Philippine Peso: Internal Dynamics As The Critical Factor; Why the Peso Will NOT Be Immune to External Forces

The deprostitutionalization of research can be done as follows. Force people who want to do “research” to do it on their own time, that is to derive their income from other sources. Sacrifice is necessary. It may seem absurd to brainwashed contemporaries, but Antifragile documents the outsized historical contributions of the nonprofessional, or, rather, the non-meretricious. For their research to be genuine, they should first have a real world day job, or at least spend ten years as: lens maker, patent clerk, mafia operator, professional gambler, postman, prison guard, medical doctor, limo driver, militia member, social security agent, trial lawyer, farmer, restaurant chef, high volume waiter, firefighter (my favorite), lighthouse keeper, etc., while they are doing their initial research. It is a filtering, nonsense expurgating mechanism—Nassim Taleb

In this issue

Philippine Peso: Internal Dynamics As The Critical Factor; Why the Peso Will NOT Be Immune to External Forces

-Survey Says Philippine Peso Most Resilient Currency, Market Disagrees

-Statistical Rationalizations Fail to Appease Peso Bears

-Peso’s Woes: It’s the Political Economy, Stupid!

-The Philippines Will NOT Be Immune to External Influences

-Has USD php 50 Been the BSP’s Maginot Line? Why the Peso Will Fall Further

Philippine Peso: Internal Dynamics As The Critical Factor; Why the Peso Will NOT Be Immune to External Forces

Once again, the USD Philippine peso (php) hit 50, a 2009 high, last week, before settling down to close at 49.92 or higher by .56%.

Survey Says Philippine Peso Most Resilient Currency, Market Disagrees

Curiously, the Bloomberg conducted a poll on experts who predicted which Asian currencies would outperform in 2017

The survey’s result: the Philippine peso. The peso is “being tipped as the one likely to suffer least from the global slings and arrows of 2017”, that’s primarily anchored on the notion that the Philippines “doesn’t largely depend on trade, especially with China or the U.S.”

Although the survey included many other factors such as geopolitical risks, developed market central bank policies, china economic slowdown, oil prices, Trump foreign policies, Trump trade policies and Europe’s risks.

Yet such crowd of experts, who see statistics as equal to economics or naïve empiricists, have been off to a really bad start.

 

In 2016, the USD php rose 5.65% and was the second strongest performer in 2016 after USD cny (yuan). See upper right window.

Yet 41.6% of the year’s USD php gains came from the post Trump electoral victory (upper left window)

To extend this perspective, since Trump won on November 8, the USD php rose 2.76% through Friday(January 20).

And for the week, among Asian currencies, the peso along with the Indonesian rupiah had been this week’s only major losers (lower right window).

Year to date, the peso and India’s rupee have accounted for as the worst performers. Remember, India has suffered from a massive dislocation from a ban on the most widely used (86%) currency denomination 500 and 1,000 rupee notes.

Statistical Rationalizations Fail to Appease Peso Bears

This week’s USD php outperformance should be more of a puzzle to the mainstream.

The Yellen factor and US President Mr. Donald Trump’s comment on the US dollar where he sees the USD as “too strong…and it’s killing us” failed to make a dent on the USD peso.

The massive RECORD injection by the PBoC to contain intensifying domestic liquidity pressures, as well as thetightening noose or dragnet of capital controls helped the yuan bounce back (temporarily).

Yet little of these seemed to have helped the USD php.

On the other hand, reported domestic factors were in favor of the peso.

The BSP declared that OFW remittances soared by 18% in November and portfolio flows reported net inflows for 2016.

Even more, the Philippines government raised US $2 billion from the overseas market last week.

Yet the USD php appeared to have ignored or discounted them.

Despite the popular mainstream rationalizations, the $64 billion question is WHY the sustained underperformance of the peso? Or why has the peso been continually sold?

The obvious answer is that the market knows something more than what these experts think they know.

Also, if the Philippines has been immune to external forces, then why has local experts been repeatedly and piously been chanting that the Fed has been responsible for woes of the peso?

The experts hardly ever explain in media the supposed channels from which the FED policies supposedly influence the local currency.

Peso’s Woes: It’s the Political Economy, Stupid!

Yet the main answer is the supply side.

The BSP has been inciting a fiery credit boom. An inflationary boom intended to bankroll the government, directly through inflated taxes, and indirectly, through artificially lowered rates onpresent and future liabilities, and through easy access to cheap credit.

And such ferocious credit expansion has diffused into the uberperformance in the context of money supply growth relative to the US.

So even if the US FED doesn’t tighten, for as long as the Philippine banking system will churn out credit and money supply expansion at the current explosive rates, then the peso will WEAKEN(ceteris paribus or all things being equal).

