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Philippines' strong inflows make life tough for its exporters

Jay Directo | AFP | Getty Images

Nearly $40 billion a year piles into the Philippines, thanks to work its citizens do abroad or for outsourcing firms, but the windfall also brings pain through an overvalued currency and the risk of catching the "Dutch disease."

Economists gave that name to an ailment which hit the Netherlands long ago after it discovered large gas reserves, which spurred big cash inflows. These made the guilder strengthen so much that Dutch-made products became uncompetitive, and the country's manufacturing exports plummeted.

In the Philippines, inflows from outsourcing contracts and millions of citizens working overseas lift incomes yet also have made the peso appreciate sharply, to the point where Barclays reckons it is the most overvalued of the world's widely traded currencies.

A strong currency could derail expansion for Philippine manufacturers. The sector, disappointing for decades, grew 8.1 percent last year, and the Philippines - despite poor infrastructure and rolling power-cuts - seems well placed to grab some production leaving China because of rising costs.

But too strong a currency means "we will be left behind," says Sergio Ortiz-Luis, who heads the Philippine Exporters' Confederation.

JP Morgan says that from June to February, the peso's trade-weighted exchange rate appreciated about 15 percent after accounting for inflation. Since mid-2014, the peso has depreciated about 1.4 percent against the rallying dollar, while the rupiah has tumbled more than 10 percent.

The peso's relative strength worries Obra Cebuana, which makes fancy furniture in Cebu from bamboo, sea-grasses and other natural materials - and which competes with Indonesian firms.

Edwin Rivera, general manager, frets that the company's export business, which climbed to $500,000 a year, is imperiled.

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"Definitely it will curtail growth if the peso strengthens further," he said, adding that some of the 50 employees might be laid off.

Make or break

Lorenza Boquiren, marketing director at Castilex Industrial, another Cebu furniture maker, says the peso is "make or break" for it.

"We are at a losing end" as some Southeast Asian competitors have weaker exchange rates that boost exports, she said.

Analyst Aditya Srinath at JP Morgan is worried the Philippines is vulnerable to Dutch disease. Huge dollar remittances have an impact similar to the windfall from finding a natural resource, he said, adding that "the strong peso would deter export-orientated manufacturing" and could make imported goods cheaper than locally produced ones.

To be sure, a strong currency isn't altogether bad.

Steady, hefty inflows mean the Philippines has left behind its balance of payments crises of the 1980s. There are chronic trade deficits, but the current account has been in surplus every year for more than a decade.

Indeed, Manila has largely avoided the volatility and disruption seen in many emerging markets ahead of higher U.S. interest rates.

Sweet spot

The Philippine central bank, which hiked its policy rate in July and September, is not expected to join multiple Asian peers in cutting the benchmark, because the country is in a sweet spot with low inflation and strong growth.

Eugenia Victorino at ANZ bank thinks the peso "stands out primarily because of the Philippines' better fundamentals."

The economy grew by an annual 6.9 percent in the fourth quarter, the fastest since late 2010, and this year is set to be one of the fastest-growing major economies in Asia.

Investors still complain about crumbling infrastructure, red-tape and corruption.

"Let's fix some of the other stuff that makes manufacturing expensive here," said Frederic Neumann at HSBC.

"You can move the currency as much as you want but if you don't get the investments it does not matter."