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Vigilance seen to be key in sustaining PH boom

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Conclusion

Like any grizzled veteran watching from the sidelines, Gabriel Singson loves telling  “war stories,” chuckling as he shares inside jokes and anecdotes from his long years in government service.

But his tone quickly turns serious when discussing the financial crisis that defined his stewardship of the Bangko Sentral ng Pilipinas (BSP) in the 1990s.

“It was a very different time,” he said. “We have it so much better now. So much money is coming in that we don’t know where to put it.”

Indeed, the kind of funds that have swamped the Philippines over the last two years are, for the most part, portfolio investments. Derisively known in the financial community as “hot money,” these are funds invested in the stock market, Philippine-issued bonds or the central bank’s high-yielding special deposit accounts.

These funds can leave the country as quickly as they enter, sometimes needing only a trader sitting in New York to push a button on his terminal to execute a sale and repatriate the investments.

On the other hand, foreign direct investment (FDI)—capital from abroad that stays in the country almost permanently, and is used to build factories and critical infrastructure—remains in short supply.

“Hot money makes up the bulk of inflows nowadays,” Singson said. “What we need is more FDIs.”

This year, the government expects the Philippines to receive $1.3 billion in FDIs (comparable to that of Cambodia) and about a tenth of the $12.7 billion that entered economically troubled Vietnam in the same period.

Singson also complains that not a day goes by without him receiving text messages on his mobile phone from unrecognized numbers—all offering him condominium units at “affordable” prices and “attractive” financing terms.

“Do you receive those messages, too?” he asked, looking at his phone. “Ang dami. Minsan nakakainis eh (There’s a lot of them. Sometimes it’s irritating).”

Which is not to say that the property sector is overheating.

“In 1997, condo buildings were empty, and the units were mostly bought with debt,” said COL Financial Group president Conrado Bate, citing a key difference between today and the crisis of 15 years ago. “Nowadays, some condos are also empty… but they were bought with cash.”

‘We knew what was coming’

On the morning of July 11, 1997, the supervisor of the BSP’s treasury department, came to work earlier than usual.

An hour before the 9 a.m. he girded himself for battle by reading real-time news reports of one country after another being overwhelmed by a massive wave of currency speculation sweeping the region.

“Naturally, I was scared,” the BSP official said. “We knew that other countries, starting with Thailand, were falling like dominoes since the week before.”

That official was an up-and-coming managing director named Amando Tetangco Jr.—the man who now heads the BSP.

His recollections give the impression of a man on a beach, holding a pail of water, and tasked with stopping the financial tsunami looming on the horizon.

“We knew what was coming,” Tetangco said, describing the tension in the trading room that morning. “At kakaunti ang bala namin (We didn’t have enough ammunition).”

And it didn’t take long before the inevitable came to pass.

Within 30 minutes from the start of trading, relentless speculative attacks pushed the peso from 26 to a dollar to 29. In the ensuing market panic, bankers completely forgot about “stop trading” limits imposed by regulators and continued dumping the local currency long after the threshold was breached. (Trading stopped mid-morning after someone remembered it.)

Four days later, with the peso already weakened way past the 30:$1 mark—and with the BSP running low on precious dollar reserves—authorities decided to stop intervening and allow the currency to free-fall.

The results were catastrophic. Companies which borrowed in dollars (because it was cheaper to borrow in foreign currency) suddenly found their peso-equivalent debt doubling almost overnight. Hard pressed to pay their loans, most firms cut costs, laying off millions of workers. Many went bankrupt.

Nature of the beast

In an interview, Tetangco said the most devastating financial crises in recent history had elements in common.

“If you noticed, many of them have roots in the property sector,” he said. “Whether it was the East Asian financial crisis in 1997 or the US subprime mortgage crisis in 2007-2008 or Japan in the 1990s.”

After the property sector, the contagion then moves to the financial sector, particularly the exchange rate and equities markets, as massive selling ensues to satisfy the need of foreign and local investors for capital flight.

But what could possible threaten the Philippines now that its growth rate, in terms of gross domestic product, is the envy of its neighbors?

“A sudden reversal of capital flows is one,” the BSP chief said, explaining that such a shift—like the tide suddenly receding from the shoreline—is what financial crises are made of. “Identifying what causes it … that’s the challenge.”

