(First of two parts)
No, the most important economic reform that the Philippine Government can do is not to reverse the strong peso and undervalue the currency. What really matters today is not the exchange rate — this is a misguided view — but the steadfast adherence of Government to good governance.
Good political and economic governance ensures appropriate formulation and implementation of agricultural and industrial policies. The first is to achieve food security and stable commodity prices and the second is to establish a strong industrial base and viable external trade. Without a strong and viable production base, talking about being competitive in the global market is vacuous. We have a very limited range of products that could link to the global value chain. Domestically, with a limited supply of commercial commodities, prices would remain high, and inflation would be very volatile depending on the season. Peso devaluation cannot cure that.
Good political and economic governance says no to graft and corruption, regulatory capture, and red tape impediments to business activities including exports and imports. It is expensive to operate in the Philippines, what with enormous amount of grease money and commissions from every government project. Such would explain the high cost of doing business in the Philippines, uncompetitive pricing, and thus, the weak inflow of foreign capital in agriculture, services, and industry. Peso devaluation cannot compensate for business’ huge overhead.
Good political and economic governance favors critical infrastructure to address limited physical connectivity, expensive power, and low-quality human resources. Appropriate soft and hard infrastructure would make economic growth exuberant but sustainable, one that transcends narrow and vested interests in petty but profitable pork barrel projects like road widening and river dredging. Laying down key infrastructure in the Philippines is viable only when the government is forthright with the budget. With a strong trust in political leadership, the private sector could be rallied to participate in public-private- partnership projects. Peso devaluation can neither mitigate the lack of fiscal sustainability nor bolster private sector trust.
For many years until today, we have had very limited progress in establishing good political and economic governance. In terms of the Chandler Good Government Index, for example, covering such pillars as financial stewardship, attractive marketplace, strong institutions, helping people rise, robust laws and policies, global influence and reputation, and leadership and foresight, it was only this year that the country managed to recover from four years of successive declines in ranking. But such an improvement still failed to lift the Philippines out of the bottom four with Mongolia, Cambodia, and Laos among the East and Southeast Asian countries in 2025.
This result checks out with the Philippines’ ranking in the corruption perception index by Transparency International. The Philippines stood at 114th among the 180 countries covered, scoring only 33 out of 100, lower than the global average of 43. The country lagged most Asia-Pacific countries in terms of corruption perception by experts and businesspeople.
Some past empirical evidence* shows that in the Philippines, weak political governance based on such governance indicators as, yes, corruption perception index; legal structure; and property rights index drove the low GDP per capita and serious poverty and income distribution. On the other hand, relatively robust economic governance indices, including global competitiveness indicators and economic freedom, explained the strong economic growth in the Philippines.
The issue is not so much the pricing of products and services in the global market as reflected in the exchange rate, it is the country’s ability to be competitive by way of agile trade and industrial policies to take advantage of changing tastes and preferences, supported by a strong production and logistics base.
As the IMF’s Gustavo Adler, Luis Cubeddu, and Gita Gopinath wrote six years ago (“Taming the Currency Hype,” August 2019), “one should not put too much stock in the view that easing monetary policy can weaken a country’s currency enough to bring a lasting improvement in its trade balance through expenditure switching. Monetary policy alone is unlikely to induce the large and persistent devaluations that are needed to bring that result.”
With this, is the Philippines prepared to go all the way to pursue a growth path based on weakening the peso relative to the dollar?
First, it is difficult to argue that a weak peso could bolster weak exports and depress surging imports and, in the process, protect local industries. When the average peso dollar rate depreciated by nearly 10% in 2022 and over 2% in the next two years, exports growth even slowed down by 6.4% in 2022 from the previous year’s 12.5% in 2021 when the peso was appreciating in the last three years. In 2023 and 2024, exports even declined.
On the other hand, imports only slowed down in 2022, declined by only about 5% in 2023, but recovered in 2024.
Indeed, there is so much more other than the exchange rate.
We should recall that the bulk of Philippine exports consists of electronic products which are largely dependent on imported integrated circuits. Exports share around 40% of total external trade while imports account for the rest of the 60%. Devaluing the currency may encourage exports and discourage imports, something that is not certain given the experience of the last few years, but the large import dependence of our exports should make the advocates of weak currency as a major economic reform more circumspect.
