With weak peso, government urged to help business

THE further depreciation of the peso to another record low should prompt the government to extend incentives and subsidies to firms, especially those importing raw materials, according to local economists.

Former University of the Philippines School of Economics (UPSE) Dean Ramon L. Clarete said the government could consider subsidizing exporters located in Philippine Economic Zone Authority (PEZA) areas to boost their production.

Clarete said these may be provided on top of existing perks being received by firms under PEZA and those under other investment promotion agencies (IPAs) such as the Board of Investments (BOI).

“The weak peso closes the current trade or balance of payments deficit, accordingly the fiscal deficit. Imports need to be reduced and exports increased to do this,” Clarete told the BusinessMirror. “There is pain with inflation and reduction in goods available including high cost of fuel or energy.”

Clarete said there may also be a need to provide additional tax credits on top of exemptions from paying value-added tax (VAT) and excise on imported raw materials.

However, Clarete said he would advise against subsidizing fuel but efforts to subsidize the transportation of workers may be considered a good move. Efforts must be exerted to bring down the use of imported fuel.

Ateneo Eagle Watch Senior Fellow Leonardo A. Lanzona Jr. told the BusinessMirror there is also a need to provide incentives to firms in order to consider sourcing raw materials from local producers and manufacturers.

“The weak peso should force firms to look for other inputs other than usual imports.  There is also a need to adopt other technologies that will utilize more of the domestic resources such as labor,” Lanzona said.

“Investments can be redirected to industries that are more labor-industries. The government can help support firms in these transitions,” he added.

Lanzona said firms can be provided incentives when they locate to poorer regions that are near the country’s domestic resources.

He said these firms should also be given subsidies or tax deductions when they undertake technology transfers. The government should encourage firms to innovate.

Lanzona said some of the incentives may require legislation, but it is important to note, he added, that the government has the capability to prevent markets from failing.

“The issue is how to let markets determine which industry should prosper and identify the cases for government intervention when market failures are seen,” Lanzona said.

Meanwhile, UPSE Associate Professor Renato E. Reside Jr. told this newspaper that apart from short- and medium-term solutions, there is a need for the government to remain focused on improving

This, Reside said, will ensure there are “continuous uninterrupted flows of important raw materials, since losing access and disrupted supply chains can be very costly.”

Reside thinks the government should invest in “unit-cost-reducing, efficiency- and productivity-enhancing infrastructure” projects which help firms reduce their overhead and other operating costs.

“Good infrastructure reduces production, transport costs and perhaps even power costs. Government can also try to improve digital infrastructure to reduce communication costs,” Reside said.

Rising costs

Meanwhile, University of Asia and the Pacific (UA&P) economist Cid L. Terosa said ultimately, the government can help firms cope with rising costs such as those linked to utilities, logistics and transportation as well as marketing and distribution.

Terosa said these are already being done by the government. However, since no policy is perfect, there will always be room to improve these efforts.

“The government can exert effort to lower transaction costs between companies and government agencies responsible for facilitating the importation of raw materials,” he told this newspaper.

On Monday, the peso further depreciated to P56.999 to the greenback. This was considered an all-time low for the Philippine currency.

In a recent analysis, Rizal Commercial Banking Corporation (RCBC) said the local currency could still weaken in the coming days as local and international developments could play to the strength of the dollar.

RCBC chief economist Michael Ricafort cited two main catalysts to the movement of the peso against the dollar for the remainder of the year.

The peso has been on a weakening streak anew in the previous week despite efforts to prop up sentiment against the US dollar.

Data from the Bankers Association of the Philippines (BAP) showed that the local currency closed at P56.77 to a dollar, down from the P56.42 in the previous day’s trade (Full story here: https://businessmirror.com.ph/2022/09/05/peso-could-still-weaken-on-global-devts/).

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