While we in the Philippines were understandably distracted on Thursday by the arrival of Pope Francis, central bank authorities in Switzerland were pulling a nasty surprise on the rest of the world.
For the past three years, the Swiss National Bank has been holding down the value of the Swiss franc (CHF), keeping it from appreciating by imposing an exchange ceiling of 1.20 CHF to one euro. On Thursday the SNB suddenly removed the exchange rate ceiling, and in minutes—literally in minutes, because the value changed from one market update to the next, which happened about 15 minutes apart on Bloomberg—the currency shot up in value from 1.20 CHF:1 euro to 0.85 CHF:1 euro, settling back down to just a fraction below a 1:1 exchange rate (0.9919, to be precise) by the end of the trading day.
The immediate effect of the move was to wreak havoc on the Swiss stock market. The Swiss economy relies heavily on exports, and a sharp gain in the currency means correspondingly lower earnings for Swiss companies; about 12 percent of the market’s capitalization disappeared in a matter of a couple hours as equity investors pulled out their money.
A second and probably more damaging effect will be seen over the coming weeks in other places in Europe as loans are put under pressure. In some non-euro countries like Poland and Hungary, big-ticket loans such as mortgages (according to one report, 700,000 of them in Poland alone, about 40 percent of all mortgages in that country) are denominated in CHF rather than the local currency to avoid problems with exchange rate fluctuations. A big gain in the value of Swiss franc, of course, means that those loans have suddenly become considerably more expensive for the borrowers, and greatly increased the risk of defaults.
The reason the SNB made the move, most analysts assume, is that the European Central Bank is most likely to announce a major stimulus program to ward off deflation of the euro, a move that could come as soon as this coming Thursday. Keeping the exchange rate ceiling against an inflating euro would become ridiculously expensive for the SNB, and so it has apparently decided that eliminating the ceiling is the lesser evil.
The crisis does not actually mean much for the Philippines at this point; transactions involving pesos and Swiss francs are, if anything, only a minor component of this economy. For families that happen to collect remittances in CHF, the sudden jump represents a windfall; the CHF-PHP rate at the beginning of the week was about P44:1 CHF, and as of Friday morning had moved to about P52:1 CHF. On the downside, it makes imports considerably more expensive.
What no one really knows at this point, however—and if anyone says he does, ignore him, because he doesn’t—is what effect the shock will have on the European economy, and how far the ripples will spread. Any event like this should be a cause for concern for the Philippines, being as import- and remittance-dependent as this country is; even if the effects turn out to be positive, and they might, they will compel some changes in economic planning and monetary policy here, so the nation’s managers would be wise to pay close attention to what is happening elsewhere.
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George Perry, a senior fellow at the respected Brookings Institution in the US, thinks OPEC (the Organization of Petroleum Exporting Countries) is dead. In an opinion on January 14, Perry asserts, probably correctly, that the stubbornness of OPEC in not cutting its production to try to halt the slide in oil prices is an attempt to force big non-OPEC producers like the US to cut their production first.
Since the oil price slide has continued basically unchecked for at least seven months, the US and others like Russia, Mexico, and Canada are obviously just as stubbornly refusing to dance to OPEC’s tune. Perry sees the price drop continuing for up to a year until natural supply-side factors begin to reduce US production.
Good news for the Philippines, if it’s true, and there’s no reason to think it’s not. OPEC, whose members are coincidentally some of the shadiest governments on the planet in terms of contemporary ideals of civilized society, has for too long been able to exercise control over the world economy because of the inelasticity of demand for petroleum. While it might cause some short-term chaos, ending the influence of this high-toned band of extortionists is a significant step in the right direction.
Add that thought to the general good cheer the Philippines has experienced this week with the arrival of Pope Francis, and have a wonderful weekend.