Philippine economy

[ANALYSIS] Why the stronger peso mirrors a weaker PH economy

JC Punongbayan

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[ANALYSIS] Why the stronger peso mirrors a weaker PH economy
'[There's] not much demand for dollars since Filipinos aren’t traveling and investing abroad as much as they used to'

A stronger peso is not necessarily good.

Amid the COVID-19 pandemic, the Philippine peso has strengthened against the US dollar (Figure 1). 

From P50.9 a dollar in January, the exchange rate has gone down to P48.1 a dollar in November — a 5.5% appreciation of the peso.

This is hardly the first time our currency strengthened against the US dollar by this much. There was an even steeper and longer peso appreciation stretching from 2005 to 2008, and a more muted appreciation from 2009 to 2013. 

The peso’s recent strengthening is but a continuation of a longer trend that started back in late 2018.

Figure 1.

Still, the continuous appreciation of the peso from May 2020 is quite striking, as well as the fact that the peso is now one of ASEAN’s strongest currencies.

What explains this trend? And is it good? Far from signaling our economy’s strength, the stronger peso actually betrays our economy’s present weaknesses.

Demand and supply

By telling us how many pesos you have to give up to get a dollar, the peso-dollar exchange rate simply represents the price of a US dollar.

As with any other market price, this exchange rate is intricately tied to the forces of demand and supply.

For instance, you can expect the price of a dollar to go down (say, from P50 to P45 a dollar) if there’s weaker demand for it. In this case, there’s an appreciation (or “strengthening”) of the peso.

Meanwhile, you can expect the price of a dollar to increase (say, from P45 to P50 a dollar) when there’s a lower supply of it. Hence, a depreciation (or “weakening”) of the peso.

Weak imports

Arguably the biggest factor behind the peso’s recent strengthening is the anemic demand for imports. 

When Filipinos lost their jobs and incomes because of the pandemic, they refrained from buying stuff from abroad. This dampened the total demand for dollars that can be used to pay for such imported goods. 

More significantly, imports of capital goods and raw materials — essential for production — have also been derailed by the pandemic.

Figure 2 shows that the growth of imports plunged to -65.3% in April. Trade bounced back since, but as of September imports are still 16.5% lower than the same month last year.

By contrast, exports have recovered in September, growing again by 2.25%. This reflects the general recovery of international trade, as well as the gradual reopening of our trading partners.

But for as long as imports remain depressed because of the ongoing economic downturn, the demand for dollars will continue to weaken, and the peso to strengthen. 

Apart from weak import demand, there’s also not much demand for dollars since Filipinos aren’t traveling and investing abroad as much as they used to. 

In all these senses, a strong peso really mirrors the economy’s weakness.

Figure 2.

More borrowings, fewer remittances

On the supply side, lots of dollars have flowed in because of the Duterte government’s new foreign borrowings, in a bid to combat COVID-19 and its myriad effects. 

As of November 23, our government has amassed a total of $10.615 billion (or about P511 billion) in new foreign loans and grants, as well as substantial proceeds from the sale of global bonds.

But this inflow of dollars was counteracted by sizable outflows, too.

For example, we saw a record contraction of remittances from overseas Filipinos (OFs). Figure 3 shows that, for the first time in many decades, the 12-period moving average of remittances has shrunk.  

Of course, this is on account of the fact that some 310,000 OFs have been displaced and repatriated since the start of the pandemic. Thousands others have found themselves jobless and stranded abroad. 

If OFs can’t send money back at home, this will hamper consumer spending and derail our economy’s recovery. The resulting drop in the supply of dollars tends to weaken the peso. 

Figure 3.

Other than weak remittances, dollar inflows were also tempered by anemic investments (especially portfolio or “hot money” investments), tourism receipts, and export earnings.

On balance, the supply of dollars has generally gone up. This is supported by the balance of payments surplus recorded by the Bangko Sentral ng Pilipinas in the first half of this year, as well as the steady rise in gross international reserves.

This, together with the tremendous decline in the demand for dollars (due mainly to weak import demand), invariably led to a stronger peso.

Winners, losers

Any movement of the exchange rate presents both winners and losers. 

The recent appreciation of the peso is a boon to anyone who imports, because foreign goods become relatively cheaper to buy. But it’s also a bane to anyone who exports, since they receive lower prices for the things they sell abroad. 

By hurting exports — which feed directly into our nation’s total output — the stronger peso spells a loss of trading competitiveness for our economy. 

Figure 4 shows that, in real terms, the peso has appreciated more than any other ASEAN currency of late — save for the Myanmar kyat. This means our exports are becoming increasingly expensive relative to the exports of our neighboring countries.

Figure 4.

A protracted recession will almost certainly spell a further strengthening of the peso and a further deterioration of our competitiveness.

But a quick recovery presents a mixed bag as far as the exchange rate is concerned.

On the one hand, economic recovery could bring with it a massive wave of imports, which will weaken the peso but prop up domestic consumption and production.

On the other hand, if OFs get back on their feet in the next few years, we might see a return of strong remittance inflows. But this could strengthen the peso and hurt exports yet again. 

Don’t obsess over the exchange rate yet

Changes in the peso-dollar exchange rate are a confusing if not misleading gauge of the economy’s health. Just as a stronger peso is not always good, a weaker peso is not always bad.

Rather than obsess with exchange rate movements, we will do better to focus on shoring up Filipinos’ incomes and ending the recession as soon as possible. 

First and foremost, we ought to pressure government to continue addressing the pandemic. The fate of our economy rests on the eradication of COVID-19.

But at the same time, we need government to spend aggressively on economic aid that will not just tide over displaced OFs and the poor, but also support the tens of thousands of embattled businesses about to go under. 

Unfortunately, the 2021 budget — on which the economy’s recovery hinges — is badly designed and ill-equipped to fight the recession. (READ: Why you should be alarmed by Duterte’s 2021 budget)

We can focus on the exchange rate again once a sense of normalcy returns. The first order of business is to climb out of this economic sinkhole. –

JC Punongbayan is a PhD candidate and teaching fellow at the UP School of Economics. His views are independent of the views of his affiliations. Follow JC on Twitter (@jcpunongbayan) and Usapang Econ (

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JC Punongbayan

Jan Carlo “JC” Punongbayan, PhD is an assistant professor at the University of the Philippines School of Economics (UPSE). His professional experience includes the Securities and Exchange Commission, the World Bank Office in Manila, the Far Eastern University Public Policy Center, and the National Economic and Development Authority. JC writes a weekly economics column for He is also co-founder of and co-host of Usapang Econ Podcast.