Why is the peso falling when the economy is growing?
When we talk about how well a country’s economy is doing, we usually look at something called gross domestic product (GDP) growth. It’s like the main number that tells us how healthy and strong the economy is.
But only looking at GDP growth doesn’t give us the whole story. We also need to look at another important number: the national savings rate, which tells us how much money people in the economy are saving compared to the total income generated.
The national savings rate can be calculated as a percentage of GDP by subtracting the total money spent on consumption by both household and government sectors from national income. When savings rate is high, it means that a large portion of the national income is being saved for investment and capital formation. This, in turn, contributes to economic growth and stability.
Although our national savings rate may not be as high as that of other countries in Southeast Asia, its steady growth in the past has been important in supporting economic expansion.
For example, prior to 2020, the national savings rate ranged between 15 and 20 percent from 2000 to 2019, which resulted in an average annual GDP growth of 5.2 percent. At one point during this period, the national savings rate reached 21.6 percent in 2010, coinciding with a GDP growth of 7 percent.
But during the height of the COVID-19 pandemic in 2020, when the GDP declined by 9.5 percent, the national savings rate went to as low as 6.5 percent in the second quarter for the first time in decades. The fall in the national savings rate was anticipated because households experienced a decrease in income during the crisis while maintaining their spending levels.
However, as the economy began to recover the following year, the national savings rate continued its downward trend, reaching 9 percent despite a GDP growth of 5.7 percent in 2021. Even after the pandemic subsided in 2022 and the economy experienced a strong rebound, with a GDP growth rate of 7.6 percent, the national savings rate further declined to 8.9 percent.
When the economy is growing but the national savings rate is falling, it means that households and the government are spending more of their income rather than saving it.
While increased consumption can stimulate short-term economic activity, a persistently low savings rate may limit the availability of funds for investment, which could potentially slow down economic growth and leave the economy vulnerable to external shocks.
Last year, GDP growth slowed to 5.5 percent in 2023, while the national savings rate hardly improved, remaining at 9.1 percent. The economy seemed to continue to slow down this year, with the first quarter GDP growing by 5.7 percent, slower than the 6.4 percent in the same period last year. The national savings rate for the first quarter of this year, on the other hand, deteriorated further to 8.7 percent.
One of the immediate repercussion of a falling national savings rate, aside from signaling a possible weaker consumer confidence, is the downward pressure that it may exert on the peso.
A decrease in national savings may lead to increased reliance on foreign borrowing to finance domestic investment and consumption, resulting in higher levels of foreign debt. This can expose the economy to risks associated with foreign exchange rate fluctuations and debt servicing obligations.
Following the GDP equation, when we subtract total investments in the economy from the national savings, what we derive is an amount that is equivalent to the trade deficit.
In recent years, as the national savings have decreased while investments have increased, trade deficit has been steadily increasing. This trend contributed to the depreciation of the peso, which lost 10 percent in two years to fall to more than P57.5 to a dollar today. A weakening peso could keep inflation and interest rates at high levels.
A widening trade deficit can contribute to market volatility and uncertainty, affecting investor sentiment and stock prices. If we conduct a simple correlation analysis between the trade deficit and the Philippine Stock Exchange Index over the past 23 years, we find that the stock market is influenced by the trade deficit 44 percent of the time.
While GDP growth is often seen as the primary indicator of economic health, it’s important to also take into account the national savings rate.
A declining national savings rate can lead to increased reliance on foreign borrowing, a widening trade deficit and a weakening peso. Therefore, policymakers and stakeholders must closely monitor the national savings rate due to its significant role in shaping the economy. INQ
