The following article including the preamble is a paper prepared by Global Filipino Nation and is printed here as a talking point for discussion, particularly for the students of Philippine Studies. A short version of this paper is published at The Filipino Australian website. // Ed.
This paper is the product of the collective insights of a multi-sectoral group of varied practitioners, including the NEDA Director-General, Monetary Board members, private sector investors and executives, economists, and financial specialists, among others. Victor S. Barrios prepared the paper as part of the policy program of Global Filipino Nation (GFN). GFN is an international coalition of global Filipino leaders and organizations in 30 countries, committed to “Building the Filipino Nation for Good Governance”. Barrios, a GFN Convenor, is an international banker-economist and has served as Sr. Adviser to multilateral initiatives for the financial sector in a dozen countries. GFN and the writer acknowledge the initiative and leadership of Oscar Barrera, a business and management specialist, and Clara Lapus, a civic leader, in initiating and coordinating the multisectoral dialogue on the foreign exchange rate.
For the country to emerge from the mass of poverty that afflicts the people, we must have a robust Gross Domestic Product (GDP), fueled by growing Investment and Export sectors.
But the “strong” peso penalizes local value added and intensifies the atrophy of exports. In simple terms, the US dollar equivalent of local value added or cost has significantly risen, thereby eroding the competitive position of local producers and exporters. The higher the local value added, the heavier the penalty.
The BPO-KPO sector, the second largest net FX earner next to remittances, is being squeezed and is losing out to competing countries — jeopardizing this important buffer to the international stabilization of the peso.
At current exchange rates, the country is not exactly a bargain tourist or retirement destination. The cost of living in Manila – housing, food, clothing and essentials – rival those in cosmopolitan cities like San Francisco.
The “strong” peso has exacerbated the steep decline in the Investment to GDP coefficient from the 30s to the anemic halved level. The savings ratio of 20%, low for an aspiring emerging economy, and together with the even lower investment ratio, have created an anomalous situation where the country has become capital exporting.
The country is actually going through a “distorted growth crisis”, which should be recognized and addressed. It is more appropriate to label the peso rate as “prohibitive” rather than “strong”.
What are the consequences?
First, a “prohibitive” peso has eroded the tax revenue base by a multiple of more than four times compared to the gain in lower foreign exchange debt service (Abola, 2012).
Second, there is a wide swath of industries that have sustained corporate closures and layoffs – a far worse curse than benign inflation.
Third, the prices of locally-produced goods have added to inflationary pressures — paradoxically contrary to public policy.
Fourth, the high cost of local production (especially hogs, poultry and many agricultural products) has created a niche for smuggling with the attendant corruption.
Fifth, the pinching impact on local food production has adversely affected food security and exposed the country to hyperinflation should global hostilities and shortages break out due to sharply depressed economic conditions.
Sixth, for GDP to continue to grow, Personal Consumption Expenditures, nurtured by remittances, have to rise — which means the country has to continue to “export” able bodies with the attendant devastating social costs. But the shrinkage of the industrial sector has limited the experience credentials of engineers and other skilled workers who target jobs abroad.
Seventh, the “default” public policy of redeploying our human resources to foreign lands locks the value of Philippine human capital to the lower rungs of international pricing.
Eighth, the trade sector will continue to make an increasingly negative contribution to GDP, with trade deficits symptomatic more of an economy oriented to imported consumerism rather than a build-up of productive capacity.
Ninth, as the single largest loser in mitigating the advance of the peso, Bangko Sentral ng Pilipinas lost P107 billion in 2010 and 2011 or half of its net worth (more if 2011 accounting change is factored). BSP will be bankrupt by 2014 if asset/liability management remains unchanged — a severe threat to the soundness and stability of the banking system. BSP estimates that the rate could have reached P37 if they did not intervene to siphon dollar inflows into Special Deposit Accounts (SDAs) at 4% and incur a wide negative carry. The government is now a net loser, second only to BSP, since the loss of tax revenues far outweigh the reduced FX debt service.
