Stabilizing the peso exchange rate
A rapidly appreciating peso exchange rate to other foreign currencies is as damaging to the economy as a rapidly depreciating peso. So, the 20% appreciation of the Philippine peso against the U.S. dollar is already adversely affecting almost half of the Filipinos, probably causing social and political instability even as the economy continues to grow respectably. The 4 million OFW’s who are remitting to their families, at 4 dependents per family, already total 20 million; the 2 million workers of export oriented industries, especially the small and medium industries which are labor intensive, add another 10 million; the export zones and outsourcing company employees whose jobs are affected will add another 10 million; then the one million jobholders of manufacturing companies whose products are no longer competitive, another 10 million. All in all, there are 40 million Filipinos who have experienced a loss of purchasing power or even jobs.
This is validated by the fact that the $16 billion OFW remittances is 15% of GNP, the $34 billion export revenues is 31% of GNP, and the upcoming outsourcing industry already contributes 2% of the GNP. The griping has started and it is coming from the upper- lower class and the lower- middle class. This will eventually spread to the whole middle class, which together with the portion of the lower class will account for 40% of the population.
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The strong Peso has it’s good effects, such as : lower inflation, slower increase in fuel and power prices, lower government debt and debt service, and a balanced budget for the government. But weighing these against higher unemployment in a country like the
The Central Bank has been trying its best to mitigate the appreciation of the peso via monetary tools and market intervention. Yet it has not been as effective and the peso came out as the strongest currency in
What is needed is an Exchange Stabilization Corporation (ESC), which will substantially remove the speculative activity in the foreign exchange market. The objective of this Corporation is to manage the appreciation so that it will be absorbable and livable for the economy in terms of employment and competitiveness of its industries. It will not defend a specific exchange rate, but will relate the appreciation to the appreciation of the other trading and competitive nations.
The ESC has to be capitalized at P10 billion, to be contributed by the National Government, the Central Bank, and the government Financial institutions.The Central Bank will have reported a P4 billion foreign exchange loss in its 2007 financial report, which it could have put up as capital for ESC. Then, the ESC shall have the flexibility to absorb and book these exchange losses without Central Bank accounting standards. At this level of Capitalization, with a trading band of 5%, it will have a trading clout of at least P200 billion or $4 billion. At the current daily trading volume in the Forex market of $300 million, this would be a significant amount to temper speculative activity and establish an orderly appreciation of the peso.
Fortunately, we also have the talents for this endeavor. Over the years in my work in Investment Banks, Commercial Banks, PDIC, SGV, and other financial institutions, I know that the best foreign exchange traders and dealers are Filipinos. They are employed in the top foreign and Filipino banks and they are making money for their companies, that’s why the banks are reporting record profits.
For the record, I am of the opinion that had we properly managed the Peso appreciation, it should have ended the year at the P43 to P44 range to the dollar. This would have been the less disturbing exchange rate conducive to a 7% to 8% economic growth. I am also of the opinion that the Central Bank should further reduce interest rate levels, so that all loans will be priced at single digits, at 6% for short term loans and 9% for long term loans.
So, the Exchange Stabilization Corporation, together with the more proactive Central Bank initiatives on interest rates, a less ambitious budget deficit target (the government should spend more even if it incurs a deficit) and inflation target should prevent the peso from appreciating to the point where it will be counterproductive and inimical to the country and the wellbeing of its people.
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