He conceded that, in some ways, the devastation caused by crises helped strengthen the economy for future generations, as lessons were learned and safeguards were put in place to buttress the financial system.

“Pain can be good sometimes,” he said, but rued its cost on the lives of ordinary Filipinos. “Personally, I prefer that kind of pain be avoided, as much as possible.”

He looked over at a paper pile on his table, and picked up a graph showing differences between peak property prices in Makati in 1997 and today, and another detailing the historical performance of local stocks.

“That’s why we always have to be vigilant.”


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  • Hayek_sa_Maynila

    You said:
    “Just one further comment, Hayek. You mentioned lowering interest rates. The effect of that would be to encourage further borrowing. This would have two problems.1. In a country where people have a reluctance to save money, this is hardly a great idea.2. It would probably create a bubble, unsustainable growth, that would result in faster short-term increases in the peso possibly followed by a collapse. I can hardly think of anything worse.What exactly is it that you are trying to achieve, Hayek?”

    As I mentioned below, if BSP wants to stick to inflation targeting, it can do so by adopting capital controls/financial repression/macroprudential measures. This way, BSP can achieve both its inflation and exchang rate objectives.

    I’m saying, it does not have to stick to inflation targeting, that it can abandon orthodox prescriptions by lowering domestic interest rates.

    The PHL has had asset bubble episodes and believe it or not they were not fuelled by low domestic interest rates but, ironically, high domestic interest rates. Why? Local corporates were discouraged to borrow locally bec of high domestic rates but bec exchange rate was stable/PHP was appreciating e.g. from 1993 to 1996, local companies were encouraged to borrow abroad. Even worse, local companies that do not earn in USD, borrowed heavily in USD. This is what I meant by currency mismatches in the balance sheet which I urged you to read about but you seemed to have ignored. Back in 1996, loan growth of the banking system was more than 50%, lending to real estate grew 90%, most of them funded in USD.

    If BSP does not lower rates, local corporates will just borrow heavilly abroad to fuel asset bubbles. The sin of omission (not cutting interest rates) is worse than the sin of commission. Theory does not teach this but reality is that the 10 years the PHL lost (1997 to 2006) was a result of keeping interest rates too high, combined with a bias for a strong currency in the 1990s. Of course, lower domestic interest rates will also help temper or even reverse PHP appreciation, which is what I am clearly very much against.

    My goal is simple: Make this country grow faster but be vigilant enough to ensure that it is sustainable. Rapid PHP appreciation does not benefit me or my business. However, bec it is a source of instability for our economy, a threat to the sustainability of our newfound growth momentum, I am very much against it.

    Don’t worry, I am still part of the minority. More likely than not you have more pro-orthodoxy friends in this country. Unfortunately, if you  and the rest of this group thinl (pro PHP appreciation, high interest rates) wins in this battle, a crisis in the PHL will likely happen in the next 18 months and your business here in the PHL might have a hard time surviving. We Filipinos who love this country will still be here.

  • Hayek_sa_Maynila

    alienpatriot,

    Unlike you I do not base my arguments on the basis of what is good for me or for the sector I come from. My assessment of how the exchange rate should be managed is for the good of the entire economy. 

    I am sure rapid PHP appreciation will make many sectors happy including those in the trading business, especially those into trading of imported goods…the arguments i put forward however is about what is good for the PHL economy over the medium and long term and whether a certain policy will be sustainable or not. In this case, a 7.0% nominal appreciation against the USD in 2012 is unsustainable and must not be repeated in 2013. Our economy can ill afford it.

    I don’t mind the stock market yielding 35% this year. I don’t mind interest rates falling to a new record low of 3.5% (BSP O/N). Most sectors in the economy will benefit from strong equity markets and low interest without necessarily causing unsustainable effects…but a rapid appreciation of the PHP, while good for some sectors, will be unsustainable and proven to be the cause of the 1997 balance of payments crisis as well as those from the 1970s and the 1980s, which led to the PHL lagging behind its neighbors.

