Tuesday, 15 January 2013

The Philippine peso problem

John Mangun
Business Mirror

A NATION’S currency is the most important component of its economy. It is the blood of the economic body. No matter how strong the body is, without healthy “blood,” the organs of business, government spending and investments cannot function effectively.

The average person has little idea about currency because the symptoms of a currency problem can be subtle and take time to develop. But like an untreated cancer, it can one day explode, destroying individual wealth without mercy.

The most extreme symptom of a damaged currency is hyperinflation. During the German Weimar Republic, the German currency was stable at about 60 marks per US dollar in 1921. In June 1922 the mark traded at about 320 marks per dollar. The mark then fell to 8,000 marks per dollar by December 1922. The cost of living index was 41 in June 1922 and 685 in December 1922.

This event occurred because the German central bank printed all the marks possible to buy foreign currency.

The argument for the Bangko Sentral ng Pilipinas (BSP) intervening in the currency markets and for a weaker Philippine peso is to protect the exporters’ profits, give the overseas workers more buying power, and help the outsourcing companies. A very noble endeavor.

Let’s return to the good old days of 2009 when the peso exchange rate was 48 to $1. The exporters, outsourcers and overseas workers would all be happy.

However, in order to make those “winners” happy, gasoline will go up to at least P60 per liter. There are certainly some “progressive” thinkers that would say P60 gasoline is a small sacrifice to pay for the overseas workers, exporters and outsourcing companies’ financial benefit.

But those would not be the only winners. Balikbayan and foreigners would be given an instant 18-percent discount on the condominium they want to buy, as the dollar cost would fall. The property developers would be winners also. The stock market would soar too, as now stocks would be much cheaper in dollar terms. I like that last idea.

The commuting public would see transportation costs go up but they, too, have to sacrifice some of their wealth for exporters, overseas workers, outsourcers and stock-market investors like me. It is only fair.

There might be an end to any discounts for condos. Prices might even go higher, as foreign buyers would increase demand to take advantage of cheap prices. The young couple looking to buy their first residence might have to wait another year or two, but the overseas Filipino workers have families also. But you might say that a P48 is unrealistic. The peso at 42 is generally thought to be a good price. Fine. Let the BSP try to keep the peso around 42; a line in the sand.

Then watch the disaster unfold.

The Bank of England tried to fix a floor price on the British pound in August and September 1992, spending $27 billion and failing; the pound depreciated 30 percent. George Soros made $1.2 billion in one day on that idea. I know. I was there.

Modern currencies have no intrinsic value, such as a fixed exchange rate to a tangible asset like gold or silver. They are only “priced” in relation to other currencies as money flows in and out of economies. In the 1970s the Japanese yen/US dollar exchange rate went from 350 to 175 as money flowed from the US into Japan to buy goods. The US dollar has depreciated 80 percent against the Chinese renminbi since 1981 for the same reason.

Here is an example when central banks have tried to keep a currency artificially low. The Bank of Japan tried in the 1980s, intervening to make the yen “cheaper” to protect the exporters, moving the currency from 175 to 275. Notice that is the period of the Japanese bubble economy when land prices tripled and the subsequent “Lost Decade” of no economic growth after the bubble burst.

During the first Aquino administration, controlling the peso was a government priority with strong capital controls. A 10-percent daily fluctuation of the peso on the black market was normal. It took seven years to get a telephone because dollars were impossible to find as no one knew what silly currency policy would come next. The economy finally took off when President Fidel Ramos ended the currency-control policy.

The peso will move higher as foreign money comes into the country. Yes, it is “hot” money. Before long-term funds, hot money always comes to test the investment risk.

When governments try to pick economic ‘”winners” and “losers,” the winners always lose and the losers lose more.

E-mail to mangun@gmail.com, Web site is www.mangunonmarkets.com and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by COL Financial Group Inc.

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