How this will protect domestic industries escapes me.
Second, it is not easy to dismiss the inflationary impact of peso devaluation given the lower exchange rate pass-through (ERPT) to domestic inflation. True, the updated model of the Bangko Sentral ng Pilipinas (BSP) shows a lower ERPT both in the short run and the long run, before and after the BSP switched to inflation targeting in 2002. Today’s ERPT shows that in the short run, a P1 depreciation could increase inflation by 0.08 of a percentage point (ppt). In the long run, it’s 0.12 ppt.
A weak currency policy does not involve a mere P1 or P2 depreciation, otherwise such a magnitude of exchange rate adjustment has been more than possible under the current regime of flexible exchange rates. If we say we need a P5 depreciation to bring about meaningful impact on external trade, we are talking here of an initial inflation impact of 0.40 ppt and in the long run, 0.60 ppt. If this adjustment proves inadequate, nothing stops the authorities from depressing the peso further by another P5. In the short run, that means inflation could rise by 0.80 ppts and in the long run, 1.2 ppts.
The impact looks minuscule but once the market sees a constant increase over time, inflation expectations could be de-anchored and the overall inflationary consequences could be many times higher. Imperfect pricing behavior of import-dependent traders could further amplify inflationary tendencies in both the goods and labor markets.
Third, a weak currency can neither stimulate OFW remittances nor protect us from cheap goods from China. While inflation shows some moderating trends, price levels remain elevated. The viability of our overseas Filipino workers’ (OFW) industry is anchored on the skills and experiences of our migrant workers. Our OFWs would be more competitive and earn more if the government prioritizes quality public education and public health. Reskilling and upskilling would multiply the benefits of overseas employment far better than engineering peso weakness which has many collateral harms. A 10%-peso depreciation to, say, P60 to a dollar is meaningless when most Chinese goods are cheaper by 50% than their domestic counterparts. The point is to take advantage of the space for quality and durable products and longer shelf life. If we succeed in this, we could then boost domestic consumers’ patronage. This is something that cheapening the peso could not handle.
Fourth, it is not true that a weak peso is the strongest incentive for foreign investors to invest in the Philippines. That is less than half of the story. No less than the BSP’s research** indicates that foreign investments respond more to the country’s credit rating, ease of doing business, quality of human capital, and public governance.
Fifth, rather than saying that a strong peso could undercut the country’s tariff advantages under the new Trump tariff policy, our tariff advantage should actually provide us with some kind of a counterweight to a strong peso. In her pioneering work on how to adapt to the new tariff regime of Trump, former Trade Undersecretary Rafaelita Aldaba computed the ASEAN-5’s tariff exposure composite index (TECI) last April. Based on tariff rate severity, tariff burden, exemption level, nature of affected goods, and US export dependence, the Philippines has the least TECI at 2.2 against Vietnam’s 3.4, Thailand’s 3, Malaysia’s 2.8 and Indonesia’s 2.2. There is latitude for Philippine exports to the US to be competitive as US imports remain invoiced in US dollar. It would be the Americans who would be paying for imports from the Philippines higher by the 17% additional reciprocal tariff. Some products, especially electronic products, would also be exempted from the tariff.
The challenge for the Philippines in the face of the new tariff regime in the US is to capture relocation and shifts in the supply chain from China and other countries with higher reciprocal tariffs. This is especially true for those industries engaged in final assembly and testing of electronics as well as in semi-conductor packaging and IC backend services. While a weak peso may be of help here, again, foreign investors will be looking for our credit rating, ease of doing business, and the quality of human capital. The value of good governance cannot be overemphasized.
(Next week: Should the BSP have a dual mandate?)
* For instance, Lino Brigoglio, Carmen Saliba and Melchor Vella, “Governance in the Philippines in a Global Context — Evidence from Global Governance Indicators,” November 2014.
** For instance, H. Santos, M.R. Amador, and M.E. Romarate, “ASEAN-5 counties: In competition for FDI,” December 2021.
Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.