    If you are afraid of big adjustments, I’m sure you wouldn’t mind if PHP weakens against USD by 10% each year as long as the PHP prices also increase by that much. The stock market gains could have still been spectacular at 25% if the peso had weakened by 7.0% instead of gaining 7.0%. This is most likely true for the property market as well as property prices have obviously gone up the past year. But were the jobs lost because of the PHP appreciation worth it? Is it PHP’s strengthening really fundamentally driven or due to speculative pressures from parties that just want to make a quick buck (e.g. financial institutions)?

  • Hayek_sa_Maynila

    Hey Alienpatriot is that all you can say? 

    “The PHP has not undergone a fast increase. It has actually fallen against the AUD. Against any trade-weighted or international index, the rise is slow.”

    Slow? But isn’t that relative. The question is whether a poor country can afford it? There’s no sense comparing us with Australia. Compare us with Indonesia and India which are closer competitors. Double digit gains against the Rupee and the Rupiah in a year are by no means slow. These two economies are investment grade economies.

    Larger USD holding is enough to indicate that we are OK? Have you noticed how quickly our dollar obligations have grown? Even Gov Tetangco admits that our BoP surplus is due to foreign currency borrowings of locals. A dangerous and potentially destabilizing trend.

    I’m not saying the BSP should panic. I say it should do more, much more. What it needs to do is to allow more currency depreciation during “risk off” episodes. When Greece was at the verge of leaving the EU in May 2012 and Nov 2011, BSP clearly stepped in to sell USD in the market during those episodes! What were those for?

    Why does BSP have an asymmetric preference for appreciation? so scared of depreciation? Thats the kind of thinking you get if most of those at the helm were trained to be firefighters (late 70s throuh 1990s).Crisis managers are important but what we need these days are policy makers that can adopt strategies that will pursue the interests of the PHL.

    Who said all their USD holdings should be in USD? There are other assets out there they can purchase to ensure PHP does not strengthen too rapidly against major currencies.

    Give it up alien patriot. Bottom line, BSP is not doing enough. It must do everything it can to make the PHL stay competitive. It should at the very least stay true to its commitment to be in the middle-of-the-pack in terms of currency performance in the region.

    Inflation can be a bigger risk if the BSP does not print pesos because local inflation will just be fuelled by foreign borrowings because interest rates in the G-3 are even lower. What will stop PHL companies from borrowing abroad to fund their inflationary activities? Where does your theory of printing domestic money causes CPI inflation fall in place now? You’re all theory! 

    Give it up! The push factor caused by zillions of USD being printed is just too much! Say good bye to orthodox thinking! Say good bye to mainstream theory! Swallow your pride. Listen and have an open mind. We want this country to continue moving forward and not be gullible when foreigners tell us “There’s nothing wrong with a 7.0% appreciation of your currency” but when something finally goes wrong are the first to be out of the exit door.

  • Hayek_sa_Maynila

    Why then was PHP allowed to strengthen by nearly 7.0% if there were enough vigilance? It sends the wrong signal to the business community. It tells them “Borrow Dollars!” “Issue Dollar bonds” The new NDF rules don’t seem to be working as market barely closed above the 41.000 handle on 28 December. Yes the 100 bps cut was commendable and so were the banning of foreigners from SDAs. Still, not enough is being done.

    • alienpatriot

       The question here is essentially one of interventionism. Should a central bank pull out all stops to control the currency?
      Between the government and the BSP, the economy should be made to move along smoothly with inflation around 3% and unemployment low. The currency is a third issue although it impacts on both. In the case of the PHP, the increase in value is slow but inevitable. It is inevitable because of the economic improvement. It is simply a reflection of the economic improvement. Compare it with the AUD. The “Aussie” has risen faster and further and is now worth more than the USD despite being worth 0.70c US only a few years ago. Do we criticise the Reserve Bank of Australia for allowing this? We do not, because no central bank can entirely control its currency.
      One positive development is the extent to which the Philippines has reserves of foreign currency. They are large and growing. Thus we are in a stronger position to cope with a collapse in the peso. It is also evidence that the BSP is already acting to control the peso’s rise.
      Without being critical of your statement, Hayek, I am inclined to ask how you would take action to reduce the exchange rate and weaken the peso. Would you print money or equivalent (QE)? Would you sell more pesos?

