By Dr. Johnny Noet Ravalo

INQUIRER.net

First Posted 15:15:00 03/05/2008

(Third of a series)

I read in the internet that the Philippine Peso will appreciate against the US dollar to P39 at the end of the first quarter this year and will appreciate further to P35 by end of 2008. Is this a possible scenario? I’m currently in a dilemma whether to convert into pesos my USD time deposit. — Vic

The hedging facility launched by the government financial institutions is not good enough if the OFW is earning only a meager amount of $500 per month. If an OFW is earning $1,000,000 or more then he stands to benefit from the program. But how many OFW’s earn more than $10,000.00/ month? — Romeo

An estimated 8.2 million Filipinos are based abroad, many of whom regularly remit part of their earnings to the Philippines. For this reason alone, the rate of exchange between the peso and various foreign currencies will be a major socio-economic policy concern for a very long time.

Most Filipinos based overseas, whom I will call currency converters in this series, are inclined to think investing will solve the problem of an appreciating currency. Should they buy land now for their retirement? Should Vic liquidate his dollar time deposit in Saudi Arabia and go for peso deposits instead? Should OFWs go for bonds or a pension plan? What about the hedging facilities cited by Romeo?

The truth is, the real challenge is managing recipients? cash flow and not finding the best investment outlet.

For seven and a half years from July 1997 to December 2004, the peso moved from about P27 to roughly P56 per dollar. This doubled the peso value for every dollar remittance. Of course, the actual situation of each OFW will be different on a case-to-case basis.

Over the past 37 months, the peso has been strengthening against the dollar, reversing from P56 to under P41 per dollar. This new trend leaves currency converters with three options:

? Remitt more dollars than before. This option hinges on how much more the OFW can save from current income. It?s possible there may not be much more to remit even if they wanted to.

? Reduce family expenses. To get back the same purchasing power they enjoyed, OFWs families need to roll back 37.0 percent of expenses. That is over a third of regular expenses. Very unrealistic.

? Hedge against a further appreciation of the peso. This is the most viable option but the problem is figuring out how to hedge and what instruments to use.

Hedging Instruments For Currency Converters