Bretton Woods II served
up a deflationary impulse (globalization, open trade, just-in-time supply
chains, and only one supply chain [Foxconn], not many), and Bretton Woods III
will serve up an inflationary impulse (de-globalization, autarky, just-in-case
hoarding of commodities and duplication of supply chains, and more military
spending to be able to protect whatever seaborne trade is left— Zoltan Pozsar
The USD-Philippine Peso
Surges to 18-Month High: BSP Blames 'Speculators' as GIR Composition Exhibits
Intervention Limits
In this issue
I. The Strong US Dollar
and the Weak Philippine Peso
II. As USD/Philippine
Peso Surged to 18-Month High, BSP Warns Against "Speculation"
III. The BSP’s Shift to a “Dovish" Stance;
The USDPHP’s Lindy Effect
IV. Why the BSP’s Dovish
Shift: Weakening GDP and Surging Interest Payments on Public Debt
V. USDPHP’s Bull Market Based
on Inflationary Financing of Deficit Spending
VI. Soaring External
Debt Means Surging USD "Shorts"
VII. The Philippine Peso
to Benefit from a USD "Collapse?" BSP’s Assets Reveals a Different
Story
VIII. The Composition of
the BSP’s Gross International Reserves Exposes the Limits of the BSP’s
Potential Interventions
IX. Will a Weak Peso Boost Exports While
Hampering Imports?
X. The BSP Points to "Market
Failure" by Shifting the Blame on "Speculators"
XI. USD Philippine Peso Signals
Higher Inflation Risks, The Probable Shift to a Multipolar Currency System
The USD-Philippine Peso
Surges to 18-Month High: BSP Blames 'Speculators' as GIR Composition Exhibits
Intervention Limits
As the USD Philippine peso soared to an
18-month high, the BSP points blamed "speculators" for the surge.
However, this finger-pointing constitutes a smoke-screen.
I. The Strong US Dollar
and the Weak Philippine Peso
Figure 1
The US dollar index ($DXY) rose by 0.26% this week. The USD increased
against most Asian currencies, with the exception
of the Indian rupee ($INR), which fell by 0.29%. The INR benefited from inflows
into its manic stock markets, a record $25 billion
central bank payout
to the government, and an all-time high in
international reserves (as of May 17). (Figure 1, top and middle windows)
For the week, the USD surged the most against
the Thai baht ($THB) by 1.6%, the South Korean won ($KRW) by 1.05%, and the
Philippine peso ($PHP) by 0.99%.
Despite a massive $58 billion
support and repeated threats to intervene by the Bank of Japan (BoJ), the Japanese
yen fell by 0.9% week-on-week (WoW), with $USDJPY approaching 157, just
slightly below 158, which represented a 34-year high reached
at the end of April 2024.
Year to date, down by 5%, the PHP signified
the region’s fifth weakest currency after the JPY (11.3%), THB (7.2%), KRW
(6.1%), and the Vietnamese dong ($VND, 5.7%).
II. As USD/Philippine
Peso Surged to 18-Month High, BSP Warns Against "Speculation "
The USDPHP reached Php 58.27, an 18-month
high, on May 21st.
Echoing the BoJ, the Philippine BSP chief implicitly
chided speculators:
The dollar continued to strengthen as the Federal Reserve signaled delay in
cutting interest rates. The BSP continues to monitor the foreign exchange
market but allows the market to function without aiming to protect a certain
exchange rate. Nonetheless, the BSP will participate in the market when
necessary to smoothen excessive volatility and restore order during periods of
stress. (Businessworld, 2024)
In contrast to the BSP declaration, out of
the 28 USD crosses, 13 were positive, and the USDPHP outperformed that day,
according to Exante Data.
Further, while the BSP’s "plausible
deniability" did not mention interventions, two days later, newswires
reported that the monetary authority did support the peso: Mr. Remolona
said that the central bank intervened by small amounts on Tuesday, when the
peso sank to the P58 level for the first time in over 18 months or since Nov.
10, 2022. (Businessworld, 2024)
Even more, news also indicated that even
before last week’s USDPHP’s November 22 high, the BSP had already been carrying
out operations in support of the peso as early as May 7.
The BSP has been warning speculators since last April, or in June 2022, when the USDPHP was
at 54.8!
