Featured Post

MABUHAY PRRD!

Friday, May 11, 2007

OBESE PESO: CAUSE FOR ALARM

Obese peso: Cause for alarm
Raul Valino, May 09, 2007

LIKE happy parents dazed by their child's chubby physical growth, the Philippines' rising peso value against the U.S. dollar is a cause for alarm unless steps are taken to correct its obesity.

From the 2004 low (weak) rate of P56.04, the average peso-dollar exchange rate progressively gained continued stoutness so that by Friday, April 27, 2007, it hit a peak level of P47.449.

The surge of the remittances of overseas Filipino workers (OFWs) and Filipino American residents sent back to the Philippines, at an annualized level of $15 billion, is no doubt the biggest factor in the still growing obesity of the peso.

The obese peso has serious side effects and unhealthy imbalances, which are not now evident but could create unstable future developments.

For overseas Filipinos and their immediate families in the Philippines, the obese peso development has not been an occasion for rejoicing. Neither has it been a cause for celebration.

Between 2004 and now, for every dollar that an overseas Filipino sends to the Philippines, his immediate family loses about P8.50, which it can otherwise use to pay for household expenses such as food, electricity, school tuition, health care and transportation.

Based on the average monthly remittances of OFWs of about $400, the OFW family loses P3,400 – an amount that is truly burdensome for the family.

The advantage of a cheaper dollar, however, is the lower repayment of foreign debts a bulk of which is accounted for by the national government and the National Power Corp.

Nonetheless, the apparent insatiable propensity of the government to borrow more than it can earn may negate the gains from lower debt repayments.

The government, however, sees the observed rise in peso value against the U.S. dollar as encouraging. It is, in fact, one of the highlights being promoted by the government in the about to be concluded local elections this May.

Some politicians see the so-called strong peso as another excuse to increase the budgetary allocation for pork barrel and allow for massive election expenditures without the post-election indigestion. There is even the suspicion that the peso is being buoyed by the administration through Bangko Sentral ng Pilipinas (BSP) for this purpose.

There are two keys to political misbehavior with modest risks of post-election economic shock: The first is control over budgetary deficit, while the second is control over inflation. These are two interrelated control instruments.

The rise in the value of the peso has drastically reduced government debt service and the subsidy to the loss-making Napacor. As a result, the government has gained considerable flexibility in reallocating resources to discretionary, pork barrel and populist outlays – all of which have significant impact on the May 14 elections.

In a recent San Francisco forum, Finance Secretary Teves commented that for every peso change in the exchange rate, the government stands to gain about P5 million. Based on that figure, it is estimated that the government has gained budgetary flexibility to the extent of between P35 and P40 billion – a heft sum that could be used to pursue narrow political objectives.

The rise of the peso has also made inflation management significantly more effective. Since imports have been much cheaper than before, the landed cost of imported rice and oil has gone down considerably.

If government can tame the prices of rice and oil products, it pretty much controls inflation. Rice alone accounts for more than one-fifth of the weight of the Consumer Price Index or consumer spending basket that measures inflation. Putting oil product prices within manageable levels puts a damper on the prices of food, electricity, clothing and housing costs.

But does control over the budget and inflation mean that the merrymaking of politicians will last forever? Alas, neglect of the losers in the rise of the peso, as in the case of unchecked obesity, will see a day of reckoning.

In simplified economic terms, the gross domestic product (GDP) of the country is the sum of personal consumption expenditures (C), investments (I), government expenditures (G) and the trade balance (exports minus imports).

The increase in the nominal value of the peso will considerably dampen C. Based on the annualized remittances of $15 billion, the peso "stoutness" would cut OFW family incomes by about P128 billion a year. That is a staggering figure indeed. Within the foreseeable future, C will no longer be an engine of GDP growth.

Investments cannot be relied upon as a source of economic growth. In fact, the ratio of investments to GDP has been reduced to half of what it should be, i.e., 30 percent being the ideal minimum vs. the current 15 percent ratio is the lowest in 20 years.

The climate for business investments has not improved, the consequence being the exodus of some major companies to other countries and the avoidance of the Philippines as an investment destination.

Between 2002-2006, foreign direct investment (FDI) has ranged between $0.1 billion and $2.2 billion, a miniscule amount compared to the FDI flowing to our neighbors and in relative to OFW remittances.

Traditionally and conventionally, G cannot be expected as contributing directly to GDP growth.

What is left, then, is the trade balance. The obese peso has produced excruciating pain for exporters and other earners of foreign exchange, especially call centers. These businesses earn dollars but face rising costs because of the rise in the peso's exchange value.

If the policy makers continue to ignore the pleas of foreign exchange earners, the country will reach a point where it could no longer depend on export of goods and services as a reliable source of foreign exchange.

When that day of the weakened export sector comes, the country will be totally dependent on OFW remittances for GDP growth and the wherewithal to cover imports and other foreign currency needs.

Even then, the short change that OFWs find when they exchange their dollars could lead to a potentially alarming gray to black market for foreign exchange.

Better to lose weight now, then, than much later.

The Global Filipino Coalition and Global Filipino Forum collaborated on the writing of this article. The Global Filipinos Coalition is a coalition of major overseas Filipino organizations and leaders. The Global Filipino Forum is a think tank and assembly of organizations focused on strategic governance issues in the Philippines.

No comments: