Net positive

The appreciation of the peso provoked an unusual debate. It is unusual because this is one of the rare times when our currency is rising rather than falling.

For as long as we remember, the peso’s exchange value was consistently eroding against the dollar. Once the currency was pegged P2:$1. Decontrol in the early sixties brought the value down to about P4:$1.

Our currency’s value was halved again by the late seventies to about P8:$1. Then, through the turbulent times, the currency floated downwards to P26:$1 by the time the Asian financial crisis struck. In 1997, the peso’s value was halved once more, wiping out many industries and causing much economic dislocation.

It is understandable, therefore, that large sections of our economy evolved out of the expectation that the peso’s value would continuously deteriorate. That expectation was anchored on the assumption that our fiscal situation would continue to be badly managed and we will be constantly addicted to external borrowing.

But the situation changed the past few years. The Arroyo administration put fiscal discipline as its central goal, notwithstanding the political unpopularity that implied. New revenue measures were put in, spending was reined in and a primary surplus was generated.

Given the latest budget deficit figures, the schedule for achieving budget balance was advanced by two years. That altered fiscal picture due to the VAT and the regime of fiscal discipline maintained despite the cost of unpopularity, the peso strengthened.

Today, we have ample foreign currency reserves. We enjoy a robust balance of payments surplus. We have controlled our budget deficit. We have the unique advantage of having a large number of Filipinos earning in foreign currencies and remitting their earnings back home. This year, remittances through the banking system are estimated to hit at least $12 billion. The informal estimate of total remittances (including those passing outside the banking channels) is as high as $18 billion.

Combine the large remittance inflow with a reviving tourism sector, an expected rise in direct foreign investments, hot money investments in our capital markets and the large quantity of Filipino deposits in foreign currency accounts. That is a powerful combination that makes the peso’s appreciation inevitable.

Not even a stupid coup conspiracy could reverse the trend – especially since it is estimated that some of the money used to finance the conspiracy was converted to pesos from foreign currency accounts.

The two main constituencies benefiting from a continuously weakening peso are the exporters and those dependent on remitted incomes. These are unquestionably large constituencies.

Of those two constituencies, the exporters are the more politically articulate. They have geared their plans and their pricing strategies on the assumption of a weak peso and now stand to lose because the peso has performed strongly.

The hardest hit subsector are those exporters who use large domestic input in their export products such as furniture makers and food processors. The main component of the export sector, such as the electronics industry, have very little local value added and the effect of a strong peso will be marginal.

A large number of Filipino families are dependent on the remitted incomes of millions of Filipinos working abroad. They are chaffing at the lower peso value of their dollars. But the remittance figures for January indicate that our migrant workers have responded to the situation by remitting more dollars. That, in turn, will increase dollar inflow and further strengthen the peso.

Some populist political groups have tried to make the strengthening of the peso an issue for agitating against the Arroyo administration. But that will reduce them to a ridiculous position of arguing for national weakness.

For good reason, the Arroyo administration is flaunting the peso’s strength as its central achievement. It had invested much political capital in making this happen. The imposition of the RVAT and the restraint on public spending are not the most popular things to do and this administration dared to court unpopularity to bring discipline to our fiscal management.

I find it strange that my friend Romy Neri of NEDA would suggest that government takes steps to arrest the peso’s appreciation.

To begin with, the Bangko Sentral and the Monetary Board are independent entities and not subject to political dictate by the administration. Also, as a matter of (correct) policy, we are committed to non-intervention in the currency exchange, allowing market forces to determine currency values. That is how it should be.

The best our monetary managers could do is to prevent volatility in exchange rates. At the end of the day, market forces will dictate currency values.

Intervention to arrest the peso’s rise will be costly to the national economy. If the Bangko Sentral buys enough dollars to counter the effect of market forces, that will pump up the money supply and cause hyperinflation. Hyperinflation will bring misery to all the fixed wage earners.

The best that could be done is for government to borrow in pesos rather than dollars. But then again, because of fiscal discipline, there is little cause for government to borrow more.

Our monetary authorities have brought down interest rates close to the cellar. That has made speculating in the peso unprofitable but that will not reverse the impact of larger market forces favoring the peso’s appreciation.

The peso’s newfound strength has mitigated the higher oil price regime. If we weaken the peso, that would jack up pump prices and open a Pandora’s Box of other horrors: higher inflation rates, popular protests against oil prices, rising costs for power and probably political turbulence.

Let the market forces work. By mitigating pump prices for a vital imported commodity like oil and beefing up the purchasing power of all Filipino consumers, the final effect of a strong peso should be net positive.

There are sufficient rewards for the regime of fiscal discipline that this administration dared to maintain.