I remember a time in 2012 when many big-bank economists predicted that the Philippine peso would remain a shooting star at around P42/$ by year-end. The peso then was a ‘darling’ currency, having nicely recovered from a low of about P49/$ in the wake of the Financial Crisis of 2008. Little did the bank economists know that there would soon be a literal u-turn; the peso shortly began its doldrums to where it is today at P53/$. It hasn’t been a pretty sight for the responsible authorities at the central bank.
Category: phil currency
check out cielito habito’s An early Easter gift
So what’s in the credit rating upgrade for the ordinary Filipino? It’s actually a mix of good news and bad news. The positive side is that more investments—both of the job creating (FDI) and the “hot money” kind—should be drawn into the country by this new vote of confidence; let’s hope there will be much more of the former. Government and firms could borrow funds more easily and more cheaply. Lower interest rates would mean lower costs for government debt, freeing up more funds for health, education, infrastructure and other public investments to uplift people’s lives.
But the negative side is that a major segment of our population faces the very real prospect of lower incomes. Families relying on remittances from abroad, or from earnings in import-substituting or export-oriented industries (including tourism) will be hurt by a rising peso induced by the surge in foreign inflows. Pensioners, retirees and other savers relying on interest earnings from fixed-income placements will also see their incomes drop further. A retiree recently wrote me complaining that his interest income had dropped 40 percent in the past year alone because of falling interest rates, and laments that he now faces a serious problem with making ends meet.
and ben kritz’s Curb the ratings upgrade euphoria
President Aquino’s statement described the positive outcomes of the ratings upgrade as lower interest costs on government debt, making Philippine securities more attractive to investors, and “fiscal space” from the savings on debt costs, savings that can be used “to sustain and further improve on social protection, defense, and economic stimulus, among others.” The only part of that statement that is completely accurate is the first part. The specific meaning of the rating is a judgment of the country’s ability to pay foreign-denominated debt on time and in full, and because the Philippines is now judged to be at lower risk of default by one agency, the government will not have to pay so much to incur debt; interest on direct loans will be a bit lower, as will yields on government bonds.
As for the “savings” that can be applied to other activities, that presumes the government will incur new foreign debt, which most would consider a rather novel conception of “savings.” Furthermore, in a memo released on March 17, Treasurer Rosalia de Leon informed bond dealers that the Treasury will be increasing its monthly auction of 3-, 5- and seven-year bonds and treasury bills from P120 billion to P150 billion through the second quarter, as part of an effort by the government to source all its debt locally for 2013. In other words, the government has no plans for now to access the foreign credit market where the impact of the ratings upgrade would be felt the most.
and gary olivar’s Early Easter gifts
Perhaps the most important thing to remember about this credit rating upgrade is this: At the end of the day, it really matters only to professional portfolio managers who may be restricted from putting their money in non-investment-grade credits. Even with its shiny new investment grade, the Philippines will still have to compete with its new peer group for portfolio attention. And direct foreign investors—the ones who really bring in the jobs—will be totally unimpressed since they’re concerned with an entirely different set of issues altogether.
The new rating—like any other credit rating—speaks only to the country’s ability to repay its foreign-denominated debt, nothing more. It says less about whether or not equity investors can expect to earn the right returns on bricks and mortar on a level playing field. And it says nothing about whether we are investing properly for future growth, or creating more jobs through the right kind of growth, or improving our productivity as the only way to sustain long-term growth.
Unfortunately, like most early gifts, the packaging may be nice and glitzy—as the Palace will try to hype it up—but what’s inside is not what we really need.
read, too, atty. dodo dulay’s What PNoy isn’t saying about PH’s rating upgrade
Citing 2013 as the Year of the Eagle and ejaculating as if the stars, the Zodiac and the Chinese calendar had really anything to do with economic governance, some stockbrokers, with their head in the sand, will probably deny a currency crisis exists, celebrating as they do the crossing of the six thousandth mark in the stock exchange index and cheering the economy on as if the capital markets was its best indicator.
Stock market analysts, and below this breed, the stock broker, are among the most mystical, dubious at times and ambiguous at most, and that is understandable as they are hardly predictive and more responsive, finding causes and rationale after the fact if only to justify the market’s movements.
The stock market is indeed an indicator but for the serious investor, it is probably the least indicative of economic governance or investment climate. For one, the index fails to capture the cost of doing business. It does not account for infrastructure development, the level of wages, or the cost of utilities on a sustained basis.
