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Strong Peso Hurts
By Antonio C. Abaya Written July 30, 2007 For the Standard Today, July 31 issue Romulo Neri is probably one of President Arroyo�s most loyal Cabinet members. When the Hyatt 10 pulled off their mass resignation song-and-dance in July 2005, expecting that it would lead to the collapse of the Arroyo Government � and their reinstatement to their positions in a Noli de Castro successor government � Neri was one of the more prominent Cabinet members who refused to resign with them. So why is he being shunted �temporarily� from directorship of the NEDA, which is a full-fledged Cabinet position, to chairmanship of the Commission on Higher Education (CHED), which is a sub-Cabinet position? Perhaps because he has become too outspokenly critical about the state of the national economy. Listen to this Bloomberg news item that came out in the July 28 issue of the Manila Standard Today: �The economy is suffering from a rising currency, with the strengthening peso damping export growth, said Economic Planning Secretary Romulo Neri. (The peso closed at 45.35 to one US dollar that day.) ��Peso strength is affecting growth,� Neri, who is also director general of the National Economic Development Authority, said in a Wednesday (July 25) interview. The central bank, where Neri is a monetary board member, �can do very little now when the peso strengthens.� �The peso jumped 7 percent this year, buoyed by (OFW) remittances and overseas funds buying stocks. While helping hold down inflation, the stronger currency has weakened export growth and may restrict economic expansion in 2007 to the lower end of the government�s 6.1 to.6.7 percent target. �Growth in domestic product this year may be closer to 6 percent as the currency gains make products more expensive, Neri said. Imports, two-fifths of which are parts to make products that are exported, fell for a second month in May and could already be signaling a slowdown in overseas sales�.. �Gains in the peso may have led some manufacturers to close factories, leading to about 100,000 employment positions lost in the capital Manila in April, the economic planning chief said. �At least 75 small- and medium-sized exporters, in industries including handicrafts and processed food, have closed operations since late last year, said Sergio Ortiz-Luis, president of the Philippine Exporters Confederation in Manila. �Practically everybody has cut production,� he added�...� When the peso broke into the P45:$1 level late last May, for the first time in seven years, Neri aired his lament that �the peso was now uncomfortably strong.� (Philippine Daily Inquirer, May 28, 2007) Apparently, President Arroyo has had enough of Neri�s �negativism.� Every time the peso strengthened in the past two years, with a corresponding upsurge in the stock market, a beaming President Arroyo would crow about the strength of the Philippine economy and apparently interpreted these developments to fantasize about making the Philippines a First World country or another Singapore in 20 years. Neri has in effect burst these inflated balloons. With his own sanguine reading of the numbers, Neri has rendered unattainable Joey Salceda�s 7-8-9 Plan of 7 percent growth in 2007, 8 percent in 2008, and 9 percent in 2009. Which renders even more unattainable the 15 percent annual growth rate needed by the Philippines in the next 28 years to reach First World status. No wonder Neri has been exiled to CHED to curb his critique. He has had the nerve to say that the Empress has no clothes. It is not just the exporters who are hurting from the strong peso. The 50 or so million Filipinos who depend on monthly remittances from their relatives working abroad have lost some 18 percent of the peso proceeds of their dollars, compared to two years ago. So have the enterprises who depend directly on tourism: hotels, restaurants, tour operators, resorts, souvenir makers, tourist bus owners. As I wrote in my article Seize the Moment (Feb. 18, 2007), in the Philippine context, a strong peso � and its twin, a record-breaking stock market � benefit only a small group of people: players in the stock market and foreign portfolio managers who speculate with hundreds of millions of dollars � the so-called hot money - hiring no more than a couple of secretaries and messengers, but who will not hesitate to stampede out of the economy at the first hint of trouble, as they did in 1997. The overwhelming majority of the population suffers from the strong peso. Theoretically � and I underline that word � a strong peso makes oil imports, our biggest single import item, cheaper. But in reality it hasn�t. The Shellane cooking gas that we used to buy at P495 in 2005 now costs P550.per canister. Our household consumed 54 kwh less last month than in the previous month, yet our Meralco bill is higher by P2,311.80. And premium gas is now more than P40 per liter. Of course, it is partly due to the price of oil shooting up past $75 per barrel, but it does take the glamor off the presumed merits of a strong peso. Theoretically, the strong pesos makes our foreign debt and the servicing of it smaller. P20 billion less for every dollar that the peso appreciates, it is said But only if we actually make a substantial payment in the here and now, which is doubtful considering that the government is strapped for cash and cannot even meet its tax collection targets. To crow about the strong peso and the record-breaking stock market � both of which are due largely to the influx of hot money - as President Arroyo does, and to be annoyed when told that it is actually harmful to the economy, as she is, makes one wonder where she got her doctorate in economics. Not the Balic-Balic School of Economics, I trust. China, which exported a record-breaking $969 billion worth of goods in 2006 � versus only $76.2 billion for India in 2005 - has been under pressure from the Americans and the Europeans