Media suggests that the BSP’s shift from "hawkish"
to "dovish" sentiment could have been the factor, yet the BSP remains adamant: Bangko
Sentral ng Pilipinas Governor Eli Remolona Jr. remains unfazed by the hawkish
signals from the US Federal Reserve, saying the BSP’s monetary policy decisions
will be guided primarily by the Philippines’ own economic data rather than the
Fed’s moves. (Inquirer, 2024)
III. The BSP’s Shift to a “Dovish" Stance;
The USDPHP’s Lindy Effect
The BSP’s predilection in easing policy rates
regardless of the US Federal Reserve’s stance is an exposition—it suggests that
the Fed was a convenient pretext to justify the current monetary stance of
local authorities. The BSP would readily abandon it when politics so
determined.
To boost the economy, the BSP chief proposes
to cut rates by 50 bps in the second half of 2024, possibly starting this
August.
Nonetheless, typical of central banks,
markets supposedly function as the culprits for any economic maladjustments—and
not policymakers. They assume the role of Gandalf the Grey/White (in the Lord
of the Rings series), setting boundaries against the adversary.
In the
Fellowship of the Ring, Gandalf commanded the demon Balrog against crossing the Bridge of Khazad-dûm, 'You shall not pass!' At least, Gandalf emerged
victorious in his battle against the Balrog. On the other hand, the USDPHP could be
considered a trend with Lindy characteristics. The Lindy effect is the "idea
that the older something is, the longer it's likely to be around in the future"
(Waschenfelder, 2021). In a word: time-bounded resilience. (Figure 1, lower image)
Since gaining independence from the US, the Philippine peso has been pegged to the USD at Php 2. However, the defunct Central Bank of the Philippines (CBP) experimented with currency decontrols and reestablishment of controls until its dissolution and the establishment of the Bangko Sentral ng Pilipinas (BSP) in July 1993, which then adopted a managed float system (Wikipedia).
In any case, from the CBP to the BSP, the
USDPHP has remained on a 54-year uptrend, with periodic countercyclical
movements.
It's also no coincidence that the emergence
of the USDPHP bull market has coincided with 'the Nixon Shock'
in August 1971, which marked the end of the Bretton Woods system (dollar fixed
to gold but gold was allowed only for international exchange—WGC) or the
transition to the incumbent US dollar standard, the primary currency reserve
for the global economy (CFR, 2023).
The thing is, the drivers of the USDPHP bull market from
the past remain principal factors today, or even worse—meaning they should
reinforce its bull market.
IV. Why the BSP’s Dovish
Shift: Weakening GDP and Surging Interest Payments on Public Debt
Why would the BSP insist on cutting rates
ahead of the Fed?
Naturally, with firms heavily reliant on
credit, higher rates pose risks to both the GDP and the banking system.
Secondly, and more importantly, public debt
repayments and refinancing have been skyrocketing.
Figure 2
Four-month public
debt servicing soared by 49% to a historic Php 1.15 trillion, bolstered by
interest payments (38.4%) and amortizations (52.4%). Though 82% of it accounted
for local currency-denominated liabilities, it was lower than last year’s
84.9%, which means foreign obligations filled the rest. (Figure 2, topmost
graph)
The four-month carrying cost of published
public debt was just 28.3% off the annual or last year’s all-time high!
"Higher for longer" translates to even more debt repayments and
refinancing on the back of higher repricing. (Figure 2, second to the highest
graph)
Though the mainstream rejoiced at April’s fiscal
surplus, brought about by the record revenues of Php 537 billion as a
result of the annual tax filing, non-tax revenues, which comprised 41.6% of the
total, delivered the substance.
Non-tax revenues more than doubled (114%)
while BIR revenues grew 12.7%. For most years, surpluses signified a seasonal
feature of April—again in response to the annual tax filing.
And yet, public spending surged 32.3% to Php
494.5 billion.
In a nutshell, due to non-tax revenues—partly
from dividends of Government-Owned and Controlled Corporations and "one-off
remittance of disposition proceeds from the Bases Conversion Development
Authority (BCDA)"—deficit spending was moderated.
Ironically, despite this, the cumulative
four-month fiscal deficit swelled by 12.7% year-over-year—the third-largest—as
the Bureau of Treasury drew from its cash reserves (-20.4%) and reduced its
borrowing (-23%). The drain of liquidity likely means a tsunami of borrowings
going into the year-end. (Figure 2, second to the lowest chart)
Figure 3
And yet, the USDPHP has tracked the uptrend
in public spending, and subsequently, the fiscal deficit. (Figure 2, lowest
chart and Figure 3, topmost graph)
V. USDPHP’s Bull Market Based
on Inflationary Financing of Deficit Spending
Naturally, deficit spending requires
financing. How?