It also does not reflect the quality of economic governance, again on a sustained basis. Industry and agriculture may be experiencing slumps but the index will fail to reflect those on a long term basis. If at all, the spikes in the index will attract margin traders and margin players and thus bloat the index monetarily, but that will hardly be indicative as traders in the exchanges will make money either way the economy develops, or does not develop.
It is in the nature of the market and the concept of investment for those who play it. There is a reason that the so-called investments are labeled “Hot Money”. On a sustained basis, nothing can be more volatile and colloquially “iffy” and uncertain. Likewise, those who advise investing through such cannot be far behind both “iffy” and uncertain.
The real investors, as opposed to margin traders, who are earnestly looking at their long term options and willing to gamble not simply portfolio investments but real capital to build factories and long term businesses are seriously worried. These are not those who gamble. These are also not those who will, in one minute, purchase stock from the exchanges, and in the next minute, divest. These are not the financial browsers and investment tourists. More important, these are not those who give any sort of credence to a stockbroker’s sound bite advice, knowing full well that a broker earns his commission from both a purchase and a divestment, thus covering both eventualities and is characteristically risk free.
The dearth of serious foreign takers of the government’s Public Private Partnership (PPP) program is an eloquent example. Never mind the declarations of interest. Those might be plentiful but when compared to actualities and those who have seriously invested foreign capital, the number is embarrassingly low in contrast to the hype and hullaballoo. Three years into Benigno Aquino III’s incumbency, and the PPP, the original brainchild of former vice presidential candidate Manuel A. Roxas, remains as much a failure as was his unfortunate bid for the two highest elective and executive positions in government.
Failure spawns failure and two-time losers do not necessarily create winners. The arithmetic is as simple as that.
Let us however dig deeper. What is keeping foreign capital from seriously coming in and taking up residency as foreign direct investments (FDI) in the Philippines despite the declarations of a resplendent economy and the hyperbole of stock market brokers?
Let us examine one apparent hurdle.
In the recent weeks prior to the end of 2012, the monetary authorities were seriously intervening in the currency markets through what is called “open Market operations” or the buying and selling of currency to control the value of the peso as against another currency. In the case of the intervention towards the end of 2012, the peso arrayed against the dollar was a matter of serious concern, and in some instances, panic.
Threatening to impose some form of capital controls, either on the inflow of dollars, or the exit of the same, the monetary authorities constantly warned against an undesirable speculation on the peso. The imposition of capital controls, first through threats and then trough the imposition of trading limits of derivative instruments that reflect the peso’s long-term exchange volatility indicate speculators may already be attacking an overvalued peso.
Ironically, the peso is vulnerable to speculative attacks, as luck would have it, because of its apparent strength and the little that government is doing to return it to its rationale levels. Early-warning bellwether indicators have not only been ignored, but by their continued prevalence, a currency crisis might well impact on the profitability of gross domestic productivity (GDP) drivers such as the business process outsourcing sector and the one-off value of overseas Filipino worker’s (OFW) remittances.
Drowned out by the pom-pom cheerleading and girly chorusing of stock brokers who’ve broken out the bubbly over the recent rise in the stock exchange index, few are listening but officials representing the business outsourcing sectors are now complaining of our growing uncompetitiveness.
BPO revenues are not only slowing down but are thinning out as margins are depleted by the detrimental rise in the peso’s values. Note that a recent analyst from one of our creditor banks had forecasted an even stronger peso breaching all time parameters and heading straight into the uncompetitive Php 30’s levels.
When compared to other economies that offer the same BPO service and have in fact better telecommunications infrastructures, more reliable power platforms and a better-educated constituency that might service the technical BPO market, cracks in the local BPO sector are starting to form. While admittedly, we will remain a key player in the global market, our preeminent position is not only threatened but it may not remain for long should the noynoying continue. To validate such concerns, the local associations representing the BPO sector are gradually increasing their criticism of the monetary policies being pursued where the peso is kept inordinately strong.
Echoing those concerns are the associations that represent OFWs, relevant and critical especially in this period when OFW remittances flow into the economy in substantial volumes as compared to any other time of the year.
A major OFW group has begged the government to act aggressively and pro-actively to maintain the value of remittances. One way they suggest is to suspend the 0.05% documentary stamp tax slapped on every US$ 200 worth of remittances. The Aquino government simply replied with its classic callousness and has turned a deaf ear. Its highest official has instead chosen to noynoy and ride a pony while taking the holidays off. Either through a serious lack of discernment and economic comprehension it appears he has not understood the impact of their plight, or he doesn’t care. Heaven forbid that it is both.
