Thursday, 10 September 2009

The peso and other predictions

John Mangun
Outside the Box
Business Mirror

Actually the title of this column should perhaps be “What’s really behind the numbers.” Because it is only by looking at what makes up the numbers that you can truly understand what is going on. For example:

Yesterday, the business headlines from the other dailies told us that the Philippine international foreign reserves hit a record high of $41 billion. Wow, isn’t that great? Except for one thing. As usual, only BusinessMirror told the true and full story. Reserves rose to this level because of the takedown of $1 billion worth of SDR or special drawing rights.

SDR are an interesting monetary instrument. It is sort of an interest-free loan given to a country by the International Monetary Fund (IMF). But it is not a loan. SDR are more of an accounting entry that is put on the books of a central bank. The purpose of the SDR is to allow a country to pay off foreign obligations such as for trade purposes using the SDR instead of hard currency or gold. The SDR represent an amount of money that the Philippines, for example, could draw down from the International Monetary Fund (IMF) to pay its foreign bills without having to actually put cash on the table to settle the transaction. The IMF might or could loan money to a country to settle the SDR obligation. Call it sort of a credit line that you never have to use.

This allocation of SDR to nations around the world occurred August 28 and was the first since 1981. The IMF is increasing global monetary liquidity.

So what does it matter to you and me? Although the Bangko Sentral carries the value of these SDR on the books in US dollars, they are not convertible just to dollars. An SDR is made up of a basket of currencies; 44-percent dollar, 34-percent euro, 11- percent pound and 11-percent yen. So if you used this IMF SDR credit line, you would receive the hard asset of all these currencies, not just the dollar. In effect the Philippines has just taken a standby line of credit that is denominated 56-percent nondollar. But SDR can be used other ways than as a line of credit.

Countries can buy SDR from other countries using hard cash. Therefore, a nation could buy multi-currency SDR using dollars and in so doing move out of dollars and into euros, yen and pounds without reducing their net reserves and also not showing the world that they were selling dollars.

Here is where these SDR get really interesting. The peso is way too cheap regardless of what you read in the newspapers. Foreign currency is flowing into the Philippines at a fast rate; our balance-of-payments surplus will top $1 billion in 2009 as compared to a surplus of $89 million in 2008.

But an appreciating peso will put a value squeeze on $16 billion in remittances and on the $8 billion coming in from outsourcing. And consumers are not being hurt by a 49-to-the-dollar exchange rate. But no country wants to hold massive amounts of dollars. China has turned against the dollar and is trying to reduce its dollar reserves by about $50 billion per month this year.

However, for the Bangko Sentral ng Pilipinas (BSP) to reduce its dollar holdings, it normally would buy pesos and in that way making the peso appreciate, which it does not want to happen.

The IMF quota for the Philippines is about $879 million. But we took down $1 billion in SDR. Also in August, the amount of hard foreign currency held by the BSP decreased by $260 million. It looks to me that the BSP dumped a quarter of a billion worth of dollars to reduce exposure as the dollar heads down the drain, while at the same time keeping the peso at a remittance/foreign investor-friendly level.

Also interesting is that since March 2008, the BSP has increased the amount of its gold holdings from $3.8 billion to $4.8 billion. Note that in March 2008, gold traded at $920 per ounce, so the increase in value is not due to the increase in the price of gold.

Notice that no matter what the exchange rate of the peso is, near 40 or near 50, the Department of Finance and the BSP always seem to say that the peso is fairly valued and is being moved only by market forces. Nonsense. They are pricing the peso the same way prices are fixed at any wet market. And they are doing it to protect the peso value of inbound foreign money while at the same time dumping dollars.

What does that tell us? Reduce dollar holdings at this great peso rate. Move into hard assets like stocks, real estate, and gold. Expect the value of the dollar to drop even farther against the major world currencies.

By the end of first-quarter 2010, it will be almost impossible to hold the peso artificially low. By then the Christmas remittances will be in. Pesos will be actively flowing for the election season. Gold will be heading to $1,250 and the stock market will be looking at historic high prices.

PSE stock-market information and technical analysis tools provided by Inc. E-mail comments to

No comments:

Post a Comment