Aside from taxes, the government draws from the public’s savings. Therefore, the uptrend in USDPHP also reflects the "unstoppable" bull market in public debt. (Figure 3, second to the highest image)
Due to the insufficiency of public savings,
financial authorities have resorted to the "monetization " of public
liabilities.
The acceleration of the USDPHP also echoes
the rise of the BSP’s
net claims on the central government (NCoCG). (Figure 3, second to the lowest
graph)
For possible public relations (PR) goals,
monetary authorities limit the expansion of their balance sheets. Instead, they
rely on the banking and financial system to implement their objectives.
Consequently, the USDPHP likewise manifests the inflationary credit expansion of the banking system through the monetization of public liabilities. All-time highs in bank holdings of NCoCG should eventually impact the USDPHP. (Figure 3, lowest window)
Additionally, record bank holdings of NCoCG have also aligned with their historic Held-to-Maturity (HTM) assets, which escalates the siphoning off of liquidity in the system.
VI. Soaring External Debt Means Surging USD "Shorts "
Hold it, because there’s more.
The government has borrowed not only to
fulfill the FX requirements of the economy but also to meet the BSP’s balance
sheet target.
Figure 4
Though financial authorities have relied on
domestic borrowings to bridge their financial chasm, external
borrowings have also been accelerating. In Q4 2023, it grew by 12.4% to a
record USD 125.4 billion. (Figure 4, topmost chart)
Historic fiscal deficits have reflected the
surge in external debt. (Figure 4, second to the highest graph)
The public sector, with a 58% share as of
December 2023, has accounted for a vast majority of the total. (Figure 4, lowest
window)
Since external borrowing has grown faster than the published
Gross International Reserves (GIR), the debt stock has now surpassed the
purported reserves. That being said, do these appear to be 'ample reserves' to
defend the peso?
(Figure 4, second to the lowest image)
Furthermore, the intensified increases in
external debt have also contributed to USD "shorts."
Figure 5
While the government can inflate away its
domestic debt, paid for by the loss of purchasing power of the citizenry, this
would magnify the real value of FX debt—or require more pesos to finance FX
operations. (Figure 5, topmost visual)
So why shouldn’t the USDPHP be higher?
VII. The Philippine Peso
to Benefit from a USD "Collapse?" BSP’s Assets Reveals a Different
Story
The grapevine suggests that the Philippine
peso could benefit from weakness or even a "collapse" in the US
dollar.
However, the facts tell a different story.
Presently, the world operates under a de
facto US dollar standard, where US dollar reserves serve as an
anchor for domestic currency and monetary operations.
As a share of its balance sheet, the BSP have
built its international reserve holdings from 31% in 1993 to 85% in 2010. (Figure 5, second to the highest pane)
The BSP have maintained its FX holdings in a
tight range of 85% to 87% until 2019. The
BSP's local monetary operations have been closely tied to these reserves. This
reliance has led to a rising share of currency issuance compared to
liabilities. (Figure 5, second to the lowest graph)
The buildup of FX reserves fueled a 9-year
countercyclical rebound (2004-2012) in the Philippine peso. It hallmarked the "salad
days" for the Philippine peso.
This period also witnessed a reduction in the
share of currency issuance, representing an implicit cleanup of both government
and private sector balance sheets.
However, this changed following the Great Recession in 2007-2008, when the BSP, like its global peers, lowered rates to stimulate credit expansion and mitigate economic weaknesses. This marked the beginning of the era of easy money.
Fast forward to the present, a massive
injection into the financial system amounting
to Php 2.2 trillion, or about 11% of the GDP, signaled an emergency
monetary response to the pandemic crisis.
This significantly inflationary
operation resulted in a substantial decline in FX reserves, indicating that the
government has been printing more money than its FX anchor permits.
Given these factors, why shouldn't the USDPHP
rise?
VIII. The Composition of
the BSP’s Gross International Reserves Exposes the Limits of the BSP’s
Potential Interventions
Through a gradual buildup of net foreign
assets, the BSP has been attempting to restore its previous range of FX
reserves. However, the growth rates of BSP's GIR and banks' FX assets have been
slowing significantly. In contrast, the BSP's net foreign assets continue to
expand.
