The Real Economy Effects of a Weak Peso: Higher Water Bills and Fuel Prices!

The mainstream's meme on the weak peso: higher purchasing power for foreign exchange earners such as OFWs, BPOs, exports and tourism equals G-R-O-W-T-H!

Really????

Two week back I wrote:

A lower peso should not be seen in a very simplistic context.

Changes in the peso, which is a price or the exchange value of the domestic medium of exchange relative to the US dollar, will affect ALL commercial activities.

A lower peso, on the surface, may boost the consumption. But economics doesn’t stop here. Media skirts on the effect of the lower peso on imports, production, debt and the epiphenomenon or secondary causes from the latter factors.

Ceteris paribus (all things being equal), a lower peso means MORE peso required for any exchange transaction quoted in the US dollar. Simply said, any transactions related to USD will become MORE EXPENSIVE in peso terms.

Domestic prices of imported goods and services will RISE. So whatever alleged gains from a lower peso on OFW will be largely offset by the price increases on imported goods and services. And rising prices should REDUCE demand for imported goods.

Now for the real time--real economy effects of a weaker peso.

First on water bills. From the Inquirer: (bold mine)

Customers of Manila Water Co. and Maynilad Water Services (Maynilad) will pay slightly more in the next three months due to an adjustment in the foreign exchange component of their water bills as a result of the weaker peso.

The FCDA, adjusted quarterly, is a tariff mechanism granted to utility companies to allow them to recover losses or give back gains arising from fluctuations of the peso against other currencies.

This is because Maynilad pays foreign-dominated concession fees to the Metropolitan Waterworks and Sewerage System, as well as loans to fund projects to improve service for its customers.

Both Manila Water and Maynilad said the FCDA would have no impact on their respective net incomes.

The last statement represents analytical garbage, that’s because it assumes away the function of prices on demand.

Basically, water utilities will just pass the burden of weak peso to the consumers so the report assumes that there will be no impact on net incomes. 

But higher prices will affect demand! And impact on demand will get transmitted to the incomes of water utility companies! So the impact may not be direct and immediate but indirect and overtime.

Next, fuel prices: From the Inquirer: (bold mine)

Local oil firms are raising gasoline prices slightly this week following mixed movements in the international oil market last week…

Industry insiders said oil prices moved up in international trading in the first half of last week but dropped toward the weekend as demand failed to take off.

Since the Philippines is a net importer of petroleum products, most oil firms are exposed to similar factors (crude oil price, foreign exchange volatility, import levies, etc.) that affect fuel retail pricing.

Since January 2015 to date, adjustments for gasoline reversed back to a net increase of 76 centavos per liter while diesel is now at a net decrease of P2.64 per liter.

Household cooking gas LPG remains at a net decrease of P10.60 per kilogram.

Last week, oil firms implemented huge price hikes that virtually wiped out 11 straight weeks of rollbacks previously. The increases were P1.75 per liter for gasoline, P1.95 per liter for diesel, and P1.85 per liter for kerosene.

While it is true that international oil prices have been a key factor to the recent price increases, don’t forget that oil prices are denominated in USDs. 

So as stated, any transactions related to USD will become MORE EXPENSIVE in peso terms. Therefore, the hike in domestic fuel prices has been aggravated by a weak peso.

Now based on the law of demand will higher fuel prices translate to MORE demand? Or LESS demand?

How should this translate to consumer spending, investments, production, profits, income or general economic activities?