to revalue or strengthen its currency, the yuan, so as to make Chinese goods more expensive and less attractive in the global marketplace. It has resisted that pressure because it knows that a strong currency hurts.. China emerged unscathed from the 1997 Asian financial crisis because it did not allow the yuan to become freely convertible, thereby discouraging the inflow of hot money. Thus it was not trampled underfoot in the mad stampede of portfolio managers and currency speculators from the Thai baht, the Korean won, the Indonesian rupiah and the Philippine peso. The Chinese do not subscribe to the Balic-Balic School of Economics. ***** Reactions to [email protected]. Other articles in www.tapatt.org and in acabaya.blogspot.com. OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO Reactions to �Strong Peso Hurts� �Uncle Sam, You May See Your Banker Now� Sir, I read your article today, and it mentioned that China resisted the efforts of the United States to strengthen the yuan, If my memory serves me right, it was even an issue, I think as late as two years ago to about one year ago, were as you rightly said, the United States was pressuring China to make its currency stronger because of the strength of the Yuan, and its effect of making importations to the United States cheaper. But look what has happened. China has not strengthened its currency but rather since around eight months ago, the United States decided that it would do the opposite, make its currency (that is the US Dollar) weaker, thereby getting the same effect. Thus, American exports are now looking more attractive, tourists find it cheap to go to the United States . Irony isn't it, the net effect was the same. I would love to hear your comments to my observation and any insights you may have with regard to this matter and how it in turn affects our situation. Sunder Gidwani, (by email), July 31, 2007 (I was aware of this point and I was going to input it into the article, but I had no more space. The US has indeed deliberately weakened its currency � and has additionally cast doubts about the safety and acceptability of Chinese products (toys, pet food, processed food, toothpaste, fish and fish products, vehicle tires) � in an effort to narrow its trade deficit with China . But this has only of limited value. One effect of the deliberate weakening of the US dollar is the automatic revaluing of the peso. Obviously this cannot go on indefinitely, for both the US and the Philippines . So something will have to give sometime in the near future. Exactly what, I do not want to venture a guess at this point. ACA) (BREAKING NEWS: Two Chinese officials have recently warned that this deliberate campaign against Chinese export products may force China to use its ultimate economic weapon: its horde of more than one trillion US dollars in treasury bonds and cash. If China were to sell or convert to, say, euros, a quarter of that horde, the dollar could weaken to the point of collapse, cause high inflation in the US and bring about global depression. (The current credit crunch, brought about by concerns about massive defaults on US home mortgages, shows now vulnerable the global financial system is to sudden shocks. If the Chinese were to unload even only a part of their dollars now, it would create a �perfect storm� scenario, especially if the price of oil were also to shoot up again, as a result of a US-Israeli attack on Iran , which US Vice-President Dick Cheney has been itching to do for the past few months. See �Uncle Sam: You may see your banker now� below. ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Thanks for your article on the strong Peso. As a retiree and who decided to return to the Philippines.....the family of OFW who relies on the remittances....exporter of Philippine products, a strong Peso hurts all of us... Romulo Neri, formerly of NEDA, who made a correct prediction on the State of Economy with stronger Peso, should be rewarded instead of being demoted to a sub cabinet position. Of course, there are a plus side with a strong Peso... Rufino V. Santos, MD, (by email), August 01, 2007 Retired wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww GMA should be in the beauty parlor business. She can make anything look beautiful by just covering up the ugly, like painting the rooftops to hide the ugliness of the shanties around the airport. Amado F. Cabaero, (by email), August 01, 2007 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww The strong peso or any currency gaining strength against the US Dollar hurts the domestic economy should the latter be heavily dependent on imports (oil, raw material consumer goods) and also when growth in net revenue from domestic production of exported goods is less than the appreciation of the local currency against the dollar. This does not happen in countries producing high tech products or industrial goods. Which is why the G8 countries are really not affected by fluctuating currency levels. Only Third World countries that produce the mass flow of consumer goods are. Why is also why China has deliberately been manipulating her currency to remain weak against the US dollar. Moreover as you pointed out, oil prices should be lower with the strength of the peso which has not happened. Maybe the GMA administration should explain in detail and not in sound bytes why this has happened. Good article. Vince Kelemen, (by email), August 01, 2007 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Antonio: You wrote that "Theoretically, the strong pesos makes our foreign debt and the servicing of it smaller. P20 billion less for every dollar that the peso appreciates, it is said But only if we actually make a substantial payment in the here and now, which is doubtful considering that the government is strapped for cash and cannot even meet its tax collection targets." There is a way to lock in the gains on the Philippines ' foreign currency debt as a result of the