The government’s economic managers have said that the weaker peso should not worry Filipinos as this would even translate into higher tax revenue and additional monetary benefits for overseas Filipinos workers (OFWs) and the country’s thriving business process outsourcing (BPO) sector.
Finance Secretary Carlos Dominguez III said that even with a stronger dollar, imports of capital goods continue to increase which translates into higher revenue collections for the Bureau of Customs.
He said that the main driver of the foreign exchange rate are speculations over the planned three-phase increase in interest rates by the US Federal Reserve, which has prompted investors to migrate their dollars to the United States and resulted in a drop in demand for the Philippine peso.
“Our imports have been increasing, and the reason they are increasing is mainly not for consumer goods but for capital goods. So there are more factories being set up and more equipment, especially electrical equipment, being imported,” Dominguez said at a recent hearing of the House ways and means committee on the proposed Comprehensive Tax Reform Bill (CTRP) bill of the Duterte administration.
“The demand for those are quite high because there are opportunities for providing more electricity, more factories locally. So although it will affect somehow the imports, the demand for the imported capital goods is still very strong,” he added.
Dominguez said another beneficiary of the peso depreciation is the BPO sector, which combined with OFW remittances, contribute about $50 billion a year to the Treasury.
“So a one-peso depreciation means there is P50 billion more of potential demand. And as you know, this money goes into buying apartments, educating the kids, buying cars. So it’s actually beneficial to us, more beneficial I think than negative,” Dominguez said.
But Dominguez assured lawmakers that the government’s fiscal managers are “looking at the peso depreciation carefully and are aware that the peso has depreciated over the last few months.” Budget Secretary Benjamin Diokno said that at the macroeconomic level, a one-peso depreciation would yield a net gain of P7.2 billion for the state coffers because revenues will increase by P9.2 billion as a result of higher collections by the Bureau of Customs, while the foreign debt service will only have a corresponding increase of P2 billion.
“So the net gain will be P9.2 billion in additional revenues minus P2 billion in higher debt service, (which gives us) P7.2 billion,” Diokno said.
Dominguez also pointed out that as a percentage of GDP, the country’s debt service has been on a downtrend, from a high of 90 percent of GDP to only 40 percent. “So we are in a very good position debt-wise,” he said.
Diokno agreed, saying that “The traditional rule of thumb is that if you have a debt-to-GDP ratio of 60 percent or lower, you’re in good shape.”
Diokno and Secretary Pernia of the National Economic and Development Authority (NEDA) said that their projection is to bring down the debt-to-GDP ratio to only 35 percent by 2022, which they both said is attainable despite the deficit. Dominguez said the country’s strong fiscal and debt-to-GDP position amid a peso depreciation has been recognized by international markets, which bought $2 billion worth of 25-year global bonds at a low interest rate of 3.7 percent issued by the Philippine government last January 20, the first fund-raising activity under the Duterte administration.
“Even though interest rates had gone up worldwide already, we are still paying at a lower interest rate than other countries because they recognize that our financial system is very strong and that our debt is very, very manageable,” Dominguez said.
Diokno said a peso depreciation would be advantageous to families of OFWs as they get to consume and spend more, and thus, would bring more money into the economy.
“As the peso depreciates, the OFW families will have more money in their pockets, they will use that to consume. But part of that also will be recovered in terms of higher value-added tax (VAT) collection because value-added tax is a tax on consumption. So it’s a net gain,” Diokno said.
Dominguez said that while oil prices are likely to increase with a weaker peso, the international price of crude has not moved significantly to dramatically affect pump prices.
“Internationally, crude oil (price) is going up and down also because of demand. There’s more crude in the market than there was in the past. So prices have been very moderate abroad. So there will be some increase but it’s not going to be that significant,” Dominguez said.
Trade Secretary Ramon Lopez said a peso depreciation would act as a sort of protection for local industries and a boon for exporters.
“As we have experienced in the manufacturing sector, as long as the depreciation is gradual, the depreciation is also benefiting and increasing consumption spending. It spurs economic activity, more purchases, as we’ve experienced a consumer spending uptrend whenever there is a depreciation,” Lopez said.
Pernia said that the Philippines’ robust service exports has helped contribute to the country’s positive external current accounts. (DOF)