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How to cope with strong peso, weak dollar

First Posted 08:27:00 06/12/2007

Filed Under: Personal Finance, Investments

(Twenty-seventh in Series 2 of Take Charge of Your Money )

Question: What can an OFW do to cushion the effect of a decreasing dollar rate on the income of his family? What practical benefits does the Filipino family derive from the strong peso, and how does government communicate these benefits so that OFWs don?t have to think about hoarding their pesos, even in a small way? - Manny Jatayna

Answer: Although the strengthening peso is good news to most, it isn?t that good for overseas Filipino workers (OFWs) since US dollar earnings aren?t worth as much as before in Philippine pesos. A few years ago, one US dollar was worth as much as P56. Now it?s hovering at P46.

An OFW usually uses his foreign exchange salary to fund his family?s day-to-day living expenses in the Philippines ? that means one earns in USD and spends it in pesos.

And with market forecasts that the peso will continue to appreciate against the US dollar, it would appear that families still holding foreign currency funds from previous remittances should exchange them to reduce their exposure.

One option is to explore a ?forwards? arrangement with a bank. ?Forwards? will allow OFWs and their families to lock in the exchange rate for a future conversion. Inquire from banks regarding policies for foreign exchange transactions and foreign currency accounts.

But aside from this, there is really nothing much that can be done to mitigate the effect of the strengthening peso, or to put it in the proper perspective, a weakening dollar, since an OFW?s cash flow comes from his foreign earnings.

But if the cash flows come from investments, then the OFW can do something to achieve higher returns on dollar investments ? he can move his placement to another kind of investment that may give higher interest income. Gone will be the days that a five percent per annum return on US treasury bonds will suffice. For 2007, the peso has already appreciated by about six percent absolute. One?s USD investment should thus be earning about 14 percent to 15 percent per annum to offset the effect of the depreciating dollar and still make money in peso terms.

Other options are dollar global equity funds, global balanced funds, global high yield bond funds, and alternative asset classes such as commodity funds and real estate investment trusts (REITs). These investments may potentially yield a high interest income per annum. But since these investments come with risks, the OFW should determine first if he can handle the risks. Check too, if these investments are easily available and accessible to the OFW and/or his family.

Now let?s look at the other side of the coin. With the peso getting stronger, what benefits do OFWs get?

To be able to answer that, we must first answer the question ?why is the peso appreciating against the dollar of late (since 2005)??

The simple answer is ?more individuals (both Filipinos and foreigners) want to hold pesos than dollars.? Why is that?

The Philippines is in the middle of an economic turnaround. Since crucial tax measures were passed in 2005, investors believe the country has ?great potential.? This has resulted to lower interest rates on peso instruments, higher stock prices, and a stronger peso.

Another reason is that the US economy is expected to perform relatively weaker than other major economic blocs like Europe and Asia. Hence, investors are diversifying away from their US assets (which have performed well since 2003) into ?hotter? markets like Europe, Japan, Asia, and other emerging markets.

So how does a stronger peso benefit the Filipino? For one, half of the country?s debt is denominated in foreign currency. A strong peso means lower interest and principal payments in peso terms, making it cheaper for the government to service debt. When the government makes lower debt payments, more funds are devoted to investments (like infrastructure) and social projects (like increasing social security benefits and building schools). There will also be less pressure to raise taxes.

Lower peso interest rates also mean more affordable housing and car loans. It also means that companies can reduce their borrowing costs. Operating margins should benefit both company workers and owners. This means higher salaries (hopefully) and higher profits.

A strong peso will also help keep prices low since the import component of goods will become cheaper.

This trend of peso appreciation (or dollar depreciation) may continue for some time. This will be due to the economic expectations on both local and global economies.

But that doesn?t mean one should hoard pesos. In the end, investors should look beyond currencies when making investment decisions as such short-term advantages cancel out in the long-term.

(INQUIRER.net and Citibank invite readers to ask questions regarding financial matters. Send your questions to personal_finance@inquirer.net)

*Disclaimer: Readers are solely responsible for their own investment decisions and should thus conduct their own research and due diligence and obtain professional advice. INQUIRER.net will not be liable for any loss or damage caused by a reader's reliance on information obtained from our web site. INQUIRER.net receives no compensation of any kind from companies or industries or funds that are mentioned here.

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