Volatile

Motorists were treated to a price shock this morning. The peso is struggling to keep under P50:$1. The stock exchange has been in a slow but deep slide, with foreign funds hemorrhaging until there is too little of them left. Our inflation rate is expected to kick up – especially if our monetary authorities decide to use higher interest rates as a weapon to restore order.

All these spell a period of volatility in the weeks ahead. With volatility comes uncertainty. With uncertainty comes hesitation.

The oil price shock is the consequence both of the reappearance of bullishness in the international futures markets as well as the sharp depreciation of the peso. We pay dollars for nearly all our oil.

The bullishness is probably based on unfounded speculation. For months, oil traders hoped that the OPEC would somehow succeed in curtailing production levels to nudge up the price of the commodity. Hope is not fact. Oversupply of hydrocarbons persists. Yesterday, oil prices in Asia began to climb down once more.

The peso’s decline is not due to our currency’s unique weakness. All currencies declined against the dollar. The rise of the dollar, in turn, is not due to Donald Trump becoming president-elect. It is due to the nearly certain interest rate hike by the US Fed in the coming weeks.

With an increase in US interest rates, global investment funds will tend to migrate to the dollar. Regardless of the interest hike, its imminence certainly spells depreciation of other currencies. Dollar investments are being moved out of global markets, especially in the emerging economies, to protect the value of investible funds.

True, the move is speculative. But it is the only thing the fund managers can do to protect their shareholders from an across-the-board depreciation of other currencies.

Our stock exchange is particularly vulnerable because it is highly dependent on global funds. Our financial market is narrow. There are few financial products offered small savers to participate in the money market. 

Our corporate sector is surprisingly small compared to, say, Thailand. Therefore there are not enough bonds and corporate notes on offer for small investors to access.

The underdevelopment of our financial markets explains the magnified importance of foreign funds coming in to provide market capital for our corporations. When foreign funds flee, not necessarily due to any peril unique to our economy, the market deflates unduly. Today foreign funds are fleeing mainly to protect the value of their holdings against imminent depreciation.

When foreign funds flee, prophesy becomes fact. The exit of foreign funds pushes down the peso’s exchange value. This in turn, after speculation becomes fact, justifies the exit.

When the stock market deflates, the value of our enterprises shrink. Their ability to grow, to put in more capital expenditure, is thereby limited.

When the peso declines against the dollar, the knee-jerk reaction is to raise our own policy rates. That merely raises the cost of money. It does nothing to add to investible capital. Investible capital, preferably at more affordable rates, is what our economy needs to grow.

There is really no point in trying to defend the peso. That can only be a losing proposition in a situation where all currencies are declining against the dollar. Our monetary authorities, exercising their usual wisdom, will more likely decide to take things sitting down. All we have to do is to wait for speculation in favor of the US dollar to subside.

If the peso, as is likely, remains weak through the holiday season, we might look at this as a gift to our OFW families. They will get more pesos per remitted dollar. They will have a happier Christmas.

The weaker peso will also help curtail spending on imported goods during the holidays. It will function as a tariff equivalent to help local products gain competitiveness.

There is no sense for the BSP to lose billions trying to defend the peso. Let our currency surf the foreign exchange turbulence. Underlying our currency, after all, is a strong economy.

The real problems confronting our economy have little to do with the weakness of the stock exchange and the retreat of the peso against the dollar. Those real problems are structural. Our agriculture cannot carry its share of the burden for economic growth. Our infra backbone is antiquated. Power continues to be expensive, exacerbated by bizarre policies such as the Feed-in Tariff that penalizes consumers while rewarding big corporations.

Our goal of achieving sustained 7 percent growth through the medium term is not threatened by what should be a short phase of volatility. The inflation rate is not likely to breach the upper end of current targets. The peso is not about to fall through the floor — not with the hefty gross international reserves we maintain. In fact, it is probably perfectly prices where it is, just right for spurring exports and curtailing imports.

I recall an economist-friend, with a genius for keeping his responses short, once explained why high prices of commodities like oil ought not to be alarming. The solution to high prices is high prices, he lectured.

Indeed, how much higher could oil prices go in the face of receding demand? If speculators manage to push prices up today, they will be punished down the road with a stockpile of expensive oil no one wants to buy.

The only unknown bedeviling the market today is whether the US Fed will raise interest rates in one blow or by way of small increases over time. We will know in a while.