The mundane reality of the peso’s decline



DAVID Ingles, who is a commentator for Bloomberg, kicked a small hornet’s nest last week when he shared two unpleasant factoids on Twitter: The Philippine Stock Exchange index (PSEi) is practically the worst-performing stock index in the world so far this year, and the Philippine peso is among the worst-performing currencies over the same period of time.

The PSEi is “practically” the worst, because the only index its 12.20 percent negative price return is outperforming right now is Venezuela’s, which has, for all intents and purposes, lost all of its value and is hardly worth acknowledging. The peso, on the other hand, is being kept from the bottom of the list by a handful of other losers. Its negative 4.50 percent spot return is still better than the Mozambique new metical, the Argentine peso, palladium, the Angolan kwanza, and of course, the Venezuelan bolivar, which now has approximately the same monetary value as mildew.

The reactions to Ingles’ post were frustratingly predictable. Majority of them were offended at what they perceived as an implied criticism of the Duterte administration, accusing Ingles of everything from spreading “fake news” to being in league with those plotting to overthrow the government. A smaller number, although no less boisterous and irrational, hailed the data as proof of President Duterte’s mismanagement and ill intent.

Neither of those extreme points of view is even remotely valid, but it is an unfortunate sign of the times that plain empirical data is considered debatable, and that only extreme views about it are considered credible. It is a plain fact that the PSEi and the peso are, on a comparative basis, doing rather poorly. No one is making that up. Those are numbers, and numbers do not have feelings or political opinions. Although this will doubtless come as a surprise to some people, what is important is not who or what is to blame for those numbers, but what they actually mean.

Between the two problems, it is the weakness of the peso that matters more; it has a universal economic impact on the country, whereas the local stock market to a great extent exists in a vacuum, reflecting rather than affecting conditions in the economy.

While the weak peso is a matter of some concern, there are a couple of things that it is not, at least not now: it is not a sign of a faltering economy; and it is not, as some have asserted, particularly beneficial. It is also certainly not the result of the economic or monetary policies of the current government, which in turn means that government’s ability to correct it, if in fact it does need correcting, is likewise limited.

The peso depreciation has more negative than positive effects, but provided there are no significant economic shocks, the value of the peso will, like water, find its own level if left alone. In terms of negative effects, the weakened peso inflates import prices (that is, it takes more pesos to buy an import with a constant dollar price), and this tends to increase price inflation generally across the whole economy. Currency depreciation also inflates foreign debt for the same reason, and results in some long-term higher interest costs because debt prepayments typically decline as the peso becomes weaker. A weaker peso also correlates with slower net foreign asset growth (NFA is a component of the money supply), because obligations paid in peso terms from foreign currency sources do not require as much of the latter.

On the positive side, a weaker peso results in higher export revenues, although the effect is moderated to some extent by import-driven inflation. The positive effect is reduced further by the Philippines’ persistent trade deficit as well; the net effect is still favorable, but not nearly as much as some pundits characterize it. The weaker peso also increases the local purchasing power of remittances, both from OFWs and BPO revenues. But again, the positive impact is generally overstated, as higher inflation soaks up much of the surplus.

Taken altogether, the net impact of a weaker peso on the economy leans to the negative and in that sense can be considered undesirable; but only to the extent that it should be cause for “concern” or “awareness” and not “alarm.” The government and the central bank must remain alert to sudden shocks – for example, a drastic change in oil prices – but in the absence of those, the only interventions it should or even could take are ones that only affect the peso’s value indirectly by addressing other concerns like the trade gap or excess liquidity.

The mundane reality is that the weakening of the peso is neither very bad for the country nor very good, and that policymakers are addressing the matter as effectively as it should be addressed by essentially doing nothing, deserving neither censure nor praise. That which is complicated is not necessarily profound; with so many other issues to vent our spleen over, we should probably be grateful for one that warrants no serious anxiety one way or another.


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