business.inquirer.net/345413/trade-gap-may-weaken-peso-to-541-this-quarter#ixzz7YWC9uyAv

Sarao, Z. (2022, June 23). PH peso further weakens to 54.7 against US dollar. INQUIRER.net. https://business.inquirer.net/351156/ph-peso-further-weakens-to-54-7-against-us-dollar

Lioudis, N. (2019). How does the balance of trade impact currency exchange rates? Investopedia. https://www.investopedia.com/ask/answers/041515/how-does-balance-trade-impact-currency-exchange-rates.asp

Twin, A. (2021, June 8). 6 Factors that Influence Exchange Rates. Investopedia. https://www.investopedia.com/trading/factors-influence-exchange-rates/

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