Strongest

Between having to shore up a collapsing peso and reining in a surging one, I would rather have the latter problem.

It is, to be sure, an unusual problem. For decades, we have been trying to shore up a weak currency. This is the first time a strong peso has become such a problem.

By the close of trade last Thursday, the peso was at its highest against the dollar in over seven and a half years. Ours is now Asia’s strongest currency. If the trend continues, we could have the world’s strongest currency this year.

We don’t have the mindset and the policy instruments to deal with a muscular peso. What we have in our monetary toolbox are policy instruments designed and perfected to keep an anemic peso from finally collapsing.

In that toolbox are regulations limiting outward investments, regulations limiting how much dollars we can carry with us abroad and a thicket of banking rules making it difficult for our financial institutions from dealing internationally. The monetary authorities are now taking major steps to liberalize currency movement, intending the net effect of more dollar outflow from our economy.

But under the present conditions, the market may not respond quickly to the more liberalized regulations. For instance, given the strong possibility that the US Fed will further cut policy rates, it will be more attractive for private enterprises to borrow more dollars from abroad. It is more attractive to borrow in lower interest rate regimes to finance our exports rather than opt to pay in strong pesos because of the greater likelihood that the dollar will further weaken against the peso.

Imagine a clogged drainage system under heavy rain. That should illustrate quite well the phenomenon of dollars quickly accumulating in our domestic financial system.

The clogged drain represents the old policies put in place when the peso was weak and our current accounts were chronically in deficit. That is causing the flood of dollars now bursting our international reserves given that speculating in the peso has become the wiser tack to take and considering the huge current account surplus we have posted.

Our exporters are scrambling to design measures to deplete our accumulating dollar reserves and rein in the peso’s appreciation. In their haste, they have come up with proposals that will never work.

For instance, they have proposed opening a dollar-denominated board at the local stock exchange to supposedly absorb dollars in the system. That will not stem the tide. It might even aggravate their problem. A dollar exchange is a neutral instrument that will not at all affect the current configuration of inflows and outflows.

Our enterprises are simply not equipped to bring the dollars out and invest them in global operations. The long years of protectionism did not prepare them to do that. Besides, a consumption-led domestic growth fueled by remittance flows does not encourage our home-grown enterprises to look at foreign markets just yet. They are hard-pressed as it is meeting rising local demand.

Had our oil bill not been rising because of more expensive crude, the appreciation of the peso might have occurred at a faster rate. But if the peso had not appreciated as it did, we would now be paying over P45 for a liter of diesel fuel rather than the present P37. We would be paying over P50 for a liter of premium gasoline.

Thank heavens the peso is so strong.

In the past, many of us will recall, dollars were rationed because supply was scarce. Rationing of foreign currency discouraged our manufacturing enterprises from upgrading plant capacity. More than that, rationing discouraged our firms from investing abroad.

The policy mindset and private sector culture cultivated during the many years of a weak peso lingers on despite frantic efforts by the authorities to liberalize currency movement. Economic nationalists, for years, urged our consumers to buy local and disdain imports. That was a boon during the years of weak pesos. That is now a bane.

Our exporters must move quickly adapting to changing conditions. They should rely less on price advantages due to a weak currency and target design advantages that will enable them to command better pricing. They should decrease reliance on the US market with its weakening currency and target strong currency markets like Europe and East Asia.

At the very least, they should stop whining about the strong peso and do something to prepare for competition based on a strong domestic currency. Unless Trillanes become our Great Leader by some unfortunate turn of the stars, the peso is likely to remain strong for years to come. Remittances will continue to be large. Tourism is picking up dramatically. Our booming property sector will draw in investments. As will our strong domestic consumer demand.

Only a major political disaster — like Guingona finally being taken seriously — will reverse the large trends.

And will the leftist militants please stop exploiting the situation by ranting about how poor OFW-dependent families have become because of the exchange rate?

The fact is that the overwhelming majority of our OFWs are earning in currencies that are themselves gaining on the dollar. That means that when they convert from their strong currency earnings to pesos, the diminution in peso benefits is really marginal.

They should, on the contrary, celebrate the fact that a strong peso has curtailed our economy’s traditional vulnerability to inflationary spirals. It is, after all, not a strong currency that makes our people poorer. It is a high inflation rate that makes goods more inaccessible.

Besides, the only things that will mitigate economic migration over time is a strong currency and robust economy at home.