      • Hayek_sa_Maynila

        Australia’s income per capita in nominal USD will probably be more than $50,000 by the end of of 2012. Clearly living standards are much higher and give the Aussies the right to generously give jobs away to Americans and other nationalities. But a country like the PHL were income per capita will only be $2,500 at the end of this year? It is absolutely naive to so generously give up labor price competitiveness (among others) moreso that 1/3 of its population lives in absolute poverty. Check out Singapore. They’re probably richer than AUS in per capita terms but they limited the SGD’s appreciation to just 6.0% so far this year. 

      • alienpatriot

        Actually, Australian GDP per capita is a lot higher than Singapore but I understand the point that you are trying to make. The reality is more complicated, however. Singapore is having a bad year. GDP growth there is close to zero. THe SGD has not risen much because the economy in SG is failing. It is under no pressure to rise. The fact that the SGD has risen against the USD says more about the USD. The SGD should not rise at all.
        The issue that you do not address is how the currency should be restrained. Should the BSP buy more USDs? THe BSP is aware that the USD is likely to continue falling (it is US policy that it falls). Thus the BSP is losing money when it buys USDs.
        The second way to restrain the rising peso would be to print pesos. This reduces the value of the peso and is thus extremely inflationary but it does reduce the value of the peso. The result, then is to increase the cost to households of basic living so that the peso goes down. It is hardly a perfect solution.
        What is your suggestion, Hayek?

      • Hayek_sa_Maynila

        You are right, Aussies still earn more than the Singaporeans, by just $8,000 though (world bank)

        I understand your argument about Singapore’s growth but a 6.5% expansion for the PHL translates to very little in per capita income growth terms because of our high fertility rate here.

        Consider too that SING’s current account surplus is 16% of GDP while PHL probably 3.0% max with a non-negligible trade deficit at that. GIR of Singapore is nearly 120% of GDP while the  PHL is only 30%. A nearly 7.0% nominal appreciation of PHP is just too much and only a country whose income p/C is 20x bigger like AUS can afford.

        Look at Indonesia too. Real GDP will expand by 6.0% but IDR should be down around 6.0% against the USD this year. I heard they have a C/A deficit but AFAIK, Indo has a BoP surplus owing to surging direct foreign investments…but still IDR is becoming more competitive

        Extremely inflationary to be printing pesos? Does anyone still believe in that? Have you not heard of Zero rates and QE1,2,3…23? in the US-Fed, ECB and BoJ? The push factor of capital flows in a very small economy like ours is just overwhelming.

        Besides financial stability is probably a more important issue these days than inflation given the contraction of the EU and the sub-trend growth in the US. If the PHL does not print money, the PHL will just end up borrowing in USD/ floating USD bonds which will create a currency mismatch in the balance sheets of PHL financials and non-financials, a potentially more dangerous problem than CPI inflation. Printing pesos is the second best solution.

        Besides there are such things as macro-prudential/financial repression/capital control measures that Brazil, Turkey,Malaysia and other ASEANs currently adopt to manage massive nominal appreciation of their currencies.

        BSP is doing something but it is not doing enough.

        What do you think alien patriot?

      • alienpatriot

        That printing money raises CPI is obvious. Many countries at the moment are facing a threat of deflation and so it makes sense to print money or do some type of QE. It depends on circumstances. I note that the CPI is increasing within the band that the BSP wants and thus there is some evidence that the policy settings are working.
        The PHP has not undergone a fast increase. It has actually fallen against the AUD. Against any trade-weighted or international index, the rise is slow. Almost every currency is rising against the USD.
        The fact that the BSP has larger USD holdings shows us that they have been acting to control the peso. It has worked well although not perfectly.
        My view is that the BSP does not need to panic yet. There will come a time when it may need to act more strongly. It would be unfortunate if the BSP had converted too many of its pesos to dollars beforehand.
        As I see it, changes in exchange rates can cause two problems. One is that exporting can be more difficult. The second is the perception of instability. Thus, an exchange rate that rises slowly over a longer time is better than one that is stable but then rises quickly.

      • Hayek_sa_Maynila

        Hey Alienpatriot is that all you can say? 

