Will Holiday OFW remittances Boost the Philippine Peso? Forecasting the Fall of the Peso

Will Holiday OFW remittances Boost the Philippine Peso? Forecasting the Fall of the Peso

With the peso falling to a 13-year low, there have been attempts by the establishment to paint the peso in a positive light.

The peso, they assert, should benefit from the expected deluge of OFW remittances in the coming holidays.   

 

But what does empirical evidence reveal?

The turnaround of the USD-Php begun in 2013 when the domestic money supply growth soared by over 30% for 10 straight months.

From 2013 to 2017, in three out of the five years or in 60% of the time, the USD-Php has gained in the 4Q irrespective of the performance of the 4Q OFW personal remittances.

For instance, 4Q personal remittances boomed in 2013 (averaging 8.3% a month), yet the USD Php surged (+2.5%).

Last year, the USD Php fell (-2.25%) in the face of a remittance growth rate (averaging 5.2% per month) which was lower significantly than the growth rates of the pre-2013 years.

When OFW remittances registered their lowest growth rate in 2015 (averaging 4.07% a month), the USD-Php climbed by only .51%.

And a boom in OFW remittances hasn’t been in the cards.  4Q remittance growth rates have underperformed significantly its pre-2013 levels in 3 straight years

 

And general remittance trends have in a downtrend since 2014 as the USD peso soared.

Along with 2016, the 7-month growth trend for both personal and cash remittances have been the lowest since 2016.

The lesson is: USD Php price changes and 4Q OFW performance barely has any established statistical correlations. 

And the assumptions to arrive at such conclusions have been utterly misguided.

The focus on remittances assumes the price of USD-Php determined solely by USD flows or by USD supplies. But exchange rates are defined as a price of a nation’s currency in terms of another currency. Or, exchange rates operate in a pair.

From this perspective, whatever happened to the supply of the peso? Are changes in the supply of the peso neutral or irrelevant to the price of the USD-Php?

And what of the role of demand for the USD vis-à-vis the peso and vice versa?

Incidentally, London based Capital Economics predicted that the USD-Php would hit Php 58 at the close of 2019 due to the widening of the trade gap and elevated consumer price inflation.

“Totally unfounded” asserted a government official who ironically hasn’t seen the inflation rates explode and the peso wilt.

I offer an improvement to the forecast of Capital Economics.

For as long as the BSP keeps printing money, the Peso will fall.

The BSP will keep printing money to finance the grand political spending boondoggles, to prop up fiscal conditions, the welfare, and warfare state, the bubble economy and to rescue the banking system.

The pace of the downfall of the peso will depend on many factors, such as the rate of money printing, street inflation, BSP’s currency interventions, fx borrowings by the government, economic performance and etc.

There will be another factor which had been eluded by the consensus: capital flight. Once it has been recognized money printing has become a deeply embedded political imperative, capital flight should accelerate

For now…

The first rule of the Inflation Club is: You do not talk about the BSP’s contribution. The second rule of the Inflation Club is: Remember the First rule.

 

From a technical perspective, once the 2004 high of the USD-Php 56.45 breaks, the upside momentum of the USD should only accelerate.

For a chart reader, the breadth of the lows and the breakout point would be proportionate to the uptrend until its peak. Unfortunately, I am a not a chart reader.

Nevertheless, this wisdom from Ludwig von Mises should serve as my guide….

If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely. The purchasing power of the monetary unit will decline more and more, until finally it disappears completely. To be sure, one could conceive of the possibility that the process of monetary depreciation could go on forever. The purchasing power of the monetary unit could become increasingly smaller without ever disappearing entirely. Prices would then rise more and more. It would still continue to be possible to exchange notes for commodities. Finally, the situation would reach such a state that people would be operating with billions and trillions and then even higher sums for small transactions. The monetary system would still continue to function. However, this prospect scarcely resembles reality (p.60)

While I don’t see hyperinflation as an imminent and inevitable risk, the path towards it has been rolling forward. It will take political will to stop this political addiction to free money.

Will it take a recession or a crisis for this to happen?

This means that I see USD Php 60 as a very conservative target.

Stay tuned.