The USD-Php beat the Phisix to a new record.
Up .5%, the USD-Php soared to 50.47 a level last reached in September 2006, or an ELEVEN year high!
Among Asian contemporaries, the USD-Php was the strongest again this week (peso weakest)
The domestic currency’s weakness has been more than the USD. It has been weak against a broad spectrum of currencies.
Among the currency majors, with the exception of the Japanese yen, the Philippine peso has attenuated against the euro, pound and the yuan over the past year (upper charts). The yen has risen against the pesoin January but has traded rangebound since May. (But the yen-php remains up on a year-to-date basis)
Including all the components of the Bloomberg Dollar index (BBDXY), the Philippine peso has diminished against the Mexican peso, the Australian dollar, and the Swiss franc. The Canadian dollar has only recently spiked against the peso. Though the Brazilian real rose against the peso in the first two months of the year, such gains have dissipated. Or the peso has gained only against the real year-to-date. The real’s weakness has largely been due to corruption scandal that has surfaced to plague Brazil’s new administration.
The peso has condescended even against the ASEAN neighbors, namely the ringgit, baht and rupiah (lower window).
Despite the much ballyhooed G-R-O-W-T-H mantra, the broad spectrum of the peso’s weakness has been amazing.
Contrary to the public wisdom, the sustained softening of the peso entails that the demand for the peso (and peso related assets) continues to wane.
Moreover, while there has been a surfeit of domestic liquidity, there appears to be increasing scarcity in the context of USD liquidity in the domestic financial system.
And while local experts fixate on the FED’s “hawkishness” the international counterparts have raised the issue of USD flows in terms of remittances and of trade deficits. Hardly has there been any meaningful discussion on relative supply side factors.
On remittances. Unless much of the domestic population will be sent overseas, the law of diminishing returns will continue to dominate remittance dynamics predicated on the sheer scale of OFWs and overseas migrant workers.
Additionally, incomes of OFWs and immigrants depend or are leveraged on the global economy. With global debt at a staggering US $217 trillion or 325% of GDP in 2016(!), the burden of debt servicing will hardly generate enough room for investments and therefore provide the necessary fulcrum for growth dynamics. Furthermore, since much of these debts had been used to finance overcapacity, the latter will also serve as obstacles to real economic growth. Both these factors parlay into constricted demand.
Moreover, increased risks of protectionism and political aversion to migrants will likely serve as added hurdles to increased overseas deployment. Given these factors, remittance growth should be expected to grow incrementally, stagnate or even decline.
This brings us to trade deficits. The government proposes an aggressive infrastructure spending program to the tune of Php 8 to 8.4 trillion over the tenure of the incumbent administration (2017-2022).
To put in perspective the scale of the proposed spending, 2016’s NGDP was at Php 14.5 trillion. The personal savings as of May was Php 4.09 trillion. Total resources of the financial system as of April totaled Php 17.4 trillion with banking system’s resources at Php 14.142 trillion. This means that that the proposed infrastructure spending program would equal 55% of NGDP, 195% of personal savings and 46% of the financial system’s resources. And that’s just infrastructure alone.
Since the government’s massive infrastructure spending alone will compete and eventually “crowd out” the private sector on resources and on financing, these most likely will lead to even bigger trade deficits (greater imports than exports). With insufficient dollar flows from remittances and from foreign investments (as consequence of “crowding out”), the government’s current dollar liquidity predicament will likely intensify. The government will most likely finance such liquidity shortages with more borrowing from both local and international sources of USDs, the BSP will probably increase its usage of derivatives “forward cover” and possibly resort to access of currency swaps with other central banks.
So the government will not just be borrowing to finance its ambitious spending programs, it will also expand its leverage on the USD for liquidity purposes. At the end of the day, increasing dollar indebtedness would redound to magnified “US dollar shorts”.
And while popular politics remain fixated on free lunch funded pipe dreams, raging global asset markets may have been forcing global central banks to have second thoughts on the continued provision of easy money.
Fed officials as Ms. Janet Yellen warned last week of expensive price valuations. San Francisco Fed John Williams said the stock market "seems to be running very much on fumes" and that he was "somewhat concerned about the complacency in the market." (Bloomberg)
Ms. Yellen’s vice chair, Stanley Fisher “pointed to higher asset prices as well as increased vulnerabilities for both household and corporate borrowers in warning against complacency when gauging the safety of the global financial system.” (Bloomberg)
The Bank of England “ordered banks to hold more capital as consumer debt surges” (The Guardian) while its governor Mark Carney gave the case of raising interest rates (Marketwatch)
European Central Bank’s Mario Draghi hinted that tapering of QE may be in the offing by saying “deflationary forces had been replaced by reflationary ones”.
Mr. Draghi’s statement sparked massive selloffs in bonds, and a huge spike in the euro!
ECB officials tried to downplay Mr. Draghi’s statement to no avail.
The Swedish Central Bank is widely expected to ditch its easing bias next week.
Last weekend, prior to the spate of hints by central banks, the Bank for International Settlements, the central bank of central banks, urged major central banks to press ahead with interest rate increases (Reuters)
And with major central banks signaling a concerted tightening, it’s a wonder how the Philippine government can be able to finance their proposed grandiose project.
Aside from domestic USD liquidity issues, if the BSP continues to maintain current historic subsidies in the face of global tightening, the peso will depreciate further. Monetary subsidies include the RECORD lowest interest rate and the RECORD monetization of National government debt which went up by 8.9% in May 2017 from April’s 4.3%.
But if the BSP raises its rates to align with actions of the other major central banks, then just what happens to the much touted aggressive infrastructure spending projects?
Oh by the way, I noted in early June that the BSP has imposed a tacit tightening through a pullback in the monetization of national government’s debt. (Oh My, Has the BSP Commenced on Tightening??? June 4, 2017).
Apparently, the slowing domestic liquidity growth (11.3% in May) has percolated to impact consumer (+23.6%) and industry loan (+17.6%) growth too (lower window).
Nevertheless, the BSP seemed to have used QE (Php 31.783 billion) anew this May to finance the National Government May’s fiscal deficit (Php 33.421 billion). The doubling of growth rate has similarly reflected on M3.
Getting hooked to debt monetization translates to a policy of devaluation.
Oh, before I close, here is a SHOCKING quote of the day from Ms. Yellen (Reuters, June 27, 2017)
U.S. Federal Reserve Chair Janet Yellen said on Tuesday that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash.
"Would I say there will never, ever be another financial crisis?" Yellen said at a question-and-answer event in London.
"You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be," she said.
Writing on the wall?
