doomed dollar exchange
i had been trying to get a grip on the problem of the rising peso, trying to understand why it is said to be good for the economy when it’s clear na mas maraming pilipinong nagigipit kaysa naliligayahan. googling didn’t bring up more than the usual reports about negatively affected sectors, such as telecommunications, manufacturing, garments, real estate, and of course about ofws and their nixed appeal for a fixed exchange rate and lower remittance fees.
but now that the exchange is up (down) to 40-something pesos to a dollar from 49-something in january 2007, hindi ba tayo dapat mabahala? so i emailed two economists, cielito habito of inquirer whom i know personally (a sister of his married a brother of mine) and filomeno sta. ana iii of business world whom i “met” through the plaridel e-group, and asked them what the government could do to stop the peso from appreciating so much.
i thank them both for their quick replies via their monday columns. habito’s Dealing with the rising peso (which has a part 2 that he emailed me a capsule of) and sta. ana’s Temper the appreciation, says GMA. Is that enough?
as it turns out habito and sta. ana are on different wavelengths, representing two different schools of thought.
habito, neda director-general in fvr’s time, agrees that there are things government can do but fixing the exchange rate is not one of them.
“Defending a fixed exchange rate (that is, making it stick) under current circumstances requires measures that would raise demand for or reduce supply of foreign exchange. The Bangko Sentral (BSP, the Philippine central bank) itself would inevitably have to provide most of the needed extra demand, by buying up increasingly large amounts of dollars. While this may look good because it wouldbuild up the country’s foreign reserves, it can have at least two harmful effects. One, it pours pesos into the system, thereby stimulating inflation (i.e., accelerating price increases). Wonder why inflation has ticked up lately? Well, oil prices are not the only reason, that’s for sure. Two, it would lead to large financial losses on the part of the BSP, losses that must ultimately be shouldered by someone (there’s no free lunch!).
“The latter has in fact already been happening, even without fixing the exchange rate. In the course of trying to arrest a too-rapid peso appreciation, the BSP has quietly built up foreign reserves over the past year from about $23 billion in January to more than $33 billion by year’s end. This means that it has been accumulating massive amounts of an asset that is rapidly losing value, leading to losses estimated at over P40 billion so far. Remember the old Central Bank and how it ran up massive losses in the late ’80s and early ’90s from exchange rate operations (of the reverse kind)? After it was reorganized by law into the present BSP, we taxpayers ended up quietly paying for all that, in case you didn’t know.”
instead, habito would recommend taxing “hot money” and encouraging capital flight.
“I’ve written before that Thailand and Taiwan, among other countries, have … eased up dramatically on the rules on foreign investments by their citizens, practically abetting it. At the same time, they are restricting entry of portfolio investments (“hot money”) to curb supplies. Some people in our government still think it’s a good thing that we are able to attract a lot of hot money, unfortunately. Not because they are benefiting, but because they don’t know any better, and argue (for pogi points) that it’s a sign of (misplaced) confidence in our economy, etc. Actually it’s not a “pull” factor at play here but a “push” one, as I’ve been pointing out. There’s simply so much dollars out there — nobody wants them — looking for a place to go.
“I personally see very limited leeway for our government to influence the exchange rate in the face of global market forces (i.e. the weak dollar, which will soon be further weakened by the anticipated lowering of US interest rates by the Fed), plus the surging
remittances of OFWs, which is a natural response to the declining peso value of their remittances (i.e. in an effort to maintain the peso incomes of their families at home).
“… In a sense, we are helpless on this, and can only do palliative measures for those affected at best. I think our economy should learn to adjust to a lower peso-dollar exchange rate in the long run. The trend will continue until the US economy turns around, and I don’t see it happening under Bush because of his expensive Iraq adventure.”
sta. ana, who belongs to a reform-oriented activist policy group (Action for Economic Reforms), believes that more can be done.
“Time and again, we, together with many economists like Raul Fabella, have advocated a competitive exchange rate. Even the World Bank and the International Monetary Fund favor a more competitive exchange rate.
“What a competitive exchange rate is is debatable. At the very least, the Philippine peso should not be overvalued. We estimate that the overvaluation of the Philippine peso is about to reach 15 percent. Recall that a factor behind the 1997 financial crisis was an overvalued peso. We have not yet reached that degree of overvaluation in 1997, but the current trend is already a cause for alarm. The Bank of the Philippine Islands (BPI) forecasts that the exchange rate may even settle at PhP37 per US dollar.
“But like Fabella, we are not content with simply avoiding overvaluation. More importantly, we prefer an undervalued currency. For this is the lesson of the successful developing countries; an undervalued currency is a necessary condition to achieve sustained high-growth rates over a long period. Empirical studies have confirmed this. Dani Rodrik, for example, estimates that an undervaluation of 50 percent (which is roughly the undervaluation of the Chinese renminbi) translates into a contemporaneous growth boost of 1.35 percentage points.
“In the past, an advocacy for an undervalued currency was a lonely battle. Devaluation has been associated with economic crises. Thus, those who prescribe depreciation face what Fabella calls a ‘credibility wall.’
“But precisely, devaluation was a corrective measure in light of the significant overvaluation of the peso. We would not have been struck hard by the 1997 financial crisis, if the peso was not overvalued in the first place.
“But this time, the public is learning that an appreciating, overvalued currency hurts the whole economy and many sectors. Now, the media reports attribute the closure of 75 firms in the first half of 1997 and the displacement of 100,000 workers in the seaweed industry, to the appreciating peso.
“There is now an expanding constituency, organized and articulate, for a competitive exchange rate, which is our euphemism for undervaluation. It is composed of the organizations of manufacturing exporters, food processors, business process outsourcing, workers, overseas Filipinos, together with public interest groups and academics. Even the protectionists favor a devalued currency as a substitute for trade protection.”
of course, undervaluing the peso, maybe back to 50? 55? would require a change of policy, which seems unlikely, given GMA’s mindset that an appreciating peso is good because it takes fewer pesos now to pay off our dollar debts, which she has been gleefully doing just so she can borrow some more. masaya siya.