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THE recent depreciation of the Philippine peso may increase the cost of infrastructure projects, particularly those financed by dollar-denominated Official Development Assistance (ODA), according to economists.

On Monday, the Philippine peso depreciated against the US dollar to P54 to the greenback. This is a 4-year low since the last time the peso breached the P54 territory was in October 2018. (See story: “Peso falls to P54 to dollar, its weakest level in 4 years,” in the BusinessMirror, 21 June 2022.

In an e-mail to the BusinessMirror, Ibon Foundation Inc. Executive Director Sonny Africa said the peso is on track to “settle at its lowest level against the US dollar in 17 years or since 2005.”

The latest four-year low is just the latest development in this regard, Africa added.

The more expensive dollar will impact ODA projects through the price of imported materials as well as dollar-denominated debts, according to the University of the Philippines’s Renato E. Reside Jr.

“(The effect will be) immediate but (it) may not be too salient yet as we are not dealing with a devaluation here, which is a discrete change in the exchange rate,” Reside, director for research at the UP School of Economics, told the BusinessMirror. “What we have is a depreciation, which is a small change in the rate.”

Nonetheless, “we still do have a significant amount of foreign reserves to absorb this,” he added.

Yen, peso

ACCORDING to Victor A. Abola, economist at the University of Asia and the Pacific (UA&P), a number of ODA projects propelled by yen-denominated loans may be spared from price hikes.

This may be significant as the Japanese government remains the country’s top source of ODA funding. In 2020, Japan accounted for 36.44 percent or $11.18 billion of the country’s ODA loans and grants.

“ODA funded by Japan (mostly, anyway) will actually have no effect, since the yen has depreciated much more than the peso,” Abola said. “As it stands, we will still benefit. This benefit will offset some of the dollar-denominated loans.”

Still, Ateneo Eagle Watch Senior Fellow Leonardo A. Lanzona Jr. told the BusinessMirror that the depreciation of the peso will lead to higher costs.” NEDA Undersecretary Roderick M. Planta, however, said the Investment Coordination Committee (ICC) has a mechanism to address the increase in costs.

Price contingency

Planta, officer-in-charge at the National Economic and Development Authority (Neda), told the BusinessMirror that adjustments in foreign exchange (forex) involving projects are already lumped under “price contingency.”

This is common practice for multi-year projects and allows implementing agencies some flexibility in the financing of projects, he explained.

“Meaning, posibleng mataas ang forex losses mo ngayong taon pero variable naman for the project life (at) baka pasok pa din sa estimate ng agency,” Planta said. [This means it is possible for you to experience forex losses this year but these could be variable for the duration of the project’s life making your whole project estimate still viable]

In case forex losses are significant, such as more than a 10-percent increase in project cost, these projects will have to return to the ICC and go through re-evaluation until it secures another approval from the Neda Board. If there is an increase in total project cost by 10 percent and below, but the cost remains equal or is now more than the ICC-Neda Board cost floor for review, the implementing agency must still secure Neda Board approval.

These guidelines were part of a memorandum issued in September 2016 which revised the ICC Guidelines and procedures concerning changes in project scope and cost.

Debt pressures

IN 2020, Neda documents stated that cost overruns led to an increase in cost for projects of $5.86 billion, representing an increase of 17.38 percent.

The revised ODA project costs as of 2020 reached $39.74 billion from the initial estimate of $33.86 billion based on the ICC’s initial approval.

But as the local tender’s strength is sapped, Africa said it may be worth considering stopping projects that would no longer be viable given the forex adjustments. He added this would free up much needed resources for “social needs as well as relieve deficit and debt pressures.”

“Particular attention should be given to the most import-intensive projects such as railways where it is likely that half or up to two-thirds or more of project costs are on imported materials, equipment, machinery and contractors,” Africa said. “Despite employment hype, perhaps just 5 percent to 10 percent at most is spent on unskilled labor.”

Lanzona told the BusinessMirror that higher costs require “even more financial consolidation and tax collections.”

Image credits: Nonie Reyes