Thursday, 12 November 2009

Bangko Sentral: Trying to kill the peso

John Mangun
Outside the Box
Business Mirror
http://www.businessmirror.com.ph/home/opinion/18434-bangko-sentral-trying-to-kill-the-peso.html

ARE you ready to pay more than P50 a liter for gasoline? When it happens, do not blame the oil companies. Don’t even blame the world price of crude oil. Blame the government and its peso exchange-rate policy.

Since the high in March 2009, the dollar has depreciated against a basket of world currencies by 15 percent. Since its low in March, the peso has appreciated against the dollar by less than 2 percent. In effect, our economic powers-that-be have decided to peg or fix the peso against the dollar at an exchange rate of about 47 to $1.

You may think that this has little impact on your wealth. Wrong. You are now paying about P6 to P7 more for a liter of gasoline than you should.

In March, the price of crude oil was $40 a barrel. Currently, crude is trading at $77 a barrel. In March, at an exchange rate of P48 to $1, one barrel of oil cost P1,920. As of yesterday, with the exchange rate at P47, a barrel of oil cost P3,619. That is an increase in peso terms of 89 percent.

We are told that the reason the price of gasoline is higher today than in March is because of the increase in the world price of crude oil. Yet due to exchange-rate polices, the increase in its price in the Philippines is greater than for our neighbors.

The Thai baht exchanged at 36 to $1 in March. Now the rate is 33 baht to $1. Converting the price of a barrel of oil based on the 10-percent appreciation of the baht, the Philippines is paying at least 10 percent more for oil than the people in Thailand. This is only because of our government’s policy.

Had Philippine financial authorities allowed the peso to appreciate against the dollar and take its natural course, we could be paying about 10 percent to 15 percent less for oil than we are now.

The rationale for keeping the peso in the narrow band of about 3-percent fluctuation is “exchange-rate stability,” according to the Bangko Sentral ng Pilipinas (BSP). This can be a valid strategy. Too much volatility is bad for business planning.

Thai baht volatility was no greater on a daily basis at any time during the March to November 2009 period than the peso. More important, any excess volatility could have been stopped easily and quickly with BSP intervention while still maintaining and allowing market forces to appreciate the peso.

The argument that the BSP has controlled the peso exchange rate to decrease wild price swings is just plain false.

The more logical reason for the BSP to keep the peso pegged at around 47 to the dollar is to give more peso value to remitted money. It is probable that remitted dollars to the Philippines would now only receive P40 to P43 for each dollar rather than the current P47 had the BSP stayed out of the market.

However, the policy fails here also. The amount of pesos received for each remitted dollar means nothing if the purchasing power of those pesos is lower. At the pegged rate of P47, you get P47 that can buy one liter of gasoline, for example. Yet at P43 to the dollar, you could potentially buy 1.10 liters of gasoline, as much as 10 percent more, as shown in the price difference between the Philippines and Thailand.

Under the BSP policy, anyone who currently receives remitted dollars gets more pesos that buy less. And the overall economy suffers because remittances are only a part of the economy. The rest of the nondollar remitted part of the economy suffers because of artificially higher prices for imported goods like oil.

Continuing to peg the peso could have disastrous effects in the future when the dollar moves another 10 percent to 20 percent lower, which is very realistic. The worrisome thing is that the drop could be very quick.

In the last week, the dollar has depreciated by 2.5 percent. The peso has appreciated by about 1.5 percent. The 1.5-percent change in a week is manageable, although some peso-dollar adjustment will have to be made if this trend continues. Eventually the peso must appreciate in comparison to the dollar-value decrease. However, the dollar right now is very fragile.

There is a strong potential for a 2.5-percent movement of the dollar against the world’s major currencies in one day. If that occurred, the Philippines would suddenly have a very much-undervalued currency which would negatively impact countless Philippine international trade and financial transactions.

Yesterday the BSP “urged emerging economies to retain the dollar as the world’s reserve currency.” Are you kidding me? Dear BSP, no one cares the slightest about your opinion. Come on. Tell the truth. Did Federal Reserve Chairman Ben Bernanke ask you to say that?

The US dollar is becoming more and more a worthless piece of paper. And it is going to get worse. The BSP reminds us that 77 percent of the Philippines’ $40 billion in foreign reserves is in dollars. Too bad the BSP did not do what India just did and convert $6.7 billion into something valuable: 200 tons of gold.

So you and I are overpaying for crude oil, the BSP is bowing to the US dollar, and the rest of the world is dumping greenback as fast as possible.

On October 7, I wrote: “As of this writing the dollar index is 76.293, the spot gold price is $1,040, the peso is 46.60 and the PSE index is 2,967. Three of these four will be significantly increased in value by the end of the year.”

The dollar index is now 74.923, gold is $1,106, the PSE is 2,995 and the peso is 46.79.



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