Peso Devaluation – Opportunities and Challenges

February 13, 2014

Emerging markets have recently been facing a currency crisis as a result of the tapering program from the Fed in United States and the slowest growth of Chinese economy in decades. With Filipino Peso declining 8,9%  in the past 12 months against the US Dollar , questions emerge: Will this affect the competitiveness of the Filipino Economy? Can inflation become a real problem? Are this good or bad news for the Foreign Investment in the Philippines?

Philippines is an economy that demands heavily on its domestic consumption and on the remittances of its overseas workers, responsible for unimaginable 10% of the GDP.  As consumer driven society that has exported less than 30% of its GDP in 2012, this should be seen as an opportunity for Filipino exporting companies which products will become more competitive in the international markets.  Same applies for some of the biggest sources of Foreign Investment in the country:  business process outsourcing (BPO) and foreign remittances which % of contribution to the GDP will significantly increase.

This will bring a competitive advantage to the Philippines over India, its biggest bpo competitor which rupee has been on the rise. The Philippines is approximately y 10 to 20 % more expensive than India and despite the better level of English and the quality of its labor force, there is always a risk that these operations might relocate to a more desirable and cheaper location.  BPO Sector is obviously extremely happy with the recent peso depreciation.

On the other side, Bangko Sentral of the Philippines is closely measuring the inflation that rose in January to 4.2%, the highest value since November 2013.  Food, electricity, gas and fuel are some of the categories with more volatile prices that could threat the government target for this economic indicator in 2014 – 4,5%.

Economic Growth, Foreign Investment, the high amount of foreign owned reserves and the stability of world commodity prices are cooling down this threat for the next quarters.

Despite this currency crisis in emerging markets, Asian economies are much stronger and robust nowadays and a new Asian Financial crisis as the one started in Thailand in1997 it is highly unlikely. But all will depend on the political stability of countries such as Thailand, Indonesia and India (both with elections this year).  With high credit driven societies, central banks of this countries must not exclude the option of cooling down its economic growth for a more stable economy.

Triple I provides you business insights and management consulting services that will improve your business strategy in the Philippines.  If you are looking for a reliable business partner that understands the Philippines,  do not hesitate to contact us.

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