        “The PHP has not undergone a fast increase. It has actually fallen against the AUD. Against any trade-weighted or international index, the rise is slow.”

        Slow? But isn’t that relative. The question is whether a poor country can afford it? There’s no sense comparing us with Australia. Compare us with Indonesia and India which are closer competitors. Double digit gains against the Rupee and the Rupiah in a year are by no means slow. These two economies are investment grade economies.

        Larger USD holding is enough to indicate that we are OK? Have you noticed how quickly our dollar obligations have grown? Even Gov Tetangco admits that our BoP surplus is due to foreign currency borrowings of locals. A dangerous and potentially destabilizing trend.

        I’m not saying the BSP should panic. I say it should do more, much more. What it needs to do is to allow more currency depreciation during “risk off” episodes. When Greece was at the verge of leaving the EU in May 2012 and Nov 2011, BSP clearly stepped in to sell USD in the market during those episodes! What were those for? 

        Why does BSP have an asymmetric preference for appreciation? so scared of depreciation? Thats the kind of thinking you get if most of those at the helm were trained to be firefighters (late 70s throuh 1990s).Crisis managers are important but what we need these days are policy makers that can adopt strategies that will pursue the interests of the PHL.

        Who said all their USD holdings should be in USD? There are other assets out there they can purchase to ensure PHP does not strengthen too rapidly against major currencies.

        Give it up alien patriot. Bottom line, BSP is not doing enough. It must do everything it can to make the PHL stay competitive. It should at the very least stay true to its commitment to be in the middle-of-the-pack in terms of currency performance in the region. 

        Inflation can be a bigger risk if the BSP does not print pesos because local inflation will just be fuelled by foreign borrowings because interest rates in the G-3 are even lower. What will stop PHL companies from borrowing abroad to fund their inflationary activities? Where does your theory of printing domestic money causes CPI inflation fall in place now? You’re all theory! 

        Give it up! The push factor caused by zillions of USD being printed is just too much! Say good bye to orthodox thinking! Say good bye to mainstream theory! Swallow your pride. Listen and have an open mind. We want this country to continue moving forward and not be gullible when foreigners tell us “There’s nothing wrong with a 7.0% appreciation of your currency” but when something finally goes wrong are the first to be out of the exit door.

      • alienpatriot

        Hi.
        You misunderstood my comment about large USD holdings. The increases in USD holdings is evidence that the BSP is buyings USDs. In fact we do not want too many of those if we end up with all USDs we can’t buy more. Holding USDs is a great hedge against a falling peso but that is not your concern is it? My point is that we already have lots of USDs. Having lots of USDs has also resulted in the BSP losing money. The USDs we bought are worth less than when we bought them.
        Exchange rates are designed to be reflections of the situation. Theoretically they create balance. No, the results are not always perfect but the issue is what choices do we have? The Chinese artificially control theirs to help their exports. We could do the same but we would probably lose our chance of becoming investment grade.
        You have never stated what you really want to do to achieve your objectives. You want a lower peso but how? You have suggested that printing money would not be inflationary but that is hardly credible. The whole point of printing money is to make the peso less valuable which is exactly what inflation is. Printing money will not reduce the exchange rate unless it is inflationary.
        I am not opposed to looking for unconventional methods to deal with future crises. If you are going to push that style of thoinking, however, you will need to make some solid suggestions.
        I have investments in this country … and I live here. I can see the advantages and disadvantages of the currency appreciation. The effects are the same on any economy, regardless of size. Exports become less competitive. Imports become cheaper.
        In the case of the Philippines, cars will become slightly cheaper. Electronics exporting will become less profitable. Call centres will not pull out of the Philippines because of a 7% increase. They just want stability. Right now, they have it.
        I am reminded of the comment of the man whose business just became successful “This is awful. I am paying much more tax!” He was paying more tax because he was richer but focussed only on the tax. I would not be suggesting that exchange rate appreciations can’t be a problem but we must remember that they are a sign of increasing wealth. This country, for the first time I can remember, is actually getting its act together financially. When that happens the exchange rate goes up.
        By all means, make your suggestions on how to control the exchange rate but please remember it is a sign of a wealthier Philippines.
        I know that you hate comparisons with Australia but please remember the situation facing Australian exporters. Their product just became 50% more expensive in the USA (not 7%). That is the cost of Australia not going into recession in the GFC. Australian mining products are thus very expensive now. I note that China has imported some Philippine iron in 2012 instead of Australian. Thus Aust and Phi are competitors … and the Philippines benefitted from its LOW exchange rate.
        Maybe you need to think outside the box also. Do not immediately refuse to consider comparisons with Australia.

      • Hayek_sa_Maynila

        Didn’t I mention 1) more money printing and/or 2) the implementation of stronger macroprudential measures/financial repression to arrest the peso’s rise? unless you missed that. 

        At any rate, let me enumerate them so it becomes clearer to you.1) BSP should print more money or lower interest rates further. Money supply growth has been at 7.0%, thereabouts, slower than the nominal growth of the economy which is about 10% (real gdp at 7.1% and inflation at 3.0%) in 3Q2012. In case you are not aware of it, the BSP has this SDA facility which is near PhP2.0Trillion now which sucks out all the liquidity from the system. This is where most of its losses come from. Not from the strength of the peso. Now people will start talking about the capacity limits of the PHL only being 5.0% real GDP growth or lower. since you’re in the orthodox mold, you are likely to answer with the output-gap theory  which has been proven to be inapplicable to a labor abundant economy like the PHL. Again, if BSP does not lower local rates further, PHL companies will just borrow abroad and increase leverage in USD or EUR or AUD which is a major reason for the PHL crisis in 1997. If you don’t get this point please read about currency mismatches and how poor exchange and interest rate policy mix can bring developing economies to their knees. This is where thinking out-of-the box really applies. Not comparing apples with oranges (PHL vs. AUS). Many big economies will complain if AUS devalues its currency. No one will mind if the PHL devalues bec. it is a small global player. Get it? The mining example is funny. Its Indonesia which gained advantage of Aus. They sold more coal to everybody else in the region. The PHL is a very small player in mining, not even a drop in the bucket.2) Now, If BSP wants to (stubbornly) stick to its inflation targeting framework while avoiding currency overvaluation it will have to implement macroprudential measures/financial repression or outright capital controls. BSP can tax short term capital to make sure those who stay near the exit door are not rewarded for money-for-nothing carry trades. I’ll say it again Brazil, Turkey, Indonesia, Malaysia and Chile do this. BSP should reward those who come in for the long haul or direct foreign investors who are actually happier when the peso weakens.

        3) If I were the BSP head, I will allow USD/PHP to go back to 50.   Now don’t tell me there were no opportunities to do this. In 2011, when Greece was at the verge of exiting the EU, PHP was pressured to weaken…but guess what? BSP stepped in to avert the PHP’s weakening. It sold USD in the market. Why? This opportunity came again in May 2012, Greek election threatened its membership in the EU and PHP – like the Rupiah – weakened against USD but what did the BSP do? It sold its dollars in the market, to slow the PHP’s fall? Why? Because it has a bias for a strong peso!!! Its an implicit guarantee to speculators! We were at 49 in 2008/2009, BSP could have moved heaven and earth to keep us there. But what did it do? It gave away jobs to other countries again!

        4) BSP should not be afraid to build up more GIR. The USD they buy can be converted to EUR to CHF to Gold. BSP does not have to lose money like you insinuate.

        The strong peso doesn’t just affect exporters. It affects the whole economy. It reduces consumption because relatives of Overseas Filipinos get less for each USD their foreign based relatives send. BPO investors have second thoughts of expanding in an economy where the currency has been allowed to appreciate by 20% between march 2009 and 2012. If you extrapolate that trend  through 2016, the cost advantage of BPOs in the PHL diminishes significantly.

        The strong peso kills domestic industries that compete with cheap imports. That includes agriculture where 1/3 of our labor force is employed. There’s manufacturing where millions have lost jobs because of more affordable labor abroad.

        Happy? Still sticking to your orthodox suggestions and just continue supporting another 7.0% appreciation for the peso in 2013 in a country where income per capita only improved by a bit over 3.0% (including Php appreciation) in 2012 where real GDP is growing 6.5%? 2.0% improvement in 2011?

