Philippine Peso And Remittances: The Unsecured Knot

``One of the greatest tragedies of life is the murder of a beautiful theory by a gang of brutal facts."-Benjamin Franklin

The US dollar-Philippine Peso recently broke into the 41 level, the highest level in more than 7 years. Nonetheless, the Philippine Peso has been the top performing currency in Asia with a year to date gain of about 17%.

Figure 1 Left: World Bank: Remittances Year-on-year Growth on 3 month moving averages,
Right: Philippine Peso-USD Price Rate of Change (Inverted Scale)

Anyway, we read that the Peso has been “driven” by overseas money again. While the fundamental ratiocination appears to have given such correlation a strong link, as we demonstrated in our November 5 to November 9 edition see What Media Didn’t Tell About the Peso, these have not been airtight. In fact, based on price actions, the correlations have been more of a recent phenomenon.

The timely release of World Bank’s Remittance Trends 2007 as shown in Figure 1 (left window) exhibits the year-to-year growth of the remittances. This means that while nominal remittances have been growing, the rate of change on an annual basis have been on a decline since the last quarter of 2006 and bottomed out in July of 2007, only recently has this reversed to the upside.

In comparison with the Philippine Peso-USD (inverse scale: black line-right window) over a similar timeframe, we can identify some observable similarities and notable differences.

The peak of the October remittances coincided with the summit of the Peso last 2006, whereas the trough in the remittance this July was accompanied by a bottom in the Peso’s ROC last August.

Prior to these, the peaks and troughs have been rather distinct. As an aside, the degree of changes has been in stark contrast; for instance, the intensity of the latest ascent had been precipitate, even if we exclude the November performance, the ROCs would have been at the resistance levels relative to the benign reversal seen in the WB’s remittance chart.

Of course, one should be notified that due to the lack of breadth of our data on the Peso, the “apples-to-apples” or the equivalent year to year change has not been utilized. However, the overall trends should depict on these dynamics.

Our point is; relative price action, the Peso-remittance causality or correlation has been more of a recent phenomenon confirming our earlier views, but whose relationship cannot be reckoned as straightforward or infallible.

We are heartened by the news that new instruments (e.g. multi-currency Retail Treasury Bonds) have been designed by the Philippine Central Bank, the Bangko Sentral ng Pilipinas (BSP), aimed at our migrant workers, to hedge against the rising Peso.

But what seems to be amiss is a market based approach on these aspects. By introducing or adopting a franchise on alternative market platform/s, such as a domestic futures market (a genuine futures market-not the defunct MIFE model), which could allow more financial (non-banking) and nonfinancial institutions to even retailers to participate or access a wider range of hedging tools could spur the creation of varied hedging vehicles or instruments, such as indices like ETFs or Exchange Traded Funds, which could compete to offer better yields to OFWs or to the populace.

Remember, deeper and more sophisticated financial markets should reduce transaction costs thereby boosting efficiency and competitiveness in our domestic enterprises, as well as augment our economy’s capital formation channels. At the same time, by diminishing risks through hedging enhances returns potentials thereby attracting more participation from the populace.

This is one concrete way to yank out our inordinate dependence from politicians.