Currency War

Published in BusinessWorld on October 31, 2010

            A currency war has broken out in the global stage.  The United States Congress recently passed a law imposing punitive tariffs against countries deliberately undervaluing their currencies – a move aimed squarely at China. 

            Even as US and European officials were threatening action against China for keeping the value of its yuan down, the US government has coaxed the US dollar to weaken against other currencies, assisted by the US Federal Reserve’s “quantitative easing.”   The Obama administration has made no secret of its target to increase exports to help reduce persistently high unemployment.  

            In Japan, the government actively intervened last month in the foreign exchange markets, marking the first time in a long while that the Japanese government has aggressively acted to counter the soaring yen.  The rising yen is clearly worrying this export-led nation, threatening its manufacturers with loss of competitiveness, especially against US and Korean rivals.

            The rest of the world is not unaffected.   The weak US dollar and massive infusions of money by the US Federal Reserve into the system have investors taking shelter in emerging markets.  The result has been appreciating currencies and destabilizing capital flows.   Brazil has doubled the tax on foreign purchases of its domestic debt while Thailand imposed a 15% withholding tax on foreign purchases of its domestic debt.

            Where is the Philippines in this currency war?

            While currency movement and destabilizing capital flows are foremost in other nations’ agenda because these are seen to be affecting the national interest, here, the talk is – what else but who is President Noynoy’s next girlfriend.  

            In terms of national interest, issues like jueteng, the Luneta massacre, the President’s love life and other headline grabbing events pale in comparison to the problem of the strengthening peso and currency flows.

            Both economically and politically, the strengthening peso is the single most important national issue, yet our authorities are completely ignoring it.

            Think about this:  the strengthening peso is negatively affecting millions of OFWs and their families, yet not a single politician has spoken about the issue at all.  In fact, there have been Senate hearings on jueteng, but none of the appreciating peso and its deleterious effects. 

This is puzzling because politically, OFWs and their families constitute a large and  important part of the electorate.   Former presidential candidate Senator Manny Villar positioned himself as a champion of the OFWs in the last elections, yet he hasn’t spoken about the diminishing pesos received by these OFW families.   Neither has Vice-President Jejomar Binay, who’s supposed to be Presidential Adviser on OFW concerns, spoken, yet OFW welfare is being negatively impacted in a dramatic way by the appreciating peso. 

If President Aquino and the other government politicians think that the appreciating peso is an unimportant issue for a tiny minority of exporters, they’re wrong. 

The strengthening peso is hurting not only exporters but domestic manufacturers as well.

With tariff rates nearly nil, the only protection our domestic manufacturers have is the exchange rate.  Now, with an appreciating peso, they have to contend with cheaper competing imports.  Therefore, a strengthening peso is definitely not in the interest of our domestic manufacturers, unless they have huge foreign loans (but they have already learned their bitter lessons from the 1997 Asian financial crisis from doing that).

            Economically, the strengthening peso will have a huge negative impact.  OFW families will have less money for tuition, monthly house and car amortizations, and spending in the malls.  (Paging Henry Sy.) Call centers, a growing industry, will be less competitive.  Tourism, already battered by the Luneta fiasco, will be battered even more.   Agriculture, with a high domestic value-added component, will suffer from the appreciating peso.  

            Our authorities are clearly behind the curve.  Our neighbors, Thailand and Indonesia, have imposed some forms of capital controls while Malaysia has long been a capital control proponent.  While our BSP is making a feeble attempt to encourage capital outflows to stem the peso’s rise, it’s clearly conflicted.  Its primary mandate is to keep consumer prices stable and the strengthening peso is helping to temper inflationary tendencies.   Perhaps it’s about time that the BSP charter be amended to include growth in its mandate, as it is in the US Federal Reserve’s charter.

            Our BSP cannot be more popish than the Pope.  Even the International Monetary Fund is now sold on capital controls.  “Even when capital flows are fundamentally sound, it is recognized that they may contribute to collateral damage including bubbles and asset booms and busts.  Capital controls on certain types of inflows may usefully complement prudential regulations to limit financial fragility and be part of the toolkit.” said the IMF in a report issued this year.  

            There’s a currency war going on out there.  Nations and their leaders are talking about it and trying to do something about it because it affects their national interest.  Here, the talk is about jueteng, Samar vs Balay, ex-girlfriend (?) Shalani Soledad, James Yap, and the presidential buddy Rico Puno.  Aaarrgh.