Businesses grapple with impact of weaker peso

By Krista A. M. Montealegre, Businessworld, Jan. 27, 2017

THE PHILIPPINE PESO is expected to lose further ground to the US dollar this year, but the depreciation failed to make a significant dent on corporations, with the higher cost of imports likely to be borne by household consumers.

The peso has been hovering around the 50-to-a-dollar level since the start of the year after weakening by 5.65% in 2016. The greenback has been strengthening on bets that US President Donald J. Trump’s promises of tax cuts and infrastructure spending will bolster the economy and accelerate the pace of the Federal Reserve’s interest-rate hikes.

While there may be periods of appreciation, the weakness of the local currency is expected to be sustained this year, albeit at a slower pace than in 2016, First Metro Investment Corp. and the University of Asia & the Pacific (UA&P) said in the latest issue of The Market Call, forecasting the peso to trade P50-51 to the dollar.

Philippine Chamber of Commerce and Industry (PCCI) President George T. Barcelon said the peso’s weakening is not so worrisome for members of the country’s largest business organization for as long as it “does not go beyond the 51 (-a-dollar level).”

“I won’t be worried about the slight depreciation of the peso. It’s being talked about, but if there’s any more, we will be running parallel with other countries,” Mr. Barcelon said.

Consumer firms source a large chunk of their raw materials overseas and the peso depreciation will bump up the cost of bringing them in.

Macay Holdings, Inc. imports roughly a third of its raw materials from overseas and the bottler and distributor of carbonated soft drinks is feeling the pinch of the rout of the local unit, its Chairman Alfredo M. Yao said.

“Malaki na and tinaas (Import costs have gone up substantially). We are looking for some local substitutes, but it’s more of taste, so mahirap din magpalit (to find substitutes is difficult),” Mr. Yao said.

Food and beverage giant San Miguel Corp. and food additive maker D&L Industries, Inc. said the impact on bottom line can be cushioned by passing on any increase to consumers.

“Costs will go up, but we can pass it on,” said Ferdinand K. Constantino, senior vice-president, chief finance officer and treasurer of San Miguel.

The diversified conglomerate owns San Miguel Pure Foods Company, Inc. and San Miguel Brewery, Inc.

Higher importation cost was a contributor to the steady recovery of consumer prices towards the end of last year, said Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines.

Inflation hit a two-year high 2.6% in December, bringing the full-year average to 1.8%. The annual figure matched the Bangko Sentral ng Pilipinas’ (BSP) full-year forecast but fell short of the official 2-4% target band.

Not everyone, however, has the flexibility to raise selling prices to fully offset growing costs.

“There are limits as to how much they can pass on because the market is very price-sensitive. In the mass market, the ability to pass on is more difficult so you see companies targeting more the middle-market consumers because they are less price-sensitive,” COL Financial Group, Inc. Vice-President and Head of Research April Lynn L. Tan noted in an interview.

Jollibee Foods Corp., Universal Robina Corp. and Century Pacific Foods, Inc. are lining up incremental price hikes in a bid to partially offset rising costs, COL Financial said in a research note.

Despite the absence of election-related spending that boosted sales a year ago, consumer firms across the board should still register strong topline growth.

Based on estimates, median revenue growth will slow to 11% from 13.3% last year, even as the peso’s depreciation, “moderate” rise in commodity prices and bigger manpower expenses amid the government’s crackdown on contractualization will pressure margins, COL Financial said.

Golden Arches Development Corp., the master franchiser of fast-food chain McDonald’s in the Philippines, will work on leveraging its partnership with suppliers and managing efficiencies in restaurants to mitigate the increase in costs and continue providing customers with “affordable, value-for-money” menu items, said its president and chief executive officer (CEO), Kenneth S. Yang.

“If you look at it, it (a weak peso) gives more money for our overseas Filipino workers (OFWs). Locally, consumer spending will make up for that even with the peso there,” Jose Ma. A. Concepcion III, president and CEO at RFM Corp., which sells pasta and ice cream products.

Emmanuel A. Leyco, a public policy expert at the Asian Institute of Management, noted that “[s]ince the Philippines is a net importer and the economy is mainly a consumption-driven economy, peso depreciation will have an inflationary effect.”

“However, such inflationary effect is expected to be cushioned by consistently strong remittances from overseas Filipinos.”

The Philippine economy relies heavily on dollar-earning industries such as overseas Filipino workers and business process outsourcing. These income streams drive consumer spending, which accounts for about two-thirds of gross domestic product. A weaker peso means more bang for the buck they earn.

“It’s not a runaway inflation, so (it’s) not a real threat. Spending will still be active. Unemployment is currently at its lowest which is a good thing,” said Cora P. Guidote, senior vice-president for Investor Relations at SM Investments Co., the country’s biggest retailer and shopping mall operator.

Likewise, a weaker peso puts upward pressure on energy costs, further pushing up consumer prices. Some of costs like natural gas from Malampaya, which supplies power plants that supply around 40% of Manila Electric Co.’s (Meralco) requirements, and charges of generation companies (gencos) are denominated in US dollar.

“Hence, even if there are no changes in the tariffs from these gencos, a weaker peso will increase the equivalent in pesos of bills from these gencos,” said Lawrence S. Fernandez, head of Meralco’s utility economics.

Last month, the BSP raised estimates for inflation for the next two years after factoring in rising oil prices, rapid economic growth and the peso’s weakness. Inflation is seen to average 3.3% in 2017, from 3% initially. Overall price increases are seen hitting 3% in 2018 from 2.9% previously.

“Expectations of further peso depreciation and the ability of firms to pass on bigger input prices to consumers could push inflation higher this year towards the midpoint of the BSP’s target of 2-4%,” Land Bank’s Mr. Dumalagan said.

While upward pressures persist, inflation remains “very manageable,” said Victor A. Abola, economics professor at University of Asia & the Pacific.

“If there is inflation, people will be talking about salary increases, increase in transportation cost. In an economy, what’s important is stability of the currency and predictability,” PCCI’s Mr. Barcelon said.