strengthening of the peso without having to repay the debt. The process is called hedging. Those gains can be locked in through foreign currency forward contracts or futures contracts. Please ask your banker about it. Ed Castle, (by email), August 01, 2007 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Tony, Many criticize the President when the peso rises and slides. If the peso slides, the President is blamed for mishandling the economy. When the peso rises relative to the US dollar, it hurts the export market and make OFWs family unhappy for they could buy less for their money. To the critics of the President, I say: It is the US dollar that is sinking, stupid!. Dr. Nestor P. Baylan, (by email), New York City , August 01, 2007 (And the US dollar is deliberately being made to sink in order to stanch the flow of Chinese goods into the US market, and thereby reduce the US trade deficit with China . But since this will not be enough to solve the problem, something else may be made to happen in the near future. (As for GMA and her critics, the Asian Development Bank�s chief economist has just issued a statement that President Arroyo�s ambition of making the Philippines a First World country in 20 years is �impossible.� Do you want to call him stupid also? ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Tony, I think it is not just because Secretary Neri has become �too outspokenly critical about the state of the national economy� that he has been shunted to a lower position in the guise of being a fireman. I first met him during that period under President Estrada when the Philippine Ports Authority (PPA) was able to convince the President to sign out to a private consortium the management and operation of the entire national port system by issuing Executive Order 59, At that time, he was still with the Congressional Planning and Budget Office. Romy has written and lectured about what he calls �booty capitalism� describing it as: �The vicious cycle of booty capitalism starts when vested interests including powerful business groups, finance their own candidates during elections. When their candidates win, the vested interest groups are able to add political power to their already vast economic power. This oligarchic elite is able to influence policies to the point of distorting them. And their very ability to distort policies allows them to capture economic rent, economic rent being extraordinary profits which make them extraordinarily rich. This gives them greater economic power which in turn allows them to finance our election.� (See http://www.econ.upd.edu.ph/events/20040205/20040205_txt_lecture_romulo_neri.pdf ) Last February (see http://reklamo.ph/maritimewatchkeeper/?p=207 ) , when the papers reported his criticisms about the �regulatory capture� of some government agencies such as the PPA , I thought that Secretary Neri had finally gotten approval from the President to rescue her administration from these �booty capitalists�. Then, after the elections, there was the request for the resignation letters from all GOCC appointees, perhaps to give the President a chance to �liberate� these agencies from regulatory capture. With the unexplained suspension of the bidding for the North Harbor project by the PPA and Secretary Neri�s demotion, I guess the �booty capitalists� have won another round against Neri�s advocacy to get rid of �booty capitalism.� Tet Gambito, (by email), August 01, 2007 (The only way to neutralize the influence of booty capitalists on our electoral process would be to totally ban political ads from print, radio and TV, and to use government-owned Channels 4, 9, 13 and their radio networks as the only venues for electoral campaigns, with FREE airtime for all registered candidates and parties, as I have suggested several times. ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww There will be a day of reckoning if the authorities do not address the serious implications of a "strong peso.� You may have seen the attached article before... Victor S. Barrios, (by email), San Francisco , CA , August 01, 2007 THE ANATOMY OF THE 6.9% GDP GROWTH: D�j� vu? By: Victor S. Barrios[1] The Philippine economy showed a robust Gross Domestic Product (GDP) growth rate of 6.9% during 1Q 2007, the highest since 1990. Country credit rating has improved. Portfolio money is pouring in. There is an emerging euphoria in the air. Are happy days here again? The Issues What are the growth engines? What should be done to make them sustainable? What are the pitfalls if the growth engines are not sustainable? How do we avoid a day of reckoning? Telescoping the Sources of Growth Personal Consumption is by far the main source of growth, strengthened by government pump priming activities prior to the May 2007 elections. 1Q 2007 Personal Consumption grew by 5.9%, up from the year-ago level of 5.3%. Since Personal Consumption accounts for three-fourths of GDP, it is the principal growth engine, contributing a 4.4% weighted growth rate out of the 6.9% GDP growth. (See Table 1.) The steady rise in forex remittances from global Filipinos continues to fuel rising Personal Consumption levels. Government Consumption grew by 13.1% vs. last year�s 7.6% rise. Because the rise is traced to spending related to the suffrage exercise, it tended to reinforce the strength of Personal Consumption. However, the fact that Government Consumption represents only 7.1% of GDP has muted the impact of election expenditures. If official data on the trade sector are accurate, the positive trade balance, which is unusual for a capital importing country, had a significant impact on GDP growth. Reported imports dropped by 2.5% amidst anemic exports that grew by 9.1% compared to 13.0% in 2006. The reported trade balance of P10.2 billion represents 3.2% of GDP. If the chronic trade deficit recurs, not unless the country becomes a capital exporting nation, there could be a soft underbelly for GDP growth. GDP is the sum of Personal Consumption, Government Consumption, Capital Formation and the Trade Balance (Exports � Imports). A review of the official data shows a discrepancy of P10.3 billion or 3.2% of GDP for 1Q, 2007. Policy Concerns Notwithstanding the apparent GDP statistical discrepancy, there are major policy concerns that need to be addressed: 1. The economy is consumption-driven. This means there is over-reliance on Personal Consumption and Government Consumption, which add up to 82% of GDP. These are the �Achilles Heels� of the economy. In the thick of battle, when smart money moves, such vulnerability could be deadly. The lessons of history are clear. They need not be repeated. 