Wrapping up a weird week

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Ben D. Kritz

Ben D. Kritz

IT may not have been noticed by many people, distracted as the country has been by the pleasant after-effects of Pope Francis’ visit, but this past week may have been a sort of watershed for the world economy and the prospects for the Philippines. Over the past few months, the likelihood of another large-scale economic crisis somewhere in the world in the near future has become a near-certainty. The business and economic developments of the past week suggest that future might be closer than we think.

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While that would not necessarily be bad for the Philippines—conventional wisdom tells us that a crisis elsewhere would mostly benefit the region—these situations should be watched closely:

OPEC is in serious trouble: At the 15th World Economic Forum (WEF) in Davos, Switzerland, the OPEC Secretary General Abdallah Salem El-Badri first told an interviewer that he didn’t believe oil prices could go as low as $20 per barrel, which seemed to imply the cartel would “do something” if prices did reach that point. A couple of days later in front of a panel audience, however, El-Badri again—and somewhat defiantly this time—declared that an OPEC production cut will not happen, regardless of how far prices fall.

El-Badri was rather frank about the dilemma facing OPEC: If it cuts production, it loses market share, which means OPEC’s members would suffer long-term revenue loss. It is the clearest signal yet that the OPEC economies are in trouble; that has always been a concern for weaker members like Nigeria and Venezuela, but even the stable economies like Saudi Arabia and the United Arab Emirates may be more at risk than they have admitted until now.

Strange goings-on in the forex market: Everyone knows the peso should be weakening against the strength of the US dollar, but someone forgot to tell that to the BSP. On January 14, the last trading day before the three-day holiday imposed during the Pope’s visit, the peso opened at P44.71 to one dollar, and made a modest gain to close at P44.675. On Tuesday (Jan 20) when trading resumed, the peso gained six centavos to close at P44.61. It tripled that gain the following day, opening at P44.58 and closing at P44.40 on a trade volume of $988 million (compared with $706 million and $607 million the two previous sessions). On Thursday, the peso opened at P44.40 and advanced to P44.32.

The movement of the peso was not particularly extreme—the three-day gain of 39 centavos was less than 1 percent—but its direction was unexpected, and largely attributed to what is assumed to have been a big move by the central bank to support the peso on Wednesday afternoon. If that is, indeed, what happened, it seems counterintuitive; there is no apparent risk of inflation at the moment—if anything, continuously falling oil prices may be creating deflationary pressure on the peso—and the start of the European Central Bank’s quantitative easing program announced on Thursday is not expected to have much of an impact on the peso’s value, at least not right away. If the BSP moved to build up a “cushion” of peso strength ahead of the ECB decision, it may have been premature, but at least that explanation makes a certain kind of sense. If the peso’s unexpected recent gain was purely due to market action, however, it makes very little sense at all.

Mario Draghi whips it out: The president of the European Central Bank (ECB) on Thursday announced the stimulus package he has been aggressively pushing for the last several months over the objections of some national governments, most notably Germany. The asset-buying package was far larger than anyone anticipated it would be; signals before Thursday’s ECB policy meeting were that the program would be worth about 500 billion euros, but it will actually be more than double that—1.1 trillion euros (about $1.3 trillion), or 60 billion euros a month from now until September 2016.

Even though QE programs have generally worked to stimulate economies, albeit not quite as directly as proponents claimed they would, almost no one expects the ECB program to have substantial results. The ECB’s own estimates are that the program will be able to push European inflation higher by about 0.4 percentage points this year and 0.3 percentage points next year, which may not actually be enough to hold off deflation. What impact the QE program will have on the European and global economies if it doesn’t work is a question that must be keeping some policymakers awake at night.

ben.kritz@manilatimes.net

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1 Comment

  1. The policy of propping up the peso helps big business and other dollar users like smugglers to the detriment of those who produce all these dollars, the OFWs and exporters. These large companies that borrowed dollars because of its low interest did not learn from the lessons of the 1982 crisis and the Asian crisis of 1987. Whether you artificially protect the peso or let it seek its own level, the pain either measure creates is inevitable. The pain is only postponed with Central Bank intervention. In the light of the current world financial crisis, if these big companies do not heed the warning signs and start weaning themselves away from these dollar loans starting yesterday, the expected crash, if indeed it comes (which, given the present numbers, promises to be more brutal than ’82 and ’97), will punish them severely for making the wrong bet. On the other hand, letting it float freely (preferably gradually) will help the dollar producers, the OFWs and exporters, and those who want to go into manufacturing but find competition from cheap imports too daunting. It will help slow down big time smugglers many of whom if not all of them I am convinced are smuggling in drugs inside those thousands of containers that pass through customs without inspection. Thats the real source of wealth of some of them who have become taipans overnight. In other words, there will be pain either way, but which one will bring about genuine economic development?