The increase in the value of the peso has been a popular topic among economic and business commentators in the past few weeks, and the volume of discussion about it has left the impression that something remarkable is happening, and that we should either be excited or worried about it. Allow me to offer a relatively simple explanation of why it should be the latter.

First, a bit of historical perspective about how “remarkable” the current rise in the peso really is: In the three years beginning in January 2010, the peso has appreciated about 12.2 percent. In a two-and-half-year span between September 2005 and February 2008, the peso appreciated about 38.7 percent, from just over 56 to the dollar to a high of 40.44, a peak the currency has yet to reach in its current climb. In the last half of 1997, the peso declined by about 38 percent, thanks to the Asian Financial Crisis. The effects of a rising or falling peso tend to balance each other across the whole economy; at the moment, importers are benefitting from it, as is the government, which still holds a considerable amount of debt payable in foreign currencies that is getting cheaper as the peso increases in value. As the amount and rate of the peso’s change is still rather moderate compared to recent history, the effects whether good or bad are probably not as great as we may be led to believe.

Nevertheless, the strengthening peso has attracted a great deal of the wrong sort of attention from government policymakers, and this is what makes the current situation alarming. The BSP follows a basic policy of allowing the peso to appreciate if the gain in value is caused by “structural flows”, such as foreign direct investments and remittances; that makes sense, because structural flows represent real economic growth—money being spent to create and purchase goods and services. If the appreciation of the peso is due to foreign portfolio investment, however, the BSP intervenes to keep the peso’s growth in check, and to limit currency speculation.

But here’s the apparent dilemma: at present, the peso’s gain is mainly being driven by portfolio investment, which is reflected in the Philippines’ white-hot stock market. At the same time, remittances have remained consistently strong. If the BSP intervenes too aggressively, it creates the risk of inflation, which lowers the effective value of those remittances. On the other hand, if the BSP doesn’t intervene, it creates the potential for an even worse inflationary episode with the crash of an overvalued peso, similar to what happened to the Thai baht at the beginning of the 1997 financial crisis.

Keep in mind, however, that the recent rise of the peso has not actually been that dramatic. If left alone, the overcharged stock market would eventually slow down as share prices climbed to unattractive levels and drove investors to find better deals elsewhere; the inflow of foreign money would slow, and the peso would settle back to a reasonable value.

That would have happened, if the central bank had not overreacted. But that’s what the BSP did, and not only has its efforts to control the currency been ineffective, it may have created a real problem out of a situation that was only moderately uncomfortable. Even though the BSP potentially spent close to P90 billion in 2012 in buying foreign currency to keep the peso from appreciating even more than it did—P68.36 billion in losses the central bank recorded for the first nine months of the year plus an additional P20 billion in capital received from the government at the end of December—it has been unable to slow the currency’s gains. In its East Asia and Pacific Economic Update released last month, the World Bank warned that monetary easing measures in the US, Europe, and Japan would continue to drive hot money to the region. In building up such large foreign reserves in a futile attempt to dampen the peso, the BSP has made the Philippines an even bigger target; those reserves are a significant positive indicator for an anticipated credit rating upgrade that will attract even more foreign money and drive the value of the peso even higher.

Much of that could be avoided or minimized if the Aquino Administration put some effort into giving foreign investors something else to spend their money on by revamping an investment environment described in a January 9 report by HSBC as “restrictive” and “uncompetitive.” But that seems unlikely; in the same report, HSBC virtually wrote off the Philippines as an investment destination until beyond 2016. In the shorter term, the rising peso is going to have some negative effects the Administration is going to have to come to terms with. The dire warnings from the BPO industry about its imminent collapse are self-serving and grossly exaggerated, but the squeeze on BPO profits from the rising peso is going to curtail growth in that industry. Remittance-fueled consumption will also slow, affecting company profits and government tax revenues and potentially cancelling out the benefits of a strong peso to the government’s debt position.

Discouraging as that sounds, that’s actually a best-case scenario, one that assumes nothing unexpected will happen. Unfortunately, there are growing signs that something unexpected will happen, and that it will come from—where else—China. We’ll talk about that in the next column.