Figure 6
The BSP has been relying less on its FX
holdings for its GIR operations, as evidenced by the declining trend. (Figure
6, topmost graph)
Since 2018, the BSP has modernized, utilizing
Other Reserve Assets (ORA) such as swaps, repos, and other short-term loans to
boost its reserves. From a peak of 12.5% in January 2023, ORA accounted for
5.3% of the GIR as of March. (Figure 6, second to the highest window)
Interestingly, despite record gold prices, the BSP has been selling off its gold reserves, leading to a decrease in physical metal holdings. (Figure 6, second to the lowest chart)
However, thanks to record USD gold prices,
this has bolstered the headline value of the GIR.
In short, the headline GIR conceals its
actual state through the use of 'borrowed
reserves.'
Even with borrowed reserves, the rising
USDPHP has stalled GIR growth. (Figure 6, lowest image)
Figure 7
In other words, through the expansion of
borrowed reserves in the composition of the GIR, BSP operations ultimately
depend on loose financial conditions abroad.
Nevertheless, a tightening of access to
local and foreign FX flows will limit the BSP’s capacity to intervene, as
evidenced by the growth strains in the GIR relative to the USDPHP. (Figure
7, topmost graph)
So why shouldn’t the USDPHP rise?
Furthermore, signaling a divergence between a
'genuinely hawkish' Fed and a 'dovish' BSP could lead to a wider yield spread
favoring US Treasuries over domestic counterparts, similar to Q4 2020 through
Q2 2021, when the USDPHP rose fastest. (Figure 7, second to the highest graph)
So why shouldn’t the USDPHP rise?
Here's the thing: The BSP has benefited
from the rise of the USD, which has led to revaluation gains from its USD asset
holdings. This is evident in its increased reliance on 'investments' while
reducing its gold and FX holdings.
Unfortunately, we don’t have data on the
distribution share of the GIR or the BSP’s FX portfolio.
However, with the BSP’s FX reserves accounting for over 70% of its assets, how would a USD "collapse" favor the PHP?
To elaborate, with the BSP’s net worth and capital accounting for only 1.9% and 0.8% of its December 2023 assets, wouldn’t a substantial markdown in its USD portfolio render the BSP insolvent? So, what would the BSP do, print more?
As noted in 2021, (bold original)
The BSP must amass
sufficient FX reserves to match domestic monetary operations required
to maintain the de facto US currency reserve standard. Otherwise, with
inadequate FX anchor, the peso must fall. (Prudent Investor, 2021)
In both cases, why shouldn’t the USDPHP rise?
All this is owed to the Keynesian
policies of 'build and they will come,' predicated on 'spending drives the
economy,' which has led to a record shortfall in savings and increased reliance
on debt (local and foreign) to fill the funding gap.
How is this supposed to represent "sound"
macroeconomics?
Why shouldn’t the USDPHP rise?
IX. Will a Weak Peso Boost Exports While
Hampering Imports?
We are further told by the echo chamber that
there is a bright side to the weak peso.
Or they have been quick to rationalize: a
weaker peso would boost export competitiveness and hinder imports.
Really?
Data from the Philippine
Statistics Authority says otherwise.
Firstly, from 2013 to the end of 2023,
imports have risen alongside the increase in the USDPHP. (Figure 7, second to
the lowest image)
Why? Simply put, due to the inadequacy
of local production and the political preference to prioritize household
consumption—evidenced by the record savings-investment
gap. Additionally, interventionist and inflationary policies reduce
competitiveness.
Under such conditions, the bull market in the
USDPHP has not hindered import growth. Weak imports in the face of a rising
USDPHP have only begun to surface in 2024.
Moreover, while the overall trend in goods exports mirrors the rise of the USDPHP, increasing USDPHP have not necessarily translated to a surge in exports. (Figure 7, lowest chart)
Using reductio ad absurdum, if weak currencies were to deliver an export utopia, why not accelerate the devaluation? Better yet, why not embrace hyperinflation or the utter destruction of the Philippine peso?
The reality is that none
of the countries that experienced the worst episodes of hyperinflation—such
as Hungary, Yugoslavia, Zimbabwe, Republika Srpska, and others—became export
giants during the devastation of their respective currencies.
The essence is that heuristics do not
equate to economics.
Certainly, the weak peso, primarily a
result of domestic policies, will have redistribution effects on the economy,
and some sectors or enterprises may benefit from it. However, the overall
impact is a decline in the standard of living for the general public.
Why is the USDPHP destined to reach new highs?
