A DECADE ago the peso exchange rate had weakened and crossed over P50 to a US dollar for the first time and actually kept on depreciating all the way to over P55 for the next few years. At that time, no one thought it would ever go back to where we are now at about P43. Actually a number of local and foreign financial institutions are forecasting the peso to further strengthen to about P42 by year-end. 

Likewise, our interest-rate situation at that time was also at very high levels. The 91-day Treasury bill rate was hitting 16 percent and 10 years later, look at where we are now, at less than 1 percent!  Certainly, having very high interest rates creates a lot of problems for the economy in general, much like a constantly weakening currency creates a lot of instability.

A weak currency makes our products cheaper abroad because it would take fewer dollars to buy products that have a cost in pesos, and makes imported products more expensive because it would now require more pesos to buy something that has a cost in dollars.  For example, if a locally produced product is sold for $100 and an imported product is also bought for $100 when the exchange rate is P50 to a dollar, it means that the exporter would get P5,000 and the importer would need to pay P5,000.  However, if the peso were to depreciate to P60 to a dollar, the exporter would be able to get P1,000 more and can actually give a discount on his product, making it cheaper. The imported product will now cost P1,000 more.

High-interest rates make borrowing more expensive and dampen business expansion. The effect is, of course, to limit the growth of employment opportunities. Lower interest rates make the cost of borrowing cheaper and would or should encourage more business expansion and hence generate more employment and in theory stimulate the economy. The big question then is why is it in spite of a relatively strong peso and historically low interest rates, our economy is still lagging behind our neighboring countries and 10 million Filipinos are still unemployed? 

In our case, the biggest factor for the strong peso is of course the unprecedented inflows of foreign exchange from our OFWs.  In effect, we have been exporting Filipinos and we have been doing so for a long time and in ever-increasing numbers. In spite of the strong peso, we can still constantly reduce our price since unlike a traditional export product that has a manufacturing cost, Filipinos will keep on going abroad in spite of the lower wages they are being offered.  This is simply because there are limited or no employment opportunities here and as we continue to keep on increasing our minimum wages, this situation will continue. 

It also does not help our situation that most of our workers are unskilled or semiskilled, which means that they are easy to replace or workers from other less developed countries are willing to work at lower rates. What has happened is that we have managed to have an increasing volume of dollar remittance into the Philippines not because of the improving pay of OFWs but by the sheer volume of Filipinos desperately seeking jobs overseas under any circumstance. With the strong peso, the families they leave behind will have to do with the shrinking value of their remittance.

What about the historically low interest rates we now have?  Shouldn’t this be stimulating the economy and generating more jobs?  What is happening is that in spite of the lower interest rates very few large companies are taking advantage of the situation to raise or borrow money to expand their business.  At the same time, micro, small and medium-sized companies are unable to take advantage of the lower interest rates to start new businesses or expand their existing operations. 

First is that under the current business environment it is really very difficult to be globally competitive. Our minimum wage is already higher that most of our neighboring competitor countries, including Shanghai, which has the highest minimum wage in China.  Our power rates are the highest in Asia, our infrastructure is not up to standard, we are notorious for corruption and red tape, and we certainly need more business-friendly laws.

Next is just because money is available and interest rates are low, it does not mean that banks are now willing to lend out liberally to micro, small and medium enterprises.  On the contrary, the banks would rather put their money in Treasury bills earning less than 1 percent than take the risk of granting a commercial loan to companies without collateral or an established track record.

While a strong currency and low interest rate may mean good things to other countries, it would seem that for the Philippines that is not the case.  It looks like the government and all of us have a lot of work ahead to fix our economy.  Unfortunately, this work cannot even begin unless we realize that we have a structural problem in our approach to our labor policies.

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