2. The capacity-building engines, namely, capital formation and exports, are extremely weak. Capital formation is only 18% of GDP, whereas a minimum of 30% is needed for an emerging economy to move to a higher growth trajectory. Many years back, the economy was hitting a capital formation ratio of 30%. Exports have been wobbly, which is not a source of comfort. Looking Ahead The improvement in the country�s credit standing supports the aim of raising capital formation. There are recent stirrings of increased Direct Foreign Investment (DFI). An improved investment cum political climate is needed to raise FDI to levels approximating the emerging economies of Southeast Asia . The authorities have to address the menu of issues that existing foreign investors have raised concerning the local investment climate, e.g., level playing field, consistency of public policy, the slant of labor policy, sanctity of contracts, etc. The country has the luxury of having forex remittances on a sustained and rising basis - - a situation that buys time for policy intervention to evolve and establish roots, a process that has a long time line. But what is disturbing is the fact that the buoyancy shown by global Filipino remittances is leading to a squeeze on the ability of OFWs to cope with the more than 20% appreciation of the peso versus the US dollar over the past year. Is that a source of joy? Hardly. The drastic forex rate adjustment has significantly hurt exporters of both goods and services. The export competitiveness of the country in certain products has greatly eroded or vanished. The authorities have not taken any action to address the harmful appreciation of the peso. Bangko Sentral ng Pilipinas lately reportedly expressed concern about the impact of the strong peso, but indicated that the forex rate would be �market determined�. The authorities seem to miss the point that there is, using economic parlance, �market failure�. They should not allow the continued �free fall� of the peso/US dollar rate. Doing so would bring the days of reckoning closer to reality. D�j� vu? wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Source: http://www.manilatimes.net/national/2007/aug/01/yehey/top_stories/20070801top6.html ADB pessimistic about advance to First World IT is doubtful if President Arroyo�s vision of the Philippines becoming a First-World country in the next two decades will come true because local living standards and infrastructure�which are far behind its neighbors�must first be massively improved, the Asian Development Bank (ADB) said Tuesday. At a press briefing Ifzal Ali, ADB�s chief economist, told reporters that the Philippine economy needs to grow at the same pace as China�s economy �for 25 years in a row� to achieve President Arroyo�s goal. �For the Philippines to achieve First-World status, it will have to achieve growth rates of 9.5 percent that we have seen in the People�s Republic of China for 25 years in a row. Maybe then we can start thinking of the Philippines as a First World country,� Ali said. Comments. Like I�ve been saying for the past year or so, the country�s infrastructure needs urgent attention. The Philippines needs to invest heavily in its infrastructure (everyone reading my e-mails should know by now how the country lags behind its neighbors, e.g., Malaysia ). Investing in infrastructure will improve overall production levels, which, will invite more investments, which, in turn, will create jobs, which, in turn, will increase aggregate demand and will spur more job generation and more consumption, and so on and so forth. There�s no magic formula into this. It�s plain Economics. Anyone can learn this by taking Economics 101. As I said before, Philippine economy must grow by NO LESS THAN 7% GDP growth annually, SUSTAINED for a period of AT LEAST 20 years. With sound economic strategy, a 9% economic growth is possible, considering many East Asian countries ( South Korea , Taiwan , Singapore , Malaysia , China ) have attained it. It is also necessary for a developing economy that its population growth be moderated. For the Philippines , its annual population growth must be brought down to 1% or even less. When a poor country has a galloping population, it will require massive spending in �social services� (e.g., government-subsidized food programs, nutrition for the malnourished, etc.). These are the kinds of social spending that hardly contribute to economic growth. Dole outs might help the poor in the short term, but never in the long term (it will only perpetuate their mendicancy). Note that the Catholic Church and the Communists strongly advocate heavy social spending for the country�s poor. Neither side present long-term, sound solutions for the country�s ills. Both of them have been part of the problem. Personally, I will support a government policy of encouraging people to have small families, say two children per family. Those who prefer to heed the Catholic Church�s �Vatican Roulette� approach should demand that the Catholic bishops provide for their large families. Responsible taxpayers who practice family planning should not be burdened by others� lack of family planning. Again, the money can be better spent on badly needed infrastructure. This is the type of spending that helps stimulate the