        I’m not saying this is all our government needs to do. Infra spending, investment are still weak. $85Bn GIR should mobilized so you can have better roads, airports, seaport etc. I’m saying its one of the most important things it needs to be vigilant on.

      • alienpatriot

        There is a lot in what you write that I do not dispute. There are some differences, however.
        I do not see the increase in the value of the peso itself as the main problem. Viewed objectively the currency was actually undervalued. Obviously, a high peso could eventually cause a problem for this country so I do acknowledge some need to be careful.
        When I first invested here in colid assets (property inclusive) I was concerned about the threat of a devaluation of the peso against the Australian dollar (I am a dual citizen). As an investor I do not want a low peso. My Philippine involvement is not about low wages. I have no intention of jumping out of this country if the peso rises. I want stability – no fast rises or falls.
        It may well be that a slight increase in peso printing is possible. Obviously the more money in the system, the less value that money has so CPI would rise. As it is just over 3% now it is at the low end of the BSP target range (which is actually quite high).
        Our major difference is that I do not see what has occurred in 2012 as such a major problem as you do. You mention income per capita and there we see the real problem. The birth rate is much too high. Thus the issues raised in the RH bill are the big problem. It is not that the ecinomy is failing. It is that the wealth created needs to be shared an increasing number of ways. The GDP growth of this country is creating forces that push the PHP higher yet too many children are being born and so the improvement is lost.
        As I wrote in a previous comment, there are two issues. One is the actual exchange rate and the other is stability of it. As an investor I am more concerned with the second. I do not want large increases and decreases. I want to be able to plan on the basis that neither my Australian nor Philippine investments will suddenly drop dramatically in relative value.
        We need to have more faith in this country. While we would not want a fast rise in the peso (and this has been a year with no major currency rising or falling quickly), the productivity of the economy(real and perceived is much more important. Call centres in the Philippines are simply better than those elsewhere. It is not just about price. I know from personal experience that many companies that used Indian call centres had many complaints that the service there was inadequate. It is not just price.
        IBM is transferring more services to the Philippines at the moment. Why? They think they can get educated agents here at a rate much lower than they pay Americans. They just need to know that Pinoys can do the job. They are not comparing with Indonesia or Malaysia. They will choose Philippines ahead of other countries because the expertise is available here. It was not a choice based primarily on cost. This country will remain much cheaper (wages) than USA or Australia for a long time. The exchange rate will not change that.
        The exchange rate has a larger influence on the value and viability of low-value goods. By kmproving its capacity to produce higher value goods and services the exchange rate problem can be averted.
        Thus, I would focus more on
        1. improved education so that better services can be offered.
        2. Infrastructure – we agree on that
        3. family planning so that GDP growth can actually improve individual wealth.
        The current exchange rate of 40 to 1 is actually not a problem. I would not want a return to 50 to 1 or to the 25 to 1 that existed decades ago.
        I am not the only person with non-liquid investments in both PH and a developed country. We tend to watch the PHP as we know that developing country currencies have collapsed before. If people like myself suspect that this could reoccur we may be tempted to pull out of the Philippines. Personally I am unlikely to do this as I live and work here but it would stop me from investing further. As an investor (the FDI type) I DO NOT WANT a weak peso. Companies that just want cheap PH labor might like a weak peso but I do not. I live here. I just want relative stability and I have it.
        When I first sent money to this country I was offered 35 pesos per AUD. Now I get 43. Luckily I did not invest much until more recently. The question is where I would invest in future. If the peso falls it would be silly to invest in solid assets here. My money would go to Australia. If the peso rises moderately, then my PH investments will be seen to be succeeding so I would continue to invest here. The only people who would prefer a low peso are those whose only concern is to pay low wages and return the profits overseas. It is FDI that this country really needs, not the cheap labor investment that can come and go.

      • alienpatriot

        Just one further comment, Hayek. You mentioned lowering interest rates. The effect of that would be to encourage further borrowing. This would have two problems.
        1. In a country where people have a reluctance to save money, this is hardly a great idea.
        2. It would probably create a bubble, unsustainable growth, that would result in faster short-term increases in the peso possibly followed by a collapse. I can hardly think of anything worse.
        What exactly is it that you are trying to achieve, Hayek?



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