Economic Effects Of The Foreign Exchange Rate

INTRODUCTION

This paper tackles the effects of the foreign exchange rate as a whole and how it affects the country and at the same time how it gets affected. This paper enumerates the advantages and disadvantages of having a strong Peso. The paper also discusses what factors affect the strengthening and weakening of the Philippine Peso. This paper also includes an in depth analysis of how the foreign exchange could affect and gets affected by the economy, the society and politics.

OVERVIEW

The Philippine exchanged rate is express in terms of one unit of dollar versus one unit of peso. There are two cases on how an exchanged rate would be determined the first system is the free floating exchange rate where the supply and demand force of the market is the index and the other system is the fixed exchange rate given directly by Bangko Sentral ng Pilipinas. The free floating exchange rate would be given more consideration since it's the system that mostly affect our economy and being supported by BSP adopted since 1970. In the cases when the demand and supply is not stable, the BSP has the authority to enter and provide guidance in the market to prevent the volatility effects in the exchange rate fluctuations that affects inflation. They also fixed firmly the demands for foreign currency by providing liquidity when required. This system applied in the Philippines is consistent with its goal to aim external competitiveness through market efficiency. Peso appreciation provides numerous benefits on our economy like lowering inflationary expectations or pressures and added additional savings resulted from foreign debt servicing but it also negatively affects the export market and the beneficiaries of the remittances given by the OFW.

The peso continues to struggle in the year 2005 but compared to 2004 it appreciated by 1.72%. The factors that affect the peso and help increase the standing of our economy are the remittances by the Overseas Filipino Workers on different countries around the world. The increase level of foreign investors who are willing to give up their money to establish business in the Philippines due to high level, confidence given to our government by the new policies implemented RVAT is also one of the strong factors that affects peso. The RVAT law includes the credit rating given by the foreign credit investigators (S&P and Filtch) now includes Philippines in the list of the countries, meaning the level of credibility given to us increase when it comes to handling debts. Those scenario mentioned basically appreciates the value of peso against the US Dollar. Looking on the negative factors, an increase affects mainly the export business in the market because of the unfavorable influence on the productivity and level of investment as well as the political commotion that creates a big impact on the peso depreciation.

The steps taken by The BSP in order to stabilize the foreign exchange market during the year 2005 are increasing the interest rates to 25 basis points to decentralize the possible risks to inflation expectations. The required reserves are also increased by one percent that resulted to ten percent from nine percent, this implementation would mop up surplus peso liquidity that has a connection on inflationary impact this took effect last July 15, 2005. Currency Risk Protection Program was made this is a program where corporate and foreign exchange investors purchase foreign exchange from banks at predetermined rate in the future through this said CRPP it would diminish pressure on the exchange rate. In the year 2006 the BSP implemented additional measures in 2006 to improve its foreign exchange regulations through Circular 507 and Circular 519. Circular 507 (dated 19 January 2006) required any person who brings into or out of the Philippines foreign currency, as well as other foreign exchange-denominated bearer monetary instruments, to declare the same in writing and to furnish information on the source and purpose of the transport of such currency or monetary instrument. Meanwhile,Circular 519 (16 March 2006) amended the regulations on foreign (italic paragraph citation http://www.bsp.gov.ph/downloads/Publications/FAQs/exchange.pdf.)

The government is expecting to maintain the strength of the Philippine peso in the year 2006 even though there's a present precariousness in the financial markets. It is expected that the peso would yield to external shocks like the country's stable macroeconomic fundamentals: national government fiscal policies where it would continue to support the peso, continuance inflow of remittances from OFW, direct foreign investments including exports that's being currently worked out by the government.

STATISTICS

By the year 2005, the Philippine Peso appreciated by 1.72%, decreasing from P56.04 per dollar in 2004 to P55.09 per dollar in 2005. During the first five months of the year 2005, an appreciation of 2.35% was exhibited averaging to P54.75 per dollar. However, by the month of June, the Peso started to depreciate reaching its lowest point in 2005 at P56.32 per dollar on July 8 which continued to the month of September. This was caused by the oil price hikes and expectations of U.S Fed rate hike. Even so, during the last quarter of 2005, the Peso recovered and closed at P53.06 per dollar, the highest since May 2003. In 2006, the peso continued to appreciate reaching to an average of P51.83 per dollar for the first 4 months. Within these 4 months, the peso has been fluctuating due to the political events that have occurred. Nevertheless, the peso strengthened reaching an average of P50.96 per dollar due to the sustained dollar inflows from the Overseas Filipino Workers' remittances and the investments from China, Singapore, Japan and other countries as well.

By May, the peso depreciated as it reached to an average of P52 per dollar; And by June, dropped to P53.59 per dollar. This was caused by the Higher risk aversion in the global markets and the possible increase of the Federal Reserve Bank's interest rate. Conversely, the peso appreciated by 1.66% reaching to a level of P52.31 per dollar on June and closed at P51.97 per dollar on July 25, after the president's State of the Nation Address. And by August, it reached to a P51.33 per dollar rate, increasing by 1.90% from its previous rate. Due to the increasing confidence by investors and improving economic conditions, the peso further increased its value and reached to an average rate of P50.37 per dollar in September and P49.91 in early October, the highest level since 2002.

Volatility during the year 2006:

Due