Paying our Debts & the Currency War

Wednesday, 03 November 2010 02:42

Written by Malou Tiquia

It struck me as being naive when I read in the newspapers last Thursday, 28 October 2010 on BSA3 saying that the stronger peso “means the world is now watching us”; and that the Philippines is now an “emerging economy.” He then suggested that what “we need is a stable exchange rate.”

First and foremost, our peso is appreciating because of the weakness of the dollar and the impact of the global currency war.  The US interest rates are near zero and the US is stuck in a very weak economy going into midterm elections, with the Democrats holding a very shaky position in the Senate and with certainty to lose the majority in the House of Representatives.  The global currency war on the other hand is all about deficit versus surplus countries with the shadow of the U.S.-China trade war looming at the background.

The peso should not be seen in a void considering that the competitiveness of our exports hinge on it and hence local economy is affected.  But a more important social dimension to a strong peso is the domestic value of remitted incomes on which a lot of Filipino families depend on.

The Aquino administration should study carefully its options in relation to remittances.  According to BSP, “Remittances from overseas Filipinos (OFs) coursed through banks rose by 9.8 percent year-on-year to reach US$1.5 billion in August 2010.  The near double-digit expansion in August was the highest monthly growth of remittances recorded during the year.  With sustained inflows since January, cumulative remittances for the first eight months of 2010 amounted to US$12.2 billion, higher by  7.4 percent from the year-ago level.”

A year ago, the peso-dollar exchange rate was at Php47.032 on the average.  Today, it is trading at an average of Php43.516.  The last time the peso went down to Php42: US$1, our millions of overseas workers raised a collective wail.  With Christmas fast approaching, our exporters are on the overdrive, this too will be affected together with the vital cog in the economic engine, and the BPO industry will also start flexing its muscles for a possible government intervention into the exchange rate.

The global currency war was brought about by this exact intervention by various governments of countries like the U.S., U.K., China, Japan and Korea, which lead to a domino effect in their respective sovereigns to defend their competitiveness.

As Laurence Knight of BBC News pointed out the “the world has been divided between deficit countries and surplus countries.”  “Deficit countries, like the US and the UK, borrow from the rest of the world, so they can import more than they export.  Surplus countries, like China, Japan and many other Asian countries, do the opposite. They lend to other countries to help finance their exports. The euro zone has typically imported about as much as it exported, staying in balance.  But within the euro zone there are also big imbalances: Germany runs a big surplus, while Spain, Greece and others run deficits.”

The domino effect of defending one’s currency has resulted in China buying trillions of dollars to keep the Yuan weak against the dollar thereby making Chinese exports cheap.  China then decided to diversify its foreign exchange holdings and started buying the Japanese Yen and the South Korean Won.  These drove up the value of both currencies, hurting the competitiveness of Japanese and Korean exports.  Consequently, Japan intervened to weaken the yen and this led to the global currency war.

Three options have been mentioned to solve the currency war: a) launch an austerity program, which could lead to recession; b) adopt looser money, which could result to quantitative easing activities such as printing more money to buy up debts, or intervening directly to currency markets or c) impose trade sanctions.

But previous to that policy statement made by BSA3, BSP Governor Amando Tetangco looked at the other side of the ledger and suggested to prepay foreign debt, “now is as good as any to pay in advance some of the country's foreign debt and in the process cut the debt-to-output ratio that at 33 percent of the gross domestic product still represents a big drain on the country's limited budget.”  Reducing the debt-to-GDP ratio, Tetangco noted, is an “important factor in helping lift the country's global credit stature of below investment grade at the moment.”

It should be noted that some 43 percent or P1.978 trillion of the national government's P4.605 trillion-debt load is owed to foreign creditors while the bulk of 57 percent is owed to local lenders.  Surely, pursuing a stable exchange rate policy mentioned by BSA3 was negated by the Purisima-led “first peso bond floatation.”  BSP ended up doing mopping operations instead.  Ever heard of externalities and unintended consequences?  How about talking of team play among governmental agencies handling fiscal, monetary and trade policies?  We only have one-country guys!

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