``There are more borrowers who vote than creditors who vote. This is why democratic politics always favors long-term price inflation.” Gary North, Pushing On A String
We noted how the Peso’s performance has been a riddle, as discussed in Philippine Phisix at 2,500: Monetary Forces Sows Seeds Of Bubble
Figure 5: Danske Emerging Market Briefer: Peso Underperformance
The Philippine Peso has been underperforming its peers both in the Emerging Markets and its neighbors see figure 5 and 6.
Figure 6: Bloomberg: Bloomberg-JP Morgan Asia Dollar Index. AP Dollar Index
The Bloomberg-JP Morgan Asia Dollar Index which tracks 10 of the most actively traded currencies in Asia shows that since March of this year, Asian currencies have mostly been up while the Peso has lagged severely.
Recently, an email supposedly from an anonymous official from the World Bank reportedly said that the Philippine government has been manipulating the Peso to keep it below Php 52 to a US dollar-were it should be.
Of course the allegation was not only spurious and politically slanted, but it had little economic or expertise tacked on the assertion which supposedly emanated from a financial expert.
But if there has been any manipulation, it would be to bring the Peso down, this by expanding government liabilities by virtue of deficit spending.
While the Phisix has seen some improvements in foreign inflows over the past weeks, this hasn’t been extrapolated to the attendant firmness in the Philippine Peso. Yet last week’s carnage accounted for a modest net outflow, so this could add to the onus on the Peso.
Ideology of Policymakers Likely Tilted Towards Interventionism
The incentives aren’t for the Bangko Sentral ng Pilipinas [BSP] to appreciate the Peso; the market fundamentally determines the Peso’s strength.
Instead, it is the mainstream ideology based on a consumption modeled economy which gives the authorities the predisposition to depreciate the currency by intervention.
For instance, increased concerns over a material slowdown of remittance growth which may even post negative (-4%), according to the IMF [Manila Standard], risks weighing on the Philippine economic growth to negative (-1%).
So the BSP, in order to keep the economy from seeking its true levels, will increase the purchasing power of foreign based OFWs at the expense of the residents through higher prices. That’s because mainstream economists fixates on OFW remittances which constitutes only about 11-12% of the GDP and has been assumed to carry the onus of consumption expenditures.
Up to this point, I have yet to see a research which provides estimates on the share of OFW spending (direct and indirect or including the so-called multiplier) to total consumption. All the rest have merely been suppositions (and exaggerations in my view).
The fact that economic growth has materially slowed in the face of still positively growing OFW remittances suggests that manufacturing and agriculture could be a larger weight than the OFW remittances but which the mainstream economists and policymakers tend to ignore.
Deficit Spending For Elections, Mano a Mano
Moreover, pre-election spending by frontloading expenditures to spruce up economic figures going into the election could be another possible angle.
The Philippine Government says it is deeply committed to preserving its fiscal discipline, but expects deficit spending target up to 3.2% of the GDP (Philstar.com). Heck, it is election time and many vested interests are positioning for 2010, so it would be natural to expect an overshoot.
DBS along with ING estimates deficits to hit 4.5% of the GDP (GMAnews.tv). No question here about Philippine deficits. But from this premise they predict bearishness on the Peso.
Hello.
Currencies are basically valued by pairs. If the primary concern for the Philippines has been its fiscal deficits, then relative to the US dollar this should be minor.
The US fiscal deficit is expected to reach 13% of GDP see figure 7!
Think of it, 13% versus 4.5%, that’s a yawning gap in favor of the Peso!
Ok, the US will be borrowing from its own currency, that’s their privilege. And that’s the added risk premium for the Philippines. But the margin has extremely been one sided. Moreover, the key issue would be sources of funding and not just deficits.
Will the US economy rebound strongly enough to generate revenues to pay for these debts? Will there be enough local and foreign savers to finance these humongous public liabilities? Will official sources to continue to fund US government spending sprees? Or will the US monetize its debts?
Remember it isn’t just new issuance but present rollover financing for maturing debts that needs to be taken into account!
The recent activities in bond market hasn’t been optimistic for foreign buying activities of US treasuries, according to the Wall Street Journal, ``The closely watched figure, excluding transactions that don't occur on an open market, recorded net purchases of $11.2 billion in long-term U.S. securities, after purchases of $55.4 billion in March, according to the monthly Treasury International Capital report, known as TIC.” That’s nearly an 80% drop in foreign buying!
Yet this week, the US treasury will hold another record offering to the tune of $104 billion (CNBC.com). So record upon record issuance will test the limits of the global pool of capital. Losing the ability to raise financing will likely prompt for debt monetization or the US will be faced with the risk of a default.
Moreover, deficits are expected to be still relatively larger than the Philippines even in 2010.
Notwithstanding, the unraveling of the next wave of mortgage resets, other credit woes (credit card, auto loans, Commercial Mortgages, leveraged debts) and deficits from states that would necessitate for Federal bailouts are likely to generate pressures for additional deficit financing.
Hey guys, when looking at the Peso, the US dollar isn’t neutral or fixed. It’s like a tale of the tape of a boxing match, mano a mano.
The Last Barrier Standing
Ok there hasn’t been concrete evidence in terms of declining US dollar reserves (which continues to modestly expand in May) or admission from the BSP of any market intervention. So here we are merely making wishy washy conjectures. Maybe we could try to see the outstanding gold holdings.
But as far as BSP intervention is concerned, there seems to be a stronger incentive for such actions on concerns over the sagging consumer spending from declining remittances of OFWs and from election spending that could weigh down on the Peso. That’s the bearish case.
But the last word on the US dollar from Doug Noland in his latest Credit Bubble Bulletin ``Our foreign Creditors may be content to recycle dollar flows back into Treasuries, but they are thus far in no mood to return to financing our business or household sectors. This may prove a major factor contributing to an altered flow of finance throughout the U.S. economy. It can also be read as a warning that the crucial process of dollar recycling rests increasingly on market perceptions of the soundness of one single market – U.S. Treasuries.” (bold highlight mine)
Remarkably, only a single barrier stands between success and doom. You may call it credibility, but I call it FAITH.
Interesting times indeed.
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