MAP Insights

This year’s most harrowing economic trend, following the accelerated rate of inflation, is the depreciation of the Philippine peso against the US dollar. The local currency hit ₱50 to $1 dollar in July 2022 and continued to depreciate, eventually dropping to ₱59 in September and October before recovering this month to the ₱57 range.

 

The peso appreciation was a much-welcomed improvement by both consumers and the government, since it was buoyed by milder US inflation results in October, higher employment numbers, and continued growth in local gross domestic product (GDP). Remittances during the holiday period are also expected to improve peso values further.

 

The economic and political reasons for peso depreciation, however, still remain in place. Worldwide inflation, global tensions between Ukraine and Russia, our country’s overseas debt and increased imports versus decreasing exports are issues that will linger until next year. With the foreign exchange rate changing every day due to these factors, the peso will continue to fluctuate. Should the peso depreciate in 2023, small and medium enterprises (SMEs) must be ready to manage its negative effects, and seize the rare opportunities it presents.

 

First, a depreciated peso means that locally-sourced and made products and services are cheaper than imported ones. SMEs under the local manufacturing and sourcing sector can highlight this in their marketing activities to attract more customers, especially foreign buyers who can open the way for exporting. For the same reasons, the agriculture sector can also benefit from exporting their products, as the industry will receive more pesos per dollar. The tourism industry, meanwhile, can focus on marketing to international tourists, as Filipino goods and services are now even more affordable to foreign visitors.

 

Second, a depreciated peso makes importing supplies more expensive, reducing businesses’ purchasing power. A lot of SMEs are on the hook right now from cementing deals with suppliers back when the peso was at the ₱53-54 range against the US dollar. To better prepare for the future, SMEs must find local suppliers as an alternative to importing raw materials. Aside from lower production costs and less import taxes, diversifying suppliers can strengthen an SME’s supply chain by decreasing its susceptibility to geopolitical and economic shocks. Having a local supplier also makes it easier for SMEs to establish a good working relationship, which can help negotiate better terms in the future.

 

Third, no matter what the current foreign exchange rate is, SMEs must aim to develop products and services that are at par with imported ones. Being more competitive in the global market is critical: aside from capturing a new market through exporting, businesses that trade in multiple countries, especially our ASEAN neighbors, are also less prone to the negative effects of peso depreciation. China is more resilient to trade tensions stemming from US issues; Japan’s biggest imports, meanwhile, are heavy on electronics, such as medical equipment and circuits – a good opportunity for our burgeoning electronics manufacturing industry.

 

Lastly, to prepare for further depreciation shocks, SMEs must improve their resilience – especially in terms of working capital. For some industries, it is simply inevitable to import goods and services, as the Philippines is typhoon-prone and has a long way to go in improving local production efficiency. Thus, a minor drop in peso-to-dollar values can lead to a huge cash flow gap if, say, your company is forced to honor an importing contract that you made when peso values were more favorable.

 

Having a revolving credit line is an excellent way to ensure you always have working capital. Compared to the typical business loan, which provides a lump sum of capital upfront, revolving credit lines work the same way as a personal credit card – to be used only on an as-needed basis. Revolving credit lines provide SMEs an emergency fund of sorts by providing a credit limit that they can dip into whenever a business opportunity or cash flow gap arises, then letting you pay interest only on the portion of the credit line that you used. When opening a credit line, look for a provider that doesn’t charge anything for application, such as First Circle. Their dedicated account managers are also a great help for business owners who need funding quickly, but do not have the time or skill to facilitate credit line withdrawal requests on their own.

 

There are many more ways SMEs can manage the effects of fluctuating peso values, but marketing to foreign clients, strengthening local supply chains, building export plans and taking care of working capital can already go a long way. These steps can protect SMEs from peso depreciation vulnerabilities, and even enable them to take advantage of global trade when the local economy is not in their favor.

 

(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.  The author is the Vice President for External Relations of First Circle, a fintech provider that helps SMEs grow through long-term partnership, flexible financing, and free tools to help them find government opportunities. This article is co-written with Kathryn Jose, a content marketing contributor for First Circle. Feedback at <map@map.org.ph> and < benedict@firstcircle.ph>).