That is, the peso is too strong relative to other currencies. This means that our exports are less price-competitive in the global market, and imports are cheaper and easier to come in. Yes, even at P58 to $1.
I rest my case on the following grounds:
1. US President Trump has imposed a tariff of 19% on Philippine exports to the US, similar to that imposed on other countries like Vietnam (20%), which is the fourth biggest exporter to the US, and whose trade surplus with the US reaches $123 billion. The peso has hardly weakened since then to compensate for the tariff barriers.
2. Tradables continue to suffer. Manufacturing as a share of GDP has continued to shrink due to the strong peso. Manufacturing share of GDP decreased from 16.2% in 2023 to 15.7%. More telling is that the Philippines’ manufacturing share of GDP is just slightly ahead of Brunei, Laos, and Mongolia, and far behind Cambodia (27.8%), Thailand (24.3%), and Indonesia (19.0%).
What’s worse, 55% of our exports are in manufactured electronics, which is highly import-intensive. Consequently, our biggest import is also electronics. The strong peso has continued to disincentivize backward integration.
The Philippines is deindustrializing, a phenomenon described by National Scientist Dr. Raul Fabella as “development progeria” or “premature ageing” where services dominate the economy, mainly due to a strong currency. The problem is that these services are low-end services, from retail to fast food, and not high-end services, like financial services, as in Singapore.
Moreover, high-paying entry-level jobs are in manufacturing. A shrinking manufacturing sector means fewer high-paying blue-collar jobs.
As the United States discovered during COVID, manufacturing matters for national security. Even such simple items as masks had to be imported from China. This is why US President Trump is imposing high tariffs on imported goods to force companies to locate their manufacturing within US shores.
3. As a further reflection of our loss of export competitiveness, the number of Philippine exporters has declined significantly, from about 6,000 firms to about 4,000 firms, according to a newspaper report. Trump tariffs and increasing labor costs will further decimate those numbers.
4. We have the worst tourism numbers in all of ASEAN. The January to August tourist arrivals for the Philippines numbered a paltry 3.96 million, compared to Vietnam at 13.9 million and Malaysia’s at 28.4 million. No, the paltry tourism number is not because of our West Philippine Sea dispute with China. The fact is, traveling to the Philippines is expensive. In dollar terms, the overall travel experience — food, hotel, transport, shopping, and services — is about 20% to 30% more expensive in the Philippines than in Vietnam and Thailand.
Does the exchange rate matter in the tourism industry? Just look at Japan. Since the Japanese yen weakened after the pandemic, Japan has seen surging tourism numbers, so much so that their citizens are complaining of “overtourism.” And no, it’s not just due to the safety, cleanliness, and culture in Japan that are attracting tourists. Those were present in previous decades, but the tourism boom happened only when the yen sharply depreciated.
5. Vietnam’s share of the banana market in Japan is surging at the expense of the Philippines. The volume of exports from Vietnam to Japan has increased fourteenfold from 2019 to 2024, mainly due to better price competitiveness. I spoke to a banana exporter, and he admitted that rising costs (mainly labor) and a strong peso make it harder to retain market share in Japan.
6. In 2010, the Philippine peso and Indian rupee were at par at 45 to $1. Today, the Philippine peso is at P57 to $1 while the Indian rupee is at 88 to $1. This has implications for the price competitiveness of our BPO sector. The Philippines can’t continue to rely on its workforce’s familiarity with American culture and lack of thick accent to carry its BPOs forward.
Furthermore, Philippine BPOs are facing geopolitical and technological headwinds. AI is threatening to displace a sizeable number of BPO jobs. The US Congress is threatening to punish US companies that outsource call center jobs. Philippine BPOs lack the margins to cope with these headwinds.
7. Philippine FDI remains low at $8.9 billion, despite the CREATE MORE* law and liberalization measures, such as the Public Service Act and the foreign ownership liberalization in Renewable Energy. Why? Because the dollar cost of doing business in the Philippines remains high. Lack of infrastructure, high power cost, high labor costs, and bureaucratic red tape and corruption are cited by investors in staying away. But there’s a more fundamental reason — these problems aren’t compensated by the dollar cost of doing business in the Philippines. Wages and logistics costs are high in dollar terms, given the strong peso. Therefore, why would investors come to the Philippines to produce for the foreign market when dollar costs are high and export prices aren’t competitive?
It has been argued that the Philippine exchange rate reflects the market rate and that inflation remains low enough so that the real exchange rate (exchange rate adjusted for inflation) is competitive. However, the flaw in that argument is that the exchange rate doesn’t reflect the high cost of doing business in the country. There’s a difference between the inflation rate and the high cost of doing business in the country.
Because of the country’s history of overvaluing its currency, it’s vulnerable to external shocks. According to the Bank of America, the Philippines’ external position is the weakest in Southeast Asia, with continuing deterioration of its current account deficit. Our trade deficit is huge at $57 billion. Service income from BPOs and OFW remittances finances the deficit. However, a sharp drop in BPO revenues or exports due to the Trump tariffs could prove destabilizing to the economy.
Because of its high forex reserves, the Philippines doesn’t face an imminent foreign exchange crisis. However, it’s still vulnerable to a shock, or painful adjustment, which could come in the form of sharply lower growth in the succeeding years (it’s already much lower at 5.5% p.a. than the government’s projected 6% p.a.) and higher foreign debt.
Another painful adjustment will come in the form of higher unemployment, especially among the college-educated. CHED Chairperson Shirley Agrupis said that the latest Labor Force survey already shows a growing number of unemployed among the college-educated. The problem could get worse if manufacturing continues to shrink and BPOs curtail hiring. Growing youth unemployment could prove to be a potent addition to the growing political restlessness due to public works corruption scandals.
In other countries, an appreciating currency is a cause of panic. Thailand’s monetary authorities are scrambling to halt an appreciating baht. In the US, the Trump administration is trying to weaken the dollar to reverse its trade deficit. This is why the Trump administration wants to control the US Fed. (The writings of Stephen Mirant, Trump’s chief economic adviser, manifest that a US goal is to depreciate its currency.) Here, hard money and a strong peso are celebrated.
In 1997, I and a few others — the late NEDA Secretary Cayetano Paderanga, Jr., National Scientist for Economics Raul Fabella, and Monetary Board Member Dr. Benjamin Diokno — were called “jukebox economists” for calling attention to the peso overvaluation before the Asian Financial Crisis. Am I experiencing déjà vu?
* Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy
Calixto V. Chikiamco is a member of the board of IDEA (Institute for Development and Econometric Analysis).
