HOUSE Committee on Ways and Means Chairman Joey Sarte Salceda has warned that the weakening of the Philippine peso will affect lower-income households more than rich households.
The economist-lawmaker said over the weekend that the bottom 30 percent of households in terms of income spend 58.2 percent of their total expenditures on food. Salceda noted that 24.9 percent of total food consumption in the country is imported.
“So, a peso depreciation of 25 percent increases their total spending by at least 3.64 percent because of food alone due to first round effects alone. Second-round effects, or the effects of increases of imported input costs on domestically-produced output, could also pressure household budgets further,” said Salceda.
The lawmaker added that the upper 70 percent only spend 39.5 percent of their income on food
“So, the same depreciation will only hit them by 2.47 percent of expenses. And of course, they earn more and have more space for savings.”
Salceda said fuel accounts for around 30 percent of transport and energy costs, on which the poor spend around 15 percent of their income.
“So, you’re looking at another 1.13 percent increase in those areas due to a 25-percent peso depreciation, which we are on track to reach year-to-date by the coming weeks,” he added.
The lawmaker said the peso has already depreciated by 14.7 percent year-to-date. However, from its 2021 strongest, the peso has already depreciated by 24 percent
‘Rich people have options’
SALCEDA also said that high-income households have the option to keep their money in dollars while lower-income households barely have any savings.
“The upper 10 percent of households have at least P322,000 in savings every year that they can keep in dollars. Foreign currency deposit units are tax free also—so they get appreciated value plus tax advantages by keeping their money in dollars,” he said.
Meanwhile, the lawmaker said that the poorest 10 percent of households are in debt by at least P3,000 every year.
“So, they have no upside from dollar appreciation and all the downside of a weak currency.”
According to Salceda, the solution here is a mix of policy and program interventions.
As he has suggested, the country needs to encourage “our Big 4 in service-dollar earners: business process outsourcing (BPOs); foreign-employed freelancers; overseas Filipino workers (OFWs); and, the tourism sector.”
“That will allow us to benefit from upside in the dollar,” Salceda said. “We should train as many people as we can to have the option of employment in these areas.”
He added that the coming Christmas season “might also be a good time for some OFWs to repatriate some of their dollars.”
Getting stronger
SALCEDA has said the greenback is likely to continue getting stronger against the peso in the near-term and could reach P65 to 68.
With this, he said the country should focus on industries that earn foreign currency and on domestic agriculture to manage “imported inflation” from imported food, oil, and other essential commodities.
“Frankly, there’s not much we can do. To return to stable core inflation, the US needs to achieve 5-percent disinflation that it achieved in the early 1980s; and that took 6,500 basis points in interest rate hikes. The Fed [US Federal Reserve] under [Chairman Jerome] Powell has so far increased the Fed rate by just 2,250 basis points. So, hang on. This is still bound to be quite a ride,” he added.
Meanwhile, Salceda said his Committee on Ways and Means is also studying imposing no documentary stamp taxes on lending of foreign companies to their wholly-owned Philippine subsidiaries.
“That along with tax-free inter-corporate dividends under the Create Law would help us arrest any large-scale capital flight in dollars,” he said referring to the Corporate Recovery and Tax Incentives for Enterprises Act or Republic Act 11534.
Mitigating the worst
THE lawmaker also said there is a need for some management or mitigation of the worst.
“There are some who believe that we should keep the interest rate differential between the US Fed rates and Philippine rates. We could take a bit of that.”
The lawmaker cited a 2018 study by the Bangko Sentral ng Pilipinas (BSP) that found “there is very little evidence of monetary policy affecting bank lending.”
“So, higher interest rates by the BSP might not constrain our growth so much, especially if we take measures to protect our key growth drivers,” Salceda said.
“That is a decision that the BSP will ultimately have to weigh. But the impact of depreciation on the poor has been something the Monetary Board thinks about when they decide on this policy question,” he added.