Abu Dhabi, UAEMonday 18 June 2018

Peso rate swing should be handled with care

Filipino expats should enjoy this bounty without creating new burdens for themselves

<p>Global remittances increased&nbsp;7 per cent in 2017 to $613 billion from the previous year, according to the World Bank. Ryan Carter / The National</p>
<p>Global remittances increased&nbsp;7 per cent in 2017 to $613 billion from the previous year, according to the World Bank. Ryan Carter / The National</p>

The recent slump in the market price of the peso has given rise to a surge of homeward remittances of cash by Filipino residents in the UAE. Last June, one UAE dirham could buy you 13.4 Philippine pesos; today, the same amount can fetch you 14.5 pesos. The rates are expected to move further, creating a rare opportunity for Filipino workers to swell their reserves back home. We have seen this phenomenon before. In 2015, when the price of the rupee dropped, there was a spike in transfers to India, which is the largest recipient of remittances from the UAE. Similarly, in the aftermath of the Brexit vote, there was an increase in UK-bound remittances by British expatriates seeking to make the most of the falling price of the sterling.

Yet, as some residents rush to extract maximum benefit from this moment, caution mustn’t be thrown to the winds. Economic data for February compiled by Bangko Sentral ng, the central bank of the Philippines, shows that inflation has continued to rise. The governor of the central bank, Nestor Espenilla, has stated that “inflation will decelerate back”. But there is an emerging gulf between Mr Espenilla’s reassurances and the reality. Soaring inflation is calcifying into a trend: 3.3 per cent in December 2017, four per cent in January, and 4.5 per cent in February. Bonds have fallen in price while the Philippines’s expanding economy – which has grown at over six per cent since 2015 – continues to boost demand. The demand for raw materials generated by president Rodrigo Duterte’s mega public works projects have coincided with rising global prices. The consequence is that government of the Philippines has to deal with a growing trade deficit and import inflation while ordinary people must cope with rising prices. Prices of staples such as grains, milk, and fruit rose sharply in February; the pace at which the costs of goods and services have risen have defied government projections. Inflation has hit a three-year-high in Manila – the worst point since the summer of 2014.

t is eminently possible that these challenges will be handled deftly, as Mr Espenilla says they will, or even that the inflationary pressure may be calmed by an interest rate rise. But, as happened with Indian expatriates in 2015, Filipino expatriates should be careful not to over-extend themselves. By all means, they should enjoy this bounty to the extent that their savings and earnings allow. But at the same time it would be wise to be wary of entering into fresh, long-term financial contracts in the form of loans in order to make remittances when the exchange rates are low. The euphoria provoked among the expatriate community by the peso’s depreciation should be tempered with the difficulties engendered within the Philippines by inflation.