President B.S. Aquino 3rd is one imaginative chap, no matter what else can be said about him.
Speaking to a group of Filipino expats in Paris on Wednesday (Thursday in Manila), Aquino dispensed with his usual “the Philippines is open for business” and “You just can’t imagine what a mess Gloria left for me to clean up” schtick and floated an entirely new canard: An “international banker,” he said, made the “shocking” suggestion that, since the country’s economy was on the rise, the Philippines should “globalize” the peso.
I thought I was a bit difficult to surprise. But I was shocked when this big bank told me that we should ‘globalize’ the peso,” Aquino reportedly said. “Never had I thought that anyone would ever make such a suggestion, believing that the Philippines is in such a good shape that he would be willing to invest in our currency because he believes in the stability of our economy.”
Several of my more economically savvy friends suggested that what is very much more likely in this case is that PNoy has a poor sarcasm detector. And they may be right; the suggestion the unnamed “international banker” made is actually kind of vacuous.
“Internationalizing” the peso simply means that it could be used for transactions by non-residents; the particular benefit would be that Philippine companies could invoice exports and pay for imports in the native currency, which would largely eliminate their foreign exchange costs. A couple of news reports also pointed that “internationalizing” the currency would also allow the government to “issue peso-denominated debt overseas more competitively,” whatever that means.
Excited by the prospect, Aquino informed his audience (one has to wonder if people actually show up voluntarily to these frequent lectures he delivers in foreign places) that he would have Finance Secretary Cesar Purisima “study the proposal,” even though that’s not really Purisima’s job, but would rather fall under the purview of the Treasury and the BSP.
The thing is, the term “internationalize” as it is used in this weird story means almost nothing, as it is not up to the Philippine government to determine whether its currency is “international” or not. That is, instead, determined by the central banks of other countries; if they decide that they will accept the peso as foreign exchange, then it will be for all intents and purposes “international.”
For example, the BSP accepts 18 different foreign currencies for exchange; those are, from the point of view of the Philippines, “internationalized.” Where the peso is accepted for exchange in other countries, it is an international currency. At present, the peso is accepted by at least 17 countries, including all the ones whose currencies are considered index currencies throughout the world—the United States, United Kingdom, European Union, Japan, Hong Kong, and others.
What the French “international banker” (if he really exists) actually seemed to be suggesting was that the Philippines should consider loosening its already rather liberal foreign exchange regulations, the rules that dictate who can transact in foreign currency and pesos, and the amounts of currency that can be moved. If so, that is a dangerous suggestion. The basic effect of having an “internationalized” currency is to increase the amount of domestic currency coming into the country; in other words, if the Treasury were to issue peso-denominated bonds in an overseas market, the purchase of those bonds effectively increases the money supply here at home. That creates a big risk of inflation.
Even though the increase in money supply from a bond issuance would theoretically cancel itself out once those bonds become payable, that assumes the money supply would otherwise be static during the term of the bonds, which it never is; part of the evidence for “the stability of our economy” has been the steady growth of money supply.
An increase in money supply, of course, leads to inflation, and the BSP has had to take strenuous action to keep both under some semblance of control; adding another aggravating factor to that equation would not be wise. If inflation was running at about 2 percent and the money supply was growing at a rate that approximated the yield on 5- or 10-year peso-denominated bonds, stroking B.S. Aquino’s ego to take window-dressing steps to “internationalize” the peso would not be so risky.
At this point, however, both inflation and M3 growth are way over those thresholds, and the country’s monetary authorities—the folks who actually understand finance and macroeconomics—should regard the President’s enthusiastic “internationalize the peso” statement as just another one of those bizarre things he occasionally blurts out, and quietly continue with what they have been doing, which has done more to support the economy in the past four years than anything that’s been dreamed up on the other side of the Pasig River.