MAP Insights Business World
January 15, 2008
My three OFW daughters came home, briefly, for the wedding of their brother. Over breakfast, I asked Ani, who works in New York City doing structured finance for a financial guarantee company, if she thought that the United States is deliberately keeping the value of the dollar low. She said she didn’t think so- not as matter of policy. “Because of the recession or its anticipation, the Fed is being pressured to reduce interest rate to perk up the capital markets. But as the interest rate is slashed, funds tend to leave the U.S. to seek higher interest rates elsewhere. As a consequence, the dollar falls, but it’s not as if the U.S. has designed to keep it low.”
“But isn’t the recession caused by the deluge of manufactured goods from third world countries?” I countered. “As an American economist pointed out, while the U.S. used to import manufactured goods from other developed countries and only raw materials and commodities from third world countries, China now swamps the U.S. market with food, apparel, toys, electronics and hi-tech gadgets. They take away jobs from Americans, so the U.S. now wants the dollar kept weaker vs. the other countries’ currencies so that manufactured goods from other countries will be more expensive, that is, less competitive. So, it is by design,” I pontificated to end the argument.
“But if that is so, how come the Euro remains strong even though Chinese products are all over the stores in Europe,” my other daughter, Ela, joined in. She works with a retail company in London, so she should know. I could only reply, “ Maybe the Euro is getting strong because the dollar is getting weak.” I didn’t know how it fares with the other currencies.
All the while, my third daughter, Aileen, was listening but remained clueless in the discussion. She had dabbled in the theatre earlier but is now in the staff of a hip-hop magazine in Manhattan. All these were strange to her. So Ani was patient, “Remember, Aileen, reducing interest rates not only increases bond prices but it also helps equity prices by reducing the cost of goods and cost of funds for companies.”
“Ah, basta. What I know is my dollars now get me fewer pesos to buy gifts for my former yaya,” Aileen, ended the argument… and the tutorial lessons.
I asked myself “if my daughter who has no dependents immediately feels the effect of the rising peso, what about the dependents of the rest of the 8,233,172 Overseas Filipino Workers?” That’s 10% of all Filipinos, and assuming they each have 5 dependents, they would number 41,165,000 or nearly 50% of our total population. And the profile isn’t pretty. Household and related workers category topped the list at 28% of landbased new hires. This was followed by construction workers (14%), factory and related workers (14%), care givers and related workers (9%), building caretakers and related workers (5.8%), hotel and restaurant workers (5.1%), and performing artists (2.4%). Unlike the professionals, medical and technical workers and seamen who are in the minority, they do not earn much to be able to save enough. An estimate of OFW money flows put $11.2 Billion (80% of total official remittance) for living expenses, medical and educational expenses, house construction and improvements, and consumables. Few make attempts at some entrepreneurial ventures, mostly in tricycles and FX taxis or beauty parlors. They barely are able to set aside enough for savings and investment accounts. And this was before March 2004 when $1.00 exchanged for P56.36. Since then the peso has strengthened so that the OFWs and exporters have lost 26.5% of their income. Today, the value of the dollar is about P41. That means for every $100 they receive, OFW dependents now get P1500 less. And the more dollars the OFWs send home, the more the dollar weakens. It’s like they are chasing their tail or shooting themselves in the foot.
If they were not saving much before, would they have difficulty providing for even the basic needs of the family now? Maybe not… if the cost of living has also gone down. After all, the cost of imported goods should also go down, so I thought.
I was wrong! When I checked, the consumer price index showed price increases for all commodities in the consumer basket. With year 2000 as base, the general price level has increased by 43.1% from March 2004 to October 2007. The sharpest increases were noted in fuel, light, water and services (79%), pushed obviously by the increase in crude oil price. Food and beverage prices which account for half of the consumer basket rose by 37%.
What do these all mean? It means that our OFWs and their dependents which account for half of our population are being hit by a double whammy of decreasing incomes and rising prices.
No wonder, everyone throws his two cents worth on how to alleviate their plight---from having a fixed exchange rate for OFW remittances (in effect a subsidy, but who would bear the cost?), or a forward cover (which very few OFWs avail of), to prepaying and refraining from taking dollar loans and switching to borrowing in pesos, to suspending collection of the E-VAT for fuel, as suggested by Senator Mar Roxas (which makes the most sense) as E-VAT is directly borne by the end consumers, i.e. the masses.
The response from the Government is, unfortunately, a tepid one--- a 1% reduction of the tariff on fuel imports by oil companies at certain trigger prices. Not only does it come too little, too late---it is misdirected. It is the oil companies who will benefit from the tariff reduction, as a militant labor group observed, so much so that the President will have to tell them to pass on the savings to the consumers. The Department of Finance opposes the suspension of the E-VAT because that would mean P54 million in foregone revenues. It fears that the budget deficit will increase and this may trigger increase in prices. But what can be a worse inflationary trigger than a direct tax such as the E-VAT on rising oil prices borne directly by the masses? As to the concern on foregone revenues, The Bangko Sentral has lost that much amount already in buying long on dollars!
Meanwhile, we can only cry with our OFWs. Yet we hail them as our heroes. But then, praise is cheap.
(Mr. F.C. Payumo was a former three-term Representative of the First District of Bataan and Chairman of the House Committee on Economic affairs. He was also past Chairman and Administrator of the Subic Bay Metropolitan Authority)
