BOP & Foreign Exchange in Philippines

Our ability to export depends on our initiative to take advantage of entrepreneurial skills to sell to the big world market. If we focus our efforts on raising output, we can surely improve our trade balance and earn enough foreign exchange to finance our imports.

If Filipino citizen wish to purchase US soybeans, the Filipino must pay in US dollars.

If US citizens wish to buy Spanish olives, the Americans must pay in Euros.

Before goods can be exchanged between trading partners, the currency of the importing nation must first be converted to the currency of the exporting nation.

When Filipino citizens and firms exchange goods and services with foreign consumers and firms, payments are sent back and forth through major banks around the world.

Current Account – shows current import and export payments of both goods and services. It also reflects investment income sent by top foreign investors and received by Filipino citizens.

Capital Account – when a nation buys a foreign firm, or real assets or financial assets of another nation, it appears in the capital account.

Net unclassified assets – catch all for data errors and inconsistencies

The BSP holds quantities of foreign currency called international reserves. When adding the current account and the capital account, if the Phils. has sent more dollars than foreign currency has come in, there exists a balance of payments deficit.

In this case, the country has to draw on international reserves or the GIR to match the deficit. In short, reserve assets will have to decrease by a corresponding amount.

When nations trade goods and services, they are implicitly trading currency. The rate of exchange between two currencies is determined in the foreign currency market.

Exchange rates are allowed to “float” with the forces of demand and supply. The floating rate has an impact on the balance of payments of both the Phils. and the US.

The exchange rate between two currencies tells you how much of one currency you must give up to get one unit of the second currency. For example, if 1USD = Php51.769, 1 Php = 0.0193 USD

Base or terms currency is the foreign currency; quote or commodity currency is the domestic currency

When the price of a foreign currency is rising, it is said to be appreciating or “stronger”. More pesos are needed to buy a dollar. The dollar is appreciating (stronger), the peso is depreciating (weakening).

When the price of a foreign currency is falling, it is said to be depreciating or “weaker” . Fewer pesos are needed to buy a dollar. The dollar is depreciating (weakening) while the peso is appreciating (getting stronger).

Consumer tastes – when domestic consumers build a stronger preference for foreign-produced goods and services, the demand for those currencies increases and the peso depreciates. On the other hand, if foreign consumers increase their demand for Philippine –made goods, the peso appreciates.

Relative inflation – if a nation’s price level is rising faster than other nation, consumers seek the goods that are relatively less expensive. If US inflation is higher than inflation in the Philippines, Filipino made goods are relative bargain to US consumers increasing demand for the pesos and appreciating its value.

Relative incomes – when one nation’s macroeconomy is strong and incomes are rising, all else equal, they increase their demand for all goods, including those produced abroad. So if Filipinos are enjoying economic growth and the US is in recession, the relative buying power of the Filipino citizens is growing. They increase their consumption both domestic and US made goods, increasing demand for the dollar and appreciating its value.

All else equal, the demand for USD increases and the dollar appreciates relative to the Php if:

Filipino taste for American-made goods is stronger

Filipino relative incomes are rising, increasing demand for US goods

US relative price level is falling, making US goods relatively less expensive.

All else equal, the demand for USD increases and the dollar appreciates relative to the Php if:

Speculators are betting on the dollar to rise in value

The US relative rate is higher, making the US a relatively more attractive place for financial investments.