Briefly, it's due to the accumulation
of economic maladjustments resulting from internal policies.
Figure 8 X. The BSP Points to "Market
Failure" by Shifting the Blame on "Speculators"
The markets or the so-called 'speculators' understand
this. Unprecedented leveraging raises manifold risks, including interest,
currency, and credit risks. (Figure 8, topmost image)
As previously explained, intensified immersion in domestic debt does not serve as a talisman against the 'demon' represented by a crisis. The ventilation of economic imbalances eventually forces them to surface.
Speculators serve as easy scapegoats for a politicized agency meant to protect redistribution policies favoring the government and the elites. Authorities shift the onus onto the source of the imbalances by pointing to the supposed role of "market failure."
Still, why does the BSP not see the rocketing
growth in FX deposits? Are they not speculators too? (Figure 8, middle chart)
Since the penetration levels of the banking
system remain far from the levels desired by the establishment, could this
buildup in FX deposits primarily be about the elites? Will the BSP crack down
on them?
XI. USD Philippine Peso Signals
Higher Inflation Risks, The Probable Shift to a Multipolar Currency System
Unlike in 2018, when falling CPI coincided with a rally in
the peso, the BSP’s ONRRP elevated rate has recently paralleled the rise of the
USDPHP. (Figure 8, lowest graph)
If anything, the USDPHP tells us that the
inflation genie remains lurking around the corner, yet to wave its magical
wand—a third, "bigger" wave of the CPI.
For the USDPHP, whether 'hawkish' or 'dovish'
doesn't matter.
Rather, the BSP’s inclination towards rate
cuts is a response to the softening internals of the GDP and the increasing
cost of carrying public and private debt, along with other forms of leverage.
Finally, while we believe that the USD
standard is in its twilight phase, this climax doesn’t necessarily translate to
an imminent 'collapse' in the USD.
As illustrated by the BSP’s balance sheet, FX assets (mostly in USDs) comprise the majority.
The USD standard entails that central banks hold assets mostly in USDs.
The transition to a "war economy"
implies increased socialization through deficit 'wartime' spending—signifying
a global shift towards more inflationary policies in support of war and other war-related
agendas.
This also suggests a diminishing contribution
from the private sector.
That said, as the world realigns along
hegemonic lines, nearly every nation would likely follow the US in embracing
fiscal dominance—in which inflation becomes a feature, not a bug.
Moreover, the expanding influence of
the "war economy" signifies a transition to a "multipolar"
world.
This transition implies involvement in
more aspects—social, economic, monetary, financial, technological,
informational, environmental, and tourism-related—leading to increased global
economic, financial, and social fragmentation, supply chain dislocations, the
formation of economic or trading blocs, and more.
All of these factors extrapolate to
reduced economic efficiencies and higher risks.
The culmination of the USD standard might
also signal a transition towards a "multipolar" monetary system,
where the architecture of the currency system of the emerging competitor(s)
could be anchored on a basket of commodities.
While the sequence
of realignment of alliances has begun, other developments have yet to
materialize.
As the renowned Credit Suisse analyst Zoltan
Pozsar has propounded,
We are witnessing the
birth of Bretton Woods III – a new world (monetary) order centered around
commodity-based currencies in the East that will likely weaken the Eurodollar
system and also contribute to inflationary forces in the West. A crisis is
unfolding. A crisis of commodities. Commodities are collateral, and collateral
is money, and this crisis is about the rising allure of outside money over
inside money. Bretton Woods II was built on inside money, and its foundations
crumbled a week ago when the G7 seized Russia’s FX reserves… (Pozsar, 2022)
____
References
Businessworld, BSP seeks to curb
forex speculation,
May 24,2024
Businessworld, Peso hits 58:$1 as
Fed stays hawkish,
May 21, 2024
Inquirer.net, BSP chief unfazed by
U.S. Fed’s hawkish signals, May 23, 204
Thomas Waschenfelder, The Lindy Effect: Finding Signal In
Noise,
Wealest.com
Wikipedia, Philippine Peso
World Gold Council, The Bretton Woods
System
Anshu Siripurapu and Noah Berman, The Dollar: The
World’s Reserve Currency, July 19,2023 CFR.org,
Prudent Investor Newsletter,
External Debt Growth Accelerates in Q3! Why This Uptrend Will Continue,
December 19, 2021
Zoltan Pozsar, Bretton
Woods III, Credit Suisse Economics, bullionstar.com March 7, 2022