The criticality cannot be ignored however, now or in earlier periods. The strong peso has diminished the value of the remittances and when domestic families convert the remittances the actual peso amounts are far lower than expectations.
In the last year the peso versus the dollar exchange discrepancy had slashed the remittance values by as much as 10% thus reducing consumer purchasing power from this one vital source of cash flows for a public whose earning capacities in the local currency is severely limited and worsening under a dispensation unperturbed by worsening unemployment. Add the devaluation of 10% to a historic 30% in the previous years to 2012 and the situation shows why, despite anachronistic partying by stock market brokers and Aquino’s sycophants over GDP growth, OFW families seriously worry.
This is unfortunate on several counts. The remittances are the basis for increased consumer spending which is typically a vital economic driver that feeds into GDP growth. When the effects of the remittances are depleted, then so follow consumer spending and its impact of real GDP. This belies the veracity of Aquino’s 7.0% year-over-year GDP growth statistics. If indeed the economy grew then that statistic does not reflect the realities felt by the OFW families much less by those unemployed and continue to be unemployed.
If Aquino’s continued noynoying and his economic policies are wreaking havoc on the unemployed and the OFW families, then perhaps these are benefiting those with work in the dollar-earning exporting. Look again. Unfortunately, only the suck-ups are toasting and sipping champagne. Let’s look at the realities instead of listening to self-promoting stock market analysts who know little of the sector other than its short-term impact on the capital markets. Let us listen to the actual echoes from the export industry itself.
The Philippine Exporters Confederation is pleading for the Aquino government to stabilize the exchange rate at Php 42.50 to the dollar, determining that level to be the viability threshold to save the export sector. Too late. The prognosis on the exchange rate is far below Php 42.50 for 2013. So much for the Year of the Eagle. The better analogy is a cooked goose.
Against all these, an uneducated media, a number of paid columnists and the army of suck-ups continue to hark on the peso as the region’s best currency performer against the dollar. They should have OFW families. Or they should be a worker in the export sector, be one of the jobless, be a BPO operator or simply be Filipino. Then they would realize how empty and irrelevant such boasts of currency can be.
Let us analyze the heresy behind the hype. Government’s press releases proudly claim the peso as the region’s best performer against a weak dollar by comparing our peso’s upticks to those of the New Zealand dollar, the Turkish Lira, the Taiwanese Dollar and the Singaporean Dollar.
As if these were the economies we competed against. Taiwan perhaps, but as for the rest? It’s a question of coconuts and oranges.
They also cite the strategic devaluation of the Indonesian Rupiah, the Japanese Yen and the Indian Rupee. They seem to have forgotten their macroeconomics or perhaps they never learned it. A devalued Rupiah steals away FDI from the Philippines, a weakened Yen slows down Japanese investments into our economy and a devalued Rupee makes our BPO sector uncompetitive against India’s thus making that economy more viable.
For those sycophants who’ve made it a practice to cheer on the type of governance that has ignored these realities, we suggest they soon finish the bottle of champagne they’ve broken out to celebrate an index that can just as easily fizz out comprised as it is by bubbles and little else. Worse, bubbly like that can quickly turn to vinegar.
Dean dela Paz is an investment banker. He is a consultant in the fields of finance and banking and has packaged some of the most prolific public offerings in the Exchanges. He is a member of the Executive Committee and sits in the Board of one of the oldest financial institutions in the country. He is likewise an energy consultant having served on the Boards of several foreign-owned independent power producers and as CEO of a local energy provider.
He is currently the Program Director for Finance in a UK-based educational institution where he also teaches Finance, Business Policy and Strategic Management. A business columnist for the last fifteen years, he first wrote for BusinessWorld under the late-Raul Locsin and then as a regular columnist for the Business Mirror and GMANews TV. He also co-authored a book and policy paper on energy toolkits for a Washington- based non-government organization. He likewise co-authored and edited a book on management.
patindi nang patindi ang daing ng ating mga OFW sa tuloytuloy na pag-appreciate ng halaga ng piso. wala na daw silang naiipon dahil kailangang dagdagan maya’t maya ang ipinapadala nila sa mga pamilya nila dito. bakit parang binabalewala ng administrasyong aquino ang mga bayaning ito, e kung hindi sa kanila, matagal nang bumagsak ang ekonomiya? sino lang ba talaga ang nakikinabang sa pag-taas ng halaga ng piso? OFWs should unite and demand depreciation.
