Should I convert my dollars to pesos?

Question: I would like to seek your advice on what to do with dollar investments since the dollar has been falling. Should we convert to pesos?—Glenda Angeles

Answer: Yes, it will be wise to convert your dollars to pesos for now as rate of returns on peso investment is higher than dollar placements. You may ask, why is the peso appreciating against the US dollar and is it sustainable?

For more than two years now, the US dollar has been consistently losing to the Philippine peso not because our economy has been doing great or foreign investments have been increasing but because the US economy has been problematic ever since the global financial crisis, which put our economy vis-à-vis the US in a relatively better position.

In other words, the US economy happens to be in a much worse position than the Philippines, thus explains the stronger peso.

How did this happen? Basic personal finance principle teaches that in order to control your spending, you should live within your means. Spend only on what you can afford. When you need to borrow, make sure that you can repay it over your expected cash flows with high level of certainty.

What the US economy did was the opposite. They spent more than they saved. They spent so much that they needed to borrow money to finance their consumption. Of course, it is normal for any government to have deficit spending in order to pump-prime the economy. When government spends money by constructing roads and buildings, it stimulates business activities that generate employment and income. The problem was that the borrowings went out of control in the last two decades.

Statistics show that the average ratio in the ’70s was one to one, or for every dollar of new debt there was also one dollar of new income. This was all right until the ’80s when the ratio started to increase to three dollars of new debt for every one dollar of new income. This continued to widen in the ’90s to five to one. At present, the ratio is believed to have reached at least seven to one with all the new borrowings used to finance recent bailouts and existing debts.

If this were a regular guy who was heavy in credit card debts, he could have defaulted on his debt and risked getting blacklisted because his income was not enough to repay his debts over time. Or he could probably seek to restructure his debts to allow him some relief but this will also depend on his ability to create new sources of income. This is exactly the situation where the US is now. The only difference is that the US can simply print money if it cannot generate on time the income needed, particularly with the current economic recession. This sounds so easy and simple. If you cannot earn the money to pay your debt, you can simply create one and pay. Yes, it is true but there are consequences.

When the US prints more money, it increases the supply of money in the system. And when supply increases, there will be more dollars available in the market than what is needed, hence the dollar interest rate will decline. When this happens, there will be less incentive for investors to hold dollars because they can put their money in higher-yielding instruments. For example, the current dollar interest rate is less than 1 percent per year for 30-day dollar time deposit as against 4.6 percent interest per year for a 30-day Special Deposit Account peso investment. If you are the investor, it will make sense converting your dollars to peso because you don’t want to lose the opportunity to earn more. As more investors prefer to keep peso over the US dollar, the demand for dollar will weaken, hence depreciating the dollar. When the US dollar depreciates, the peso appreciates in value. If you expect that this trend will continue for some time, it will be wise to convert your dollar holdings to peso to avoid the risk of currency loss from further depreciation.

With a slowing US economy amid soaring debts and the fears of another global financial crisis in the horizon, it appears that the recovery of the US dollar remains uncertain. Between raising new taxes and printing new money to repay debt, it is likely that US will continue to print more money into the system, which points to further weakness in the dollar exchange rate. As to how low will the exchange rate will fall, we can only estimate based on historical charts. It will be safe to assume that the dollar will fall back to the P42 level in the near term. Bear in mind that we assume that our own economic fundamentals will remain the same.

If our peso suddenly weakens due to unforeseen crisis, then it will also depreciate and may keep the dollar from further depreciation. If you want to convert your dollars to peso, look for opportunities to sell when the dollar recovers temporarily. The P44 to $1 range should be a good selling price target.

Henry Ong is a registered financial planner of RFP Philippines. For comments and questions, you may send an e-mail to [email protected]. To know more about how to become a registered financial planner, visit www.rfp.ph or inquire at [email protected].