Weak Philippine Peso: It’s hardly about Smuggling, it is about Excessive Money Supply Growth (Credit Bubble)

The mainstream remains incredibly flummoxed by the weak peso which they continue to blame on ‘smuggling’. 

From the Wall Street Journal Real Time Economic Blog: 

Several years of sound economic management have left the Philippines with what appears to be one of the strongest government balance sheets in Asia: a current account surplus of nearly 5% of gross domestic product and enough foreign reserves to cover more than a year’s worth of imports.

So why has the peso been among Asia’s weakest currencies this year?

One reason could be a smuggling problem that has resulted in significant irregularities in the country’s trade data. Some analysts say a proper accounting might show that the country’s current account is actually in deficit – at a time when skittish investors have been punishing developing economies that are too dependent on foreign funding.

Wow. Did you see the heading of the chart? "False Advertising"? Now this is getting to be quite interesting.

 

The mainstream have come to question on the credibility of the accuracy of government statistics. Something which I have been repeatedly pounding at.

Yet if the scrutiny over the statistical numbers will be sustained then eventually whatever de facto cosmetic strength will soon reveal its true colors.

And the WSJ excerpted the BSP response last March.

Central bank Gov. Amando Tetangco Jr., in a March interview with The Wall Street Journal, defended the official data and called the studies questioning the Philippines’ current-account position “more sensational rather than rigorous.”

“I’m not saying they’re trying to discredit us, but they should do more analysis,” he said.

Any discrepancies between the Philippine data and those of its trading partners can be explained by different valuation methods, Mr. Tetangco said.

Ah, let me re-quote a favorite from Dr. Marc Faber on government statistics (bold original)

Governments will always publish the statistics that they wish to show irrespective whether that is in China or in other countries. Governments control basically the statistical offices, so they can show whatever they want. As Stalin said, it’s not important who votes but who counts the votes. And the government counts the statistics.

One should ask: who has the incentive to publicize rosy data? For what reasons? Who benefits from these?

Here is my reply:

the Philippines has sold to the domestic and international audiences—a boom story—in order for the government to have easy access to credit. The central bank engineered credit boom combined with the government publicity ‘anti-corruption’ stunt paid off, the Philippines got three credit rating upgrades in 2013.

And the relationship between smuggling and the weak peso? Again as I wrote last March 31, 2014 (footnote tags omitted, bold original)

And why should “smuggling” extrapolate to a weak peso?

The popular argument indicates that “smuggling” enervates the Philippine financial standings via the trade and current account “deficit” channel. This is partly true but hardly provides a sufficient explanation for the rest.

Based on the accounting identity called Balance of Payments (BOP) which “record of all monetary transactions between a country and the rest of the world” the total has to be ZERO

According to Wikipedia.org “When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries.”

The accounting identity:

BOP = CURRENT ACCOUNT + CAPITAL ACCOUNT = CREDITS - DEBITS= 0

In and of itself, this means that deficits are hardly the cause of a currency’s travails, if they are sufficiently funded.

Deficits become a source of concern when the deficit nation’s funding has been perceived as increasingly becoming inadequate or deficient and or when creditors’ confidence are shaken due to an observed deterioration in the nation’s capacity or the ability or the willingness to pay on her liabilities.

Wikipedia.org describes the balance of payment crisis or a currency crisis:

A BOP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential imports and/or service its debt repayments. Typically, this is accompanied by a rapid decline in the value of the affected nation's currency. Crises are generally preceded by large capital inflows, which are associated at first with rapid economic growth. However a point is reached where overseas investors become concerned about the level of debt their inbound capital is generating, and decide to pull out their funds. The resulting outbound capital flows are associated with a rapid drop in the value of the affected nation's currency.

So the agonizing peso has hardly been about “deficits” per se but rather about the 38.6% M3 growth last January which according to the BSP has been “due to higher demand for credit”.

Yet it has been simply amazing at how the mainstream experts see money and debt as operating in a black hole when discussing exchange rate values.

Read the rest here.

Nonetheless my conclusion: (bold original)

So this means that for as long as the BSP permits the inflation of credit fueled asset bubbles, surging price levels compounded by deteriorating or massive expansion of debt conditions will persist to manifest on a corrosion of the much vaunted external conditions of the Philippine economy that will be expressed on interest rates and on the peso.

The mainstream will continue to desperately rummage at statistics to explain or rationalize what they can’t see, which ironically, has been staring at them for quite sometime.