The nitty gritty still hides danger

A RELATIVELY STABLE PESO AND RISE IN STOCK MARKET MAY NOT BE SUSTAINABLE –The country’s improving macroeconomic numbers began enticing punters back into the market. It was red flag for the bulls that sent the Philippine stock market index posting above 6,000 points – an all-time high and remarkable record. Financial experts say the index improvement has now added substantial percentage in both the local currency and US dollar terms from its lows of just two months ago.
Although the Philippine peso is relatively stable and the Aquino administration’s performance has impressed somewhat, still we’re facing difficult conditions, noted some market researchers and analysts. They warned that while the country’s economy is improving, the nitty gritty still hides danger because the corporate outlook remains feeble. The peso even at P40.80 something to the US dollar is still a serious burden especially for companies with outstanding foreign debt.
The stock market may have hit an all-time best and the peso showing tremendous strength against the US dollar and other foreign currencies, but many analysts caution that the current rally – which has seen the economic growth zooming at accelerating pace may not be sustainable. Local exporters in particular are the most directly affected by the peso’s appreciation. Unfortunately for investors, that well-known fact has already driven their profits downward. Just like the investors, Overseas Foreign Workers (OFWs) earned much of their revenues in dollars and are already seeing meager returns following the appreciation of the local currency.
No country is safe neither is the Philippines – economically. Despite its reputation as one of Southeast Asia’s fast-growing economy following the growth in stock markets and stable currency, the country has proven in recent months to be susceptible to the economic ills that have infected other regional economies. Currencies in the Asian region had been victimized by currency speculators and their stocks, too, have been skidding.
One of the encouraging things that came about as a result of the recent appreciation of the peso was that the value of the other regional currencies; either fell along with the US dollar or remained unchanged. From the point of view of an investor looking for a safe harbor, the country’s current economic climate would certainly help. At this stage, they saw there is no good justification for the peso’s decline – and they would expect it to hold up better. Now, this dominant question lingers: “What if other regional economies fall and will lead to much speculation about the fate of the Philippine peso, will the local currency devalues? Will it have some adverse effects on the country’s economy?”
Financial analysts and market researchers predict that the first effect is trade diversion. The Philippines competes with countries such as Indonesia, Malaysia, Thailand, Singapore and, China above all, in labor-intensive goods. Devaluation in their currencies by 40% or more will definitely cause shifts in the sourcing by importers away from the Philippines to these competing nations. Thus, the country would slowdown in its export growth in the coming years if its exchange rate remains the same. Another effect is foreign investment diversion. With a weaker currency, foreign investment that flows to the country is going to slowdown. However, with the exception of trade diversion, the overall effects are likely to be small.
Moreover, while the devaluation of the peso may restore competitiveness for some exports, although in the short run, it may also rekindle inflation in the country. People who are steering the wheels of power and its high-profile financial and economic managers therefore should always think of long-term plans, and the competitiveness issue should really be uppermost in their minds. Attracting prospective investors must be a priority. As an old adage says, “strike while the iron is hot.”