The Wilting Philippine Peso: Increased Signs of Pressures from US Dollar Shorts?

It has been an irony to see the peso wither again as the stocks march higher.

The official USD peso rates surged by .45% this week to Php 47.125 as of Friday’s close. The pesos’ fall has virtually erased or negated all gains obtained from the post election Duterte presidency euphoria.

As I have pointed out in the past, currency traders appear to have parted ways with stock market participants.

Yet in the past, actions of the Phisix run in the opposite direction of the USD peso

Ever since the USD php hit a low in the second week of June (see rectangle), divergence between the USD peso and the Phisix has morphed into convergence where both the USD php and the Phisix chimed to symmetrically ascend (see violet trend lines).

Ironically, the last time the USD peso hit the present level, the Phisix was at 7,100.

How time has changed!

Or has it?

Has the previous correlations actually been altered? If yes, then what economic underpinnings will support this? Will the Philippines see a massive surge in inflation for stocks to serve as “shock absorber” to a collapsing local currency ala Venezuela and Argentina? But this should imply for a reduced access to credit! YET this has not represented the current conditions.

Furthermore, will a continued surge in the US dollar be beneficial to the Philippine economy? How will this affect portfolio and investment flows, external trade (exports and imports), tourism, the banking and the government’s balance sheets and most importantly, US dollar denominated debt?

If not, are stocks bound for a belated adjustment?

Or will it be the USD peso to materially change to conform with, or to reinstate the divergence, and harmonize its relations with stocks?

What is unsustainable won’t last. But which of the two, strong stocks or the weak peso has been untenable?

The BSP reported that their GIR position increased by $1.04 billion last June. Yet 63% of the GIR gains have been due to its gold holdings. Gold prices zoomed by 8.8% over the said period. So the gains of gold reflected on GIRs. The BSP has to thank gold for shielding part of their portfolio from external pressures. Meanwhile, 37.5% of July gains from foreign investments.

Interestingly, the BSP’s forex position has only marginally declined (-2.236%) and remains adrift at record highs (see lower window)!

Remember that the BSP’s GIR includes part of the February 2016 borrowing (US $ 495 million) by the national government from the capital markets abroad. In short, claims by international creditors on the national government has accounted for part of what has been labeled in the BSP’s account as “international reserves”.

In reality, since these claims have to be paid back in the future, US dollars held today signify a long term drain. And this is why such would account for as “US dollar shorts”.

The point is temporary liquidity isn’t the same as long term liquidity or temporary liquidity must not be confused with ‘stability’.

And since most of BSP’s forex positions could likely be foreign exchange derivatives via swaps and forward contracts they likewise serve as “US dollar shorts”.

The BSP’s forex swap position as of March revealed by the IMF as shown above. The BSP has about $3 billion of forward long positions in fx swaps mostly over a short term 1 month of maturity. I suspect that these forward positions could have represented hedges on US dollars acquired from swap markets (fx loans and securities) and which was sold on the spot markets to support the peso.

Again these (FX Swaps and forwards) derivatives do not represent “reserves” in the context of savings (Benjamin Franklin US dollars), instead they represent liabilities or future drains in reserves for the simple reason they are borrowed “US dollars”.

It is why I’ve called the use of derivatives as the BSP’s “window dressing” of GIRs.

The BSP’s hope is that things will turn around and that US dollars will start flowing into country, from which will reverse what has been an outflow or growing signs of “shortage” of US dollars.

Such outflows and shortages have been masqueraded by the BSP and the government’s US dollar borrowings.

Hence, it has been interesting to see how the peso continues to weaken amidst official claims of having a stash full of foreign exchange, mostly in US dollars.

More importantly, growth in external debt by the Philippine government has been accelerating.

Data based on the Bureau of Treasury showed that external debt growth reversed course to the positive in May of 2015. And external debt has grown by over 5% year on year every month since October 2015.

And since January 2016, external debt growth rates have been energized to hover from 7-9% (see blue trend line).

There will always be a foreign exchange effect on foreign currency credit exposures. So in order to smooth this out, I provided a ratio between growth rate of external debt and the changes in foreign exchange (USD php). That is, if foreign debt grows faster than the USD peso, which means a rising debt stock, then this will be revealed as a number GREATER than one (red bars). However, if the foreign exchange effect has a stronger influence on the debt, the ratio will be BELOW one.

The red (over one) bars tell us that since the 2H of 2015, the Philippine government has been increasing its foreign exchange or external debt stock. Also the government seem to have sizably increased its pace of external borrowing in April and May of 2016.

If there have been so much hoarded USD dollars as the BSP claims it has, then why has Philippine national government been stepping up its overseas borrowing? Why has such borrowing been complimenting the BSP’s use of forex based derivatives to bolster the GIR?

Because of the ongoing deterioration of current account position? But external debt has been rising even when current account position was in a surplus at the end of 2015

Because of increases in the net liability positions of International Investment Position? But the BSP brags that this has been about FDIs.

Or has this been due to access of funding for infrastructure spending via imports?

Or more importantly, could it have been intended to finance US dollar short positions of highly leveraged corporations owned by oligarchy?

There has been a lot of hidden or unseen dynamics that government statistics intends to shield from the public.

The 64 trillion peso question is WHY?

Regardless of whether the government provides an answer or not, such stealth imbalances will surface through the USD peso exchange rate or currency markets which will eventually provide the answer to the real conditions of the BSP’s and the banking system’s balance sheets.