Collective impotence and the peso
By Raul V. Fabella
THE RESOLUTION submitted by the PCCI to Pres. Aquino at the closing of the just-concluded Philippine Business Conference is notable. It called for the arrest of the continuing appreciation of the Philippine peso to safeguard our dollar earning industries. I will not comment on the specific recommendations but only in the general direction — a more assertive attitude towards the value of the peso. When, in early 1994, a group of us (Noel de Dios, Benjamin Diokno, Cayetano Paderanga, Toti Chikiamko and myself together with PHILEXPORT which is celebrating its 20th anniversary on Nov. 30, 2012) called for the deliberate weakening of the peso — a cause carried in a speech by the then Senate President Edgardo Angara at the first plenary session of the 1994 National Economic Summit — we were treated worse than lepers. One mouthpiece of the then central bank governor labelled us the “jukebox economists”: singing any tune the moneybags call. The implied moneybags, IMF and the World Bank, did not even know they were calling our tune; they were, in fact, calling the CB’s tune. They had a catatonic fixation for floating the exchange rate which, at that point of considerable dollar inflow, pointed to appreciation. And PCCI? It was firmly on the CB governor’s side. But even labor unions whose jobs we were trying to save called for our heads. Note that this was after the People’s Republic of China devalued its currency 40% early 1994. The yuan then stayed at about 8.30 per US dollar for 10 years despite ever larger trade surplus and howls of protest from the West. One did not need atomic physics to glean that PRC’s move would devastate Philippine manufacturing and employment. This was a plea for economic survival!
The CB governor himself responded to the proposal with the defiant “Over my dead body!” To the business complaint of high domestic interest rate (to support the overvalued peso), the central bank’s response was: “Borrow in dollars.” It was a counsel for disaster. Borrow with vengeance they did, especially the banks. After all, with appreciation a one way bet, you get low interest rate and a sure appreciation gain! The ‘Over my dead body’ boast being a portfolio inflow come-on and the consequent massive private foreign borrowing forced the peso upwards to ₱24/$. And this omen of an impending debacle was hailed a success! In other words, the Philippine economy got poison disguised as medicine. Two years later, the Asian Financial Crisis, the bitter harvest of private over-borrowing and asset bubbles, wiped out the gains slowly built up the last five years. The CB’s strong peso policy had aborted the Ramos growth momentum!
This rebuff of economic common sense is a source of great sadness for me personally. Toti Chikiamco summed up our collective despondency at the Summit’s rejection: “We lost our balls!” Meaning, we as a people failed a massive collective action test: we let ignorance among our central bankers and among the business community short-change our future. Had we moved the exchange rate as proposed, there would not have been excessive private foreign borrowing and the Asian Crisis would have spared our shores. The banks would have remained whole and the Ramos growth inertia would have continued into the next decade. Instead, we experienced a decade of painful curettage to sweep away the poisonous residues (bank NPAs, etc.) of that abortion. Our romance with sado-masochism marched on.
Such is the power of the CB: it can shatter a budding future. In this case, the strong peso was the sledgehammer. And this was not the first time the CB officiated in the abortion of a potential breakout in the post-EDSA era. The sledgehammer in the first was the interest rate cure administered through the JOBO Bills that shrank the economy to fit the overvalued peso: it found common cause with misguided military elements to abort the momentum of the post-EDSA Philippines. But that deserves its own re-telling.
Fast forward to 2012. The air is once more pregnant with promise. The signs are all pointing in the right direction. As if on cue, however, that same abortive sledgehammer rears its head. Will we overcome the collective action challenge this time? Now that the players and the economic realities have changed. Now that there is a new and more open dispensation in the BSP. Now that even such sworn enemies as the PCCI has switched lanes. Now that OFW remittance is the country’s lifeblood. Now that BPO is the sunshine industry and the big conglomerates have dollar earning assets. Now that the old global monetary consensus has become tired and misguided. Now that the challenge – keep the exchange rate from dipping below ₱42/$1 — is much simpler than in earlier times.
I dare take heart. A new collective consensus seems a-building. We the people should now take the bull by the horns and not leave it to bureaucrats. Would that this time we will not lose our balls. Let not collective impotence again mock our hopes. Even if it should happen twenty years late!
Raul V. Fabella is the chairman of the Institute for Development and Econometric Analysis, a professor at the UP School of Economics, and a member of the National Academy of Science and Technology. For comments and inquiries, please email us firstname.lastname@example.org. To know more about IDEA, please visitwww.idea.org.ph.