(d) Using information from the text/data and your knowledge of economics, discuss the likely

impact of an appreciating currency on the performance of the Philippine economy. [8 marks]

Exchange rate relates the value of one currency against another. An increase in the value of one
currency against another in a floating exchange rate system is termed as currency appreciation.

An appreciation in the Philipine Peso against the US Dollar, reduces the value of remittances of the
Philipinos working abroad, as their foreign earnings in dollars now buys less of Philipine Peso in the
domestic market.

Strong Peso reduces the demand-pull inflationary pressure in Philippines, as the average prices will fall.
Also this makes all the imported resources cheaper , thus reducing the cost push inflation also, which
makes a range of domestic firms relaying on imports becomes more competitive, down rightwards.
However, domestic producers face tough competition from cheap imports and may have to lay off
workers in order to cut costs, resulting in more unemployment in the economy. At the same time,
Filipinos working overseas on low-paid jobs may return back if the value of their remittances is not
worthy enough fuelling further unemployment and lower disposable incomes for those reliant on
remittances.

The Philippine Prisident’s concern over the currency appreciation validates its possible ill effects on their
current account balance, as an export driven economy, especially with Human Resource exports leading
to the falling value of remittances. The huge capital inflows and record levels of remittances, where the
Filippinios sending remittance to their families choose to absorb the losses themselves determines the
elasticities of demand for exports and imports, which further determines the effect of depreciation on
the current account balance. However, the expected rise of remittances upto 8% may balance this
effect, to a large extent, though the losses on each dollar remitted is expected to increase heavily by 2
Pesos.

Overall, the appreciation of currency is likely to impact the export driven Philippine Economy worse, as
there is no signal of an immediate fall in the value of Peso.