THE last time National Scientist and economist Raul Fabella clamored for the peso’s devaluation, a powerful but low-key government body ‘encouraged’* a newspaper columnist to criticize him and other economists who shared the same opinion. [See: Raul Fabella]
Or at least that’s what Fabella claimed after he delivered a lecture about the benefits of a competitive currency at the University of the Philippines School of Economics last November 24.
Nowadays, Fabella is more circumspect.
He’s not about to go to a senator and ask him to influence monetary officials to fiddle with the exchange rate. Which is what he, together with economists Benjamin Diokno, Cayetano Paderanga, and Calixto Chikiamco asked Senator Edgardo Angara to do in April 1994.
At that time, the exchange rate was roughly P25 to P1, hurting exporters who found it more difficult to sell their goods abroad because the peso was expensive. In the same vein, families of Filipino workers abroad found that they were able to buy fewer goods because of the fewer pesos they got in exchange for the dollars they received.
Local manufacturers also suffered.
Companies were encouraged to buy imported raw materials–which were cheaper because of the stronger peso–to the disadvantage of domestic producers. As a result, weaker demand for local goods hampered these producers’ capabilities to earn more and hire more people.
But a strong peso has an upside.
With a stronger peso, importers are able to buy more foreign-made goods.
Oil, for one, is cheaper because it costs fewer pesos to purchase petroleum products, which are priced in dollars. In turn, lower fuel prices result in reduced food and transport costs, leading to lower inflation rates.
Considering all these, is a strong peso good or bad?
The latter, if you ask Fabella.
A weaker–or more competitive–peso “protects local producers without administered mechanisms like tariffs,” Fabella said in his lecture.
His views are supported by another economist, Victor Abola, who said that the benefits of a peso devaluation outweigh its downsides.
In his lecture during the same event, Abola also emphasized that the effects of a peso depreciation on inflation have begun to grow smaller. Before 1993, a ten percent peso depreciation led to a 3.0 to 3.5 percent uptick in inflation, Abola said. After 1993, a ten percent depreciation caused inflation to rise by 1.6 percent. In 2010, the same level of depreciation only resulted in a 0.3 percent increase in inflation.
All these data has prompted Fabella to say that the Bangko Sentral ng Pilipinas (BSP) should “keep the exchange rate between P43 and P45.”
But of course, he also has other ideas, some of which I understood, which is why I am enumerating them here.
1) Launch calibrated moves to make the peso more competitive.
If it so desires, the BSP can increase its dollar purchases through market operations, thereby bringing up the exchange rate in the dollar’s favor, Fabella said.
Monetary authorities should take advantage of conjectures and/or events that could give the country chances to implement beneficial policies. He cites 2008 when it was P50 to a dollar.
Foreign investors fled riskier economies like the Philippines, taking their dollars and placing them in safer investments such as gold.
“If you had a mentality of a central banker who is going to undervalue the peso, you could hold on to P50 to a dollar at that time,” he said. “In other words, you print pesos to buy dollars so that the exchange rate stays at P50 to $1.”
2) Announce “speed bumps” to discourage portfolio investments.
Monetary officials can announce–without actually implementing–mechanisms that can make it difficult for foreign investors to bring out investments in Philippine stocks and bonds. Foreign portfolio investments are highly speculative and can be easily withdrawn unlike foreign direct investments, such as factories and equipment which are not easily convertible to cash.
The announcement–even without the corresponding action–may help arrest the inflow of dollars coming into the country that help boost the peso’s value vis-a-vis the dollar.
“In this situation, the announcement will work,” Fabella said, adding that foreign investors may be able to take the hint.
3) Encourage the national government to borrow in pesos.
Instead of borrowing in dollars, which is currently cheaper, the government should borrow in pesos, Fabella said.
“You have to convince the national government that although there is an interest rate differential, the overall effect of borrowing in pesos will be good for the economy,” the economist said.
But wouldn’t the move help increase demand for pesos and thereby, boost its value in relation to the dollar?
Not necessarily, said Arnold Tenorio, the Manila Times Business Editor, who also has an MBA from UP.
The financial system is awash in cash, he said, adding the national government should use up the cash stored in the BSP’s special deposit accounts** (SDA). Cash stored in the SDA have reached P1.73 trillion, roughly the amount of the national budget for 2012. The SDA is a a high-interest earning deposit account that siphons off excess cash in the financial system, making it one of the BSP’s tools to fight inflation.
*The word “encouraged” is used here to include various interpretations, including the use of incentives, financial and otherwise.
**From The He Who Has No Scruples, Fun and Money Soon Quadruples Dept.*** If you have a minimum of P100,000 lying around, go to your bank and ask them you wish to open an SDA. Not only is it risk-free, its interest is higher than a time deposit account.
***Paraphrased from a poem by Ogden Nash