economy and creates jobs. It is also important not to mix a particular church�s dogmas with national political decision making. Let�s learn from the words of George Carlin, Grammy-winning American stand-up comedian, actor, and author. Carlin warned, "I'm completely in favor of the separation of Church and State. My idea is that these two institutions screw us up enough on their own, so both of them together is certain death." Amen to that! The Philippine economy grew at 6.4 percent, 4.9 percent and 5.4 percent over the past three years. In the first quarter this year, the country�s gross domestic product (GDP), a standard measure of goods and services produced by a nation, rose 6.9 percent, a multiyear record, according to the government. This year the government has a GDP target of between 6.1 percent and 6.7 percent and 6.1 percent and 6.8 percent next year. In its State of the Nation address (SONA), Mrs. Arroyo promised to put the Philippines � on its way toward First-World status in 20 years by spending more in infrastructure investments. In addition, according to the preliminary report of the ADB�s �International Comparison Program (ICP) in Asia and the Pacific: Purchasing Power Parity Preliminary Report,� using real GDP as the basis, the Philippines needs more than 20 years to reach Thailand�s present per capita GDP level if it grows only at an average annual per capita of 3.7 percent. The country will take 77 years to reach the level of Brunei now because it only has a per capita real GDP of HK$16,663 (in 2005)�below the regional average of HK$20,545. Other Asian countries� real GDP per capita figures are: Malaysia HK$ 65,136; Thailand , HK$39,086; Indonesia , HK$18,427; Vietnam , HK$12,295 and Cambodia , HK$8,269. The per capita real GDP figures in the top five rich countries are Brunei Darussalam, HK$269,581; Singapore , HK$236,336; Macao , China , HK$212,617 and Taipei , China , HK$202,941. �Economies with high per-capita real GDP and high per-capita real gross fixed capital formation are the economies with the highest potential for growth,� the ADB said. Per-capita GDP measures divides the sum of all economic activity produced in a country or economy by the number of people. ADB added that richer countries generally invest more on a per capita basis than poorer countries, which is partly why they are richer. The Philippines � per-capita real gross fixed capital formation was HK$1,914 in 2005, way below the regional average of HK$5,298. Gross fixed capital formation consists of investment in residential and other buildings, roads, bridges, railways, electricity networks and other infrastructures and purchases of machinery and equipment. The ADB also said the Philippine living standard is lagging behind neighbors in terms of per-capita consumption expenditure with HK$6,556, China HK$5,753 and India HK$3,486. Five economies that topped the list are Hong Kong, with a per-capita consumption expenditure of HK$125,303, Singapore HK$99,706, Brunei HK$81,744 and Macau HK$67,639. At the bottom of the survey are Nepal , Bangladesh , Laos , Cambodia and Vietnam . Based on the price level index, which is the ratio of the PPP to the exchange rate, Fiji Islands and Hong Kong are the two costlier places to live in. They are followed by Macau , China ; Singapore and Taipei , Taiwan - China . Price levels in the Philippines , Thailand and Indonesia are very similar and are close to the Asian average. ADB said it used Hong Kong dollar as a currency base because it has a broad-based economy, its prices are available for many products, its strong statistical system for both prices and national accounts are well recognized in the region. Misael C. Balayan, (by email), August 01, 2007 (I have been saying the same thing in several articles: Losing the Export Battles (April 19, 2002), Why Are We Poor? (Dec. 14, 2004), First World by 2020? (Nov. 01 2006), all archived in www.tapatt.org. ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Tony, Correct me if I am wrong and I will appreciate it. ECONOMIC JUSTICE CAN BEST BE ATTAIND THRU FAIR AND FREE ENTERPRISE. The rise or fall of the PESO value to the DOLLAR really depends on economic forces and the productivity of the Pilipinos who add to the purchasing power of the country, not necessarily of every citizen. Some people in government feel that they know better and try to interfere with the play of economics, the funds of national treasury. Their interference and adjustments tend to favor a sector but not the entire economy and citizenry. Because of these people in positions, we often have uncertain economy and it is they who may be blamed for the perpetual poverty of so many. This does not exempt GMA who claims to be an economist. Her strategies often benefit favored sectors, but certainly not most of the common people. in the perception of many, most, not just many businessmen are unfair in their business dealings to grab more profit than what they should fairly gain from their product and services. Think of the doctors and lawyers, their charges depend often on the capacity to pay of their clients and patients not the service they give. The poor are made to pay more than the rich who can pay in cash or get volume discounts. Public service is now for sale to the highest bidder if there be any bidding, unfortunately not only with LGUs but also with the national government office up Malacanang. Tony, I am a farmer; These things seem negative, but on the positive side, we the people manage to survive and live. With less government interference and regulations, we will progress much faster. We believe that we have so much blessings and natural resources that other countries envy. Let us work together and make every land productive, and not parceling them to uneconomical sizes giving to people who are not even interested to develop and make them productive. Your articles are very enlightening, even if I do agree 90%, doubt 5% and disagree with 5%..That