A “prohibitive” peso also erodes the quality of sizeable real estate loan portfolios of banks. As the peso “strengthens”, overseas Filipinos are faced with rising loan amortizations in peso terms and a soft employment environment. One cannot dismiss as remotely possible a Philippine variant of a property bust.
Should the country forever remain poor because of the “prohibitive” peso?
Not so, if policy makers recognize the welfare implications of foreign exchange policy.
What about the welfare of the onshore families of overseas Filipinos, especially OFWs — who account for the majority of Filipinos? They have become poorer by more than 25% over the past five years, as the peso/dollar rate moved from P56 to the current P41; this is the insidious “hidden inflation” that has afflicted them without their loud hue and cry.
If one reckons with the general rise in the price level to which the population is exposed, the beneficiaries of overseas Filipinos have taken two simultaneous blows.
Ironically, the more Filipinos venture to strange lands to generate FX income for their families and the country, the greater the squeeze effect on the peso rate.
How much longer can they silently take the double blows?
Who are the winners from the “prohibitive” peso?
The winners are only a small proportion of the population/GDP: Napacor, oil companies, utilities, smugglers and their rent recipients, importers/foreign producers, and travelers.
Before the 1997 Asian Crisis, the country had 8 US dollar billionaires. When the crisis hit, there was only one standing.
Partly as a result of the continued “strengthening” of the peso, the latest Forbes tally on global billionaires lists 40 Filipinos. The Number One Filipino billionaire continues to surge ahead largely due to the rise in Personal Consumption Expenditures, fired up by remittances.
Should the market take its course?
Should the market have taken a free reign sans government intervention during the property and banking meltdown in 2008? Should that same dictum now apply to the Eurozone crisis? The Philippines is in the midst of a “distorted growth crisis” — deepening and still counting.
What, then, are the policy initiatives that can be considered?
1. Transfer the financial burden of currency management to the national budget and away from BSP’s Profit &Loss and Balance Sheet. The budgetary allocation will have a sustainable resurgence of output, exports and employment – far exceeding the impact of a stimulus program. The long-term increase in the tax revenue base will tend to offset the short-term negative budgetary impact.
2. BSP buys government securities, the proceeds of which are applied to some FX debt prepayments and the government issues debt securities at competitive rates to wind down SDAs. National government would finance 100% of budgetary deficits with peso borrowings. Additionally, it could raise the equivalent of, say, 30% more to prepay FX borrowings.
3. Set-up a “Visa” window to allow more liberal but retractable capital outflow provisions to relieve currency pressures from a large influx of remittances and high level of SDAs. The “Visa” window can partly wind down SDAs.
4. Consider the imposition of a Tobin tax on “hot money” but exempt capital inflows that stay on for a longer period. This measure would insulate the country from volatile and destabilizing money flows.
5. Invite proposals from successful and reputable investment managers and private equity firms for the sound investment of a portion of international reserves — as an alternative to a Filipino-managed sovereign fund.
6. Gradually depreciate the peso now — back to its “competitive” level, while oil and other imported prices are softening. The impact on inflation will be imperceptible or nil.
An authoritative study (Abola &Mercado, 1993-2009) reveals that a 10% peso depreciation could affect inflation by only 0.03%.
What, then, is the justification for depreciating the peso?
The gains are clear: a) more vigorous and sustainable growth cum reduced poverty incidence and multiplied jobs generated; and b) substantial tax revenue gains.
BSP’s Charter mandates that “the primary objective… is to maintain price stability conducive to a balanced and sustainable growth of the economy”. The “distorted growth crisis” raises questions about that mandate.
What can be a valid objection to depreciating the peso? Since inflation is not an issue, that would be the puzzling policy question.
A “prohibitive” peso mirrors a weak, not strong, Republic.
The government should act now: decisively and with consequence. Otherwise, the country will traverse deeper into the “distorted growth crisis” and drag the wretched poor to the poverty quicksand.