As a side note, monetary interventions can, of course, interrupt or defer on the market adjustments. But markets eventually prevail.

The sins from the 10 successive months of 30%%%+++ money supply growth in 2013-2014 has yet to fully ventilate on the USD php. After the retrenchment in money supply growth in 2015, the BSP rekindled another boom last year through a massive bond buying program—the silent stimulus.

Even worst, the shift of the political economy to the left would aggravate the dilemma of the peso because of the crowding out effect, or “the substitution of labor for capital” which would manifest itself as burgeoning fiscal deficits.

And once the real economy effects/repercussions of the present credit boom peters out, staggers or flounders, this should bring to the surface the balance sheet risks of both the Philippine government and the banking system.

It is only from here, belatedly where statistics is economics experts will see such risks.

There is no free lunch.

The inflationary effects or ramifications from the credit boom will put a lid on its continuance. We have seen this in 2014 where the BSP raised reserve requirements, interest rates, SDA rates twice for each.

This tells us that the main source of the currency’s conditions will always emanate from internal dynamics—something which eludes and has been rabidly denied by the one way looking mainstream.

To paraphrase former US president Bill Clinton’s campaign strategist James Carville:, It’s the political economy stupid!

The Philippines Will NOT Be Immune to External Influences

In contrast to empiricists, the peso has not been and will not be immune to external developments.

Trade is not the only link between the Philippines and the world.

Aside from OFW remittances, investments (FDI and portfolio), ODAs, another major transmission avenue is CREDIT.

Like China, deteriorating balance sheets, capital flight and shortages of hard supply of the US dollar can function as sources of vulnerability. Even more, confidence can have a significant influence because it can alter market psychology.

Moreover, these factors can have a nasty feedback loop or become secondary causes for further escalation of turmoil.

 

The BSP’s reported December GIRs, as expected, fell again. It dropped by $ 406 million (upper chart). $335 million or 82.5% of the decline came from a decrease in foreign investments. The decline in foreign investments can partly be seen from November’s liquidation of US treasury holdings held by the Philippine government (lower window), data from US Treasury here. December’s Philippine holdings of US Treasury papers should reflect a decline too.

As one would note, BSP’s GIRs are TIED to external accounts (assets).

And as the peso plunged to a record 2009 level, the BSP’s forex holdings continued to swell at record pace. Last December, forex holdings, which most likely constituted swaps and forward contracts, expanded $74 million. Gold holdings dropped US $143 million from the fall in gold prices.

See, another link will be prices of commodities, whether they are exported or sold locally.

As a side note, another factor would be social mobility. Should many major countries put up a wall against migration, thereby sending home many overseas workers or unnaturalized citizens, not only will this affect remittances, it will affect domestic economy (through economic, social and political channels).

Economics is not about numbers but about PEOPLE.

Falling GIRs through liquidations of US treasury holdings demonstrates of the growing US dollar liquidity shortages of the Philippine financial system.

Has USD php 50 Been the BSP’s Maginot Line? Why the Peso Will Fall Further

Yet the BSP’s GIR conditions showed that it sold significant US dollars in support of the peso.

And the BSP’s GIRs also revealed of substantial leveraged exposure in the US dollar or the “US dollar shorts”.

And part of the $2 billion bond offering this week will likely be used again to shore up GIR. Again, another “US dollar short”.

Borrowed US dollars would have to be paid back. And should the policy of credit inflation be sustained, then this should lower the exchange rate value of the local currency. Hence, it would require more domestic currency to buy US dollars. So access to US dollars will become increasingly costly. More than this, even hedging costs on US dollar will rise, so artificial “reserves” eventually will have to fall.

I suspect that the USD php 50 has accounted for the BSP’s Maginot line. Each time the USD peso hit the 50 level, the BSP may have intervened by selling waves of USD.

Like China’s PBoC, the BSP seems caught in a predicament. The BSP has been faced with a Hobson’s choice; either let the peso fall and maintain GIR levels, or support the peso and suffer the GIRs. Something will have to give.

In the present political economic environment where governments, supported by the populism, believe in free lunches or cost free political redistribution, the global US dollar short position will compound or aggravate on internal dynamics

This applies to the Philippines.

This is why I believe that the USD peso will eventually break the 50 level. And even more, the USD php will go on to breach the 2004 high of 56.45 in the fullness of time. It may be this year or it may be next.

All of which depends on the degree of inflationism, and the rate or scale of deterioration of domestic balance sheets of the government and of the banking system. And how such local dynamics will playout in face of the US dollar shorts, or at worst, a global crisis

It’s gonna be a very interesting year.

It’s a year that will likely catch most people off balance.

And don’t forget surveys have recently been exposed as mortally wrong (e.g. Brexit, Trump presidency)