``The Philippines has a very strong external position. The current account surplus has remained resilient, not least because remittances from Filipinos working abroad have continued at a high level. FX reserves have improved substantially in recent months as the central bank has tried to stem PHP appreciation.”- Danske Bank on the Peso
If there is anything that seems to defy my expectation that would be the market price actions of the Philippine Peso.
The Peso still lingers nearly unchanged from the start of the year even if it had managed to cross into the 44.5 levels in late May, prior to the second round revelation of the Greek Debt Crisis.
Figure 5: Yahoo Finance: Philippine Peso The ASEAN-4’s ODD Man
The Peso appears to be the sole ASEAN-4 currency that has not appreciated (right lower window). Our key neighbors Thailand baht (upper left window), the Indonesia rupiah (right upper window) and the Malaysian ringgit (left lower window) have all been up. The Malaysian ringgit is up over 5%.
Even if we take a look at the Peso in the lens of the mainstream, remittances was at the highest level last July[1]. Portfolio inflows have been up 245% for the first semester[2] while June recorded the highest level in gross international reserves[3]. Again, there seems hardly any connection between remittances and the Peso.
Figure 6: DBS Bank: Peso’s External Balance And International Reserve Exchange
So most of these factors appear to offset the surging fiscal deficit emanating from a record Php 1.58 trillion (US $34.7 billion) government spending, last year[4].
Since currency valuation shouldn’t be seen from a single dimension, this implies that the Philippines should be in a much better position relative to the US dollar based on these aspects.
This should even be accentuated if we consider “the relationship between the quantity of, and demand for, money” to quote Professor Mises, where we expect the US to likely engage in Ben Bernanke’s printing press as nostrum against the Great Depression paradigm at heightened signs of economic weakness.
In addition, the rising Euro[5] which implies of less worry over the sovereign issues seen early this year should translate to greater risk appetite which the Phisix and our Asean neighbors has been exhibiting.
Moreover, the currency regime shift to a managed float by the Chinese yuan[6] should equally be positive for the Peso.
So I am quite a bit puzzled by the underperformance of the Peso.
Nevertheless the populist tendencies of the new administration could be a factor to suppress the Peso’s rise for the purposes of promoting certain sectors as the OFWs or exports.
In addition, the populist proclivities can be seen in this article[7], (emphasis added)
``AFTER ditching the previous administration’s balanced-budget goal, the Aquino government plans to give the state a greater role in business by investing the proceeds of asset sales in lucrative industries, the Department of Finance (DOF) said…
``Purisima said that he does not see the urgent need to balance the budget as there are “more important things to look into in order to generate more profit for the government.”
``The new finance chief, said that areas that the government needs to do a lot of frontloading include infrastructure, education, and agriculture.”
Like almost every political leaders, the incentive to spend and conduct short term “photo op” policies is just too compelling.
[1] Bsp.gov.ph OF Remittances in May Reach the Highest Level at US$1.6 Billion, July 15, 2010
[2] Bsp.gov.ph Foreign Portfolio Investments Post Net Inflow For the First Semester of 2010, July 16, 2010
[3] Abs-cbnNEWS.com June forex reserves at new record, July 7, 2010
[4] Philstar.com, Fiscal deficit in May hits nearly $70 million, June 22, 2010
[5] See Buy The Peso And The Phisix On Prospects Of A Euro Rally
[6] See Why China’s Currency Regime Shift Is Bullish For The Peso
[7] Manila Times, Aquino govt mulls new state-owned enterprises, July 2, 2010
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