is democracy and freedom as our exposure and environment are not totally the same. Rex Rivera, (by email), Gen. Santos City, August 01, 2007 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Mr Abaya, Your criticism of the strong Peso is most apt. GMA has been buoyed-up because people have believed her claims about a strong economy. False claims. The Filipino economy cannot feed and educate the mass of its people adequately, nor does it provide them with proper health-care, decent housing, enough employment, and fair wages. In any other country, the economically enforced migration of the nation's most promising citizens would be regarded as a national disaster. The Philippine nation is reduced to the status of a poor relation holding out a begging bowl to the diaspora. The flaws in this remittance economy are manifest. If the Dollar, Euro and Pound lose any more value against the Peso the massive inflow of foreign currency, for both domestic and commercial purposes, will be slowed down. Kuya Ben in Los Angeles will invest his money in US real estate instead. Furthermore, reliance on remittances leaves the domestic economy in mortal danger from the effect of economic downturns overseas. A collapse in the US property market - which could happen, just as it did in the UK in the early nineties, - could leave the Overseas Filipino with a lot less available cash to send home. The Diaspora is presently funding major improvements in the housing and education of its families back home, but when renovation of the family home suddenly costs 20% - 30% more than planned, those improvements may slow dramatically, and the aspirations of millions could suffer a terrible blow. That could be a recipe for a social and economic disaster. Investment in the expansion of domestic agriculture and industry, and the infrastructure to support it, is more important than the Macho-Peso. Regards, Tom Hewitt, (by email), Essex , England , August 01, 2007 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Mr. Abaya, I have to react to your piece "Strong Peso Hurts" with particular focus on the following: " China emerged unscathed from the 1997 Asian financial crisis because it did not allow the yuan to become freely convertible, thereby discouraging the inflow of hot money. Thus it was not trampled underfoot in the mad stampede of portfolio managers and currency speculators from the Thai baht, the Korean won, the Indonesian rupiah and the Philippine peso." Let's go over that one more time, with underline of the most crucial phrase: " China emerged unscathed from the 1997 Asian financial crisis because it did not allow the yuan to become freely convertible, thereby discouraging the inflow of hot money. Thus it was not trampled underfoot in the mad stampede of portfolio managers and currency speculators from the Thai baht, the Korean won, the Indonesian rupiah and the Philippine peso." With your penchant for proper historical perspective, I'm sure that you will easily remember the differences in the economic-social-political scenarios BEFORE and AFTER the Philippine Peso was "allowed" to go on the much ballyhoed "Floating Rate" structure/arrangement, that the almighty USA using G8 "shoved down the throats" o f all other countries on Planet Earth. Other than the majority of Filipinos who seem to have such short-term collective memory recall only the Supreme Being knows why, who can not remember what Dr. Mohamad Mahathir of Malaysia did in 1997: "Instead of following the economic prescriptions of the International Monetary Fund and World Bank, the prime minister opted for fixed exchange rates and capital controls. " - that was the "trigger" for Malaysia to become another "Tiger Economy" in South-East Asia, following the wake of Singapore . Much earlier, Alberto Fujimori as president of PERU in 1990, implemented drastic economic reforms to tackle inflation (which dropped from 7,650% in 1990 to 139% in 1991). Was there a "common denominator" between what Mohamad Mahathir did for Malaysia and what Alberto Fujimorid did for PERU ? No one should miss the obvious: BOTH implemented FIXED exchange rates, in direct defiance of the economic prescriptions of the International Monetary Fund and World Bank! So, it seems that the issue is not really for the Philippine Peso to be "strong" or "weak", for that is simply the inescapable consequence of the "Floating Rate" structure, artificially imposed on the global economy. What seems to be the "solution" for the Philippines to get out of this god-forsaken economic mess is for a UNILATERAL declaration to the entire global community that starting on a specific date the Philippine Peso shall be at 1:1 conversion rate versus the US dollar! I'm sure you and your avid readers will have a great time, exchanging reactions to that one. Best regards, J. M. C. Nepomuceno, (by email), August 01, 2007 (I think a universal declaration of a fixed exchange rate at P1:$1 would be a major disaster. Just imagine the ten million OCW Filipinos who send home, say, $100 a month each to their families here, numbering about 50 million. Suddenly their peso proceeds of P4,500 � already down from P5,600 18 months ago - will now be only P100. There would be revolution and chaos here in less than one week�s time. (A 1:1 fixed exchange rate was tried by Argentina several years ago and it led to economic collapse that forced tens of thousands of Argentines to line up for emigration to Spain . If we were to adopt a fixed exchange rate, as Malaysia and China have done for years, it should be based on the current exchange rate. As far as I know, the fixed exchange rate in Malaysia is US$1:3.45 ringgit, in China US$1:7.57 yuan. In neither country was it ever 1:1. ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Tony, Your reading on the economy exposed in quite disturbing terms the kind of mongrel economy the Philippines has at present. In the Philippines (or elsewhere in the euphemistically called the 'developing world'), there are at least two different and opposing "economies": one that is dependent on dollar earnings such as the OFWs and exporters, and the other that benefits from a strong local currency led by the powerful importing blocs. Such economic bifurcation is further complicated by the division between the formal economy often quantified by NEDA, and the informal sector which operates 'invisibly', untaxed, and often at the expense of the formal economy. While I do not wish to indulge in a long discussion regarding these complexes, I do agree with you that, given this scenario, it would be impossible to attain sustained economic growth simply because it would create enough 'losers' to destabilize the political environment. In a democracy especially in the brand that the Philippines has adopted, this unstable political situation would result in either compromise between the state (or the governing elites), and the economic and political losers leading back to an anodyne policy framework and a stagnant "no loser, no winner" economy; or in extreme cases to a volatile situation leading to change of political leadership. In either case, economic policies would be so unpredictable that foreign capital would choose to bypass the Philippines and relocate somewhere, probably China or Vietnam where political situation is draconianically stable. GMA's slogan of expanding the Filipino middle class to support her First World objective is quite amusingly ill-advised because the RP's middle class is the OFWs who are adversely affected when Philippine economy gets strong. In short, Philippine economy has dramtically undergone - if I may be allowed to use a Marxist term (just to annoy you, Tony) - the process of fetishism. In short, the economy is being detached from the people that it is supposed to benefit. Now, given this, the options left for the country are getting slim by the day. Rural oligarchs and powerbrokers supportive of the kind of truncated democracy based on electoral fraud we now have will fight tooth and nail to preserve this kind of democratic circus because it means preserving their privilege and spoils. The military beholden to its masters in politics is unlikely to intervene; even if it does, there is no way to assure success because the military has lost most, if not all, of its credibility since the Martial Law period. The professional class is voting the best way it could - that is, "voting" through migration to other countries. Given their fragmentation, the communists are unlikely to win either. Finding no role model to look up to, the youth is either high on drugs or high on consumerist neglect. Before I succumbed to negativism, I agree with you that the most pressing task the Nation must do lies in re-engineering or revolutionizing the way we produce "leaders" in the broadest sense. More and more, elections in the Philippines have lost the capacity to produce the leaders we need, not the leaders we want or can tolerate. This means that we should for the moment lose our democratic pretension and take the path of renovating the institutions and values of our society together with the structures of policy . The Thais are more fortunate because they do not have to cling to some assumed supremacy of electoral politics when they changed government recently. I think that democracy can be preserved even without elections for the moment, especially elections the way we conduct them, so long as pluralism and intellectual freedom are preserved. Allan Mendoza, (by email), August 01, 2007 (You are advocating a revolutionary government, and I agree with you. I have been proposing that option in several articles since 2002, all archived in www.tapatt.org. ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwww Hi, Mr. Tony Reading your "Strong Peso Hurts" enlightened me a bit about economics. I thought a strong peso is good because we have to pay less for our imports and good for the image of our country. I don't mind having the worth of my remittance lessened by 18% as long as it's good for the country but obviously a strong peso is not.. A leader like Pres. Gloria M. Arroyo, being surrounded by yes men and women, does not bode well for the nation. She should be thankful that Sec. Neri tells it to her face about the state of the economy. As you can see, the Asian Institute of Management is really several notches above the Balic-Balic School of Economics. Regards, Napoleon P. Serrano, (by email), Dhahran , Saudi Arabia , August 01, 2007 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Tony: On balance, yes, the Philippine economy stands to suffer more than benefit from the continued strengthening of the peso against the US dollar. Instead of President Gloria Arroyo punishing Mr. Neri, she should now attend to the urgent task of finding ways to prevent the peso from strengthening further and hurting still more millions of Filipinos. Escape-goating, which is what she is now doing, won't cut it. If her doctorate in Economics is of any use for her at all, she ought to be able to do this quickly and effectively. For several years now China has been the subject of unremitting pressure from the United States to revalue her currency vis-a-vis the US dollar. The US's goal was to slow down the rate of growth of Chinese exports to the US by making Chinese products more expensive and at the same time making US products less expensive for Chinese consumers and thus enable the US to raise exports to China by a significant amount. President Arroyo must know that China has resisted all such efforts by the U.S. Chinese exports to the US continue to grow at a fast clip, so that now China is in possession of some $1 trillion in US securities as a result of the negative balance of trade the US has been experiencing with China all these years. There is a valuable lesson here for the Philippines which it will pay President Arroyo to learn--quickly. Mariano Patalinjug, (by email), Yonkers , NY , August 01, 2007 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Tony, I believe that the best situation for business to prosper in any country is neither a strong or weak currency,...but rather a relatively stable currency that allows business to plan, execute their plans, negotiate, order and take orders, with some predictability. That is why some countries with strong leaders who understand the economics of business, have adopted a fixed currency ( China , Malaysia } in spite of the protestations of the IMF. While other countries actively support and protect their currencies from wild fluctuations by the use of all forms of balancing techniques. Making a business successful is already difficult as it is, even without having to worry about currency movements. The only ones who are in the business of making money out of currency movements are the money traders and hedge funds--who do not produce any real product that creates real wealth that uplifts the poor. But these money traders have the power to create upheavals in some economies and make some people poor! There is indeed something wrong in the global financial system as the former U.S. President Bill Clinton has stated a while back; especially since currencies have become the products being traded itself, instead of just being the mechanism to facilitate trade of real products. Best regards, Nonoy Yulo, (by email), Aug. 01, 2007 (See my reply above to JMC Nepomuceno. I agree with PM Mahathir when he said in 1997 that currency speculators (like George Soros) should be outlawed. They do not create any wealth except for themselves. But the advocates of Free Trade and Globalization (such as Gloria Arroyo, Fidel Ramos and the Opus Dei) include the free movement of Capital as part of their religion. ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Tony, I like your BALIC-BALIC SCHOOL OF ECONOMICS (BBSE)--Balic Bachelor of Science in Economics? If this is the kind of economics degree (knowhow) that GMA acquired from a US prestigious university, kunu, our universities in regions outside Metro-Manila give better training to our youth. I submit that fantacizing about economic figures will not cure the ill-manage governance of this poor nation. Unless she reverses her motivation in the formulation of the country's economic formula, her dream for 20-year hence could turn into a nightmare! Before one forgets, there's another term for this. It is called hallucination! I fear for our people. Leaders are not "leaders" unless they show real concerns for those they are supposed to lead. Jose Regino, (by email), Zamboanga City , Aug. 01, 2007 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwww When a fat guy loses weight, would you rather see him sad about how bad it is he cannot wear those old huge shirts no more? Sorry sir, but I thought the stronger peso is an offshoot of a stronger economy. What are you saying? Would you rather see a weaker economy so that the peso will not get stronger? Or, do you prefer that our government rein in again and control the currency, such as during Marcos' time? Are we even ready to think about that? (You obviously do not understand economic terms. In economics, a �weak� currency means an �undervalued� currency, not necessarily �mahina.� A �strong� currency means an �over-valued� currency, not necessarily �malakas.� For the past 25 years, the fastest growing economy in the world has been China , which has a �weak� or undervalued currency. You should educate yourself first on this topic before throwing angry thunderbolts (below) based on nothing but hot air. ACA) "Theoretically" you said the strong peso makes fuel cheaper, but it did not happen. Although you mentioned that the international oil barrel price shoot up to $75, you did not mention how much gasoline would have been if the Peso is still more than 50 to the dollar. Then you said that the fact that gas prices did not go down dampen the stronger peso's supposed good effect. Wow. And don't tell me please you do not know the good effects of lower debt servicing even for a short period especially when we are talking about billions dollars. Well, Mr. Abaya, I am not sure anymore what you mean by "theoretically" but known facts are not just theories. I am trying to lose weight myself. I might envy the guy who crow about the need to buy new smaller pants. But I pity the other guy who only sees the negative side of positive things. Sef Dudeo, (by email), California , August 01, 2007 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Mr. Abaya, Totoo ang inyong artikulo. Bilang isang OFW dito sa Singapore , lalong naramdaman namin ang paghihirap ng aming pamilya sa Pilipinas dahilan sa pagtaas ng halaga ng peso, lumiit ang katumbas ng aming remittance. Kung ang sinasabing paglakas ng ekonomiya ang kahulugan ay mababang presyo ng pangunahing bilihin, yan sana ang maganda. Pero taliwas ang nangyayari. Nagsasabi ng totoo si Romulo Neri dahil ginagampanan niya ang kanyang tungkulin bilang pinuno ng NEDA. Ngunit ayaw yata ni Ginang Arroyo na may kumukontra sa kanya dahil gusto niyang palaging siya ang tama. At ito namang si G. Neri, maliwanag na sinipa na siya, bakit niya tatanggapin ang CHED na sa pagkaalam namin, wala siyang doctorate. Sabihin nang marami siyang karanasan sa pagtuturo pero bilang isang professional, hindi kaya siya nahihiya na mas mataas pa ang pinagaralan sa kanya ng kanyang subordinate? . Maraming salamat po at Mabuhay po kayo! Frank Y. Anoyan, (by email), Singapore , August 01, 2007 OFW, Singapore wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Sir Abaya, Don�t you think that there�s another side of the story? Dubbed me as too optimistic but if you say that Neri is as good as the secretary of NEDA then won�t he also do good in CHED which I think needs more attention? Our educational system is already suffering from inefficiency and secretly suffering from corruption. For me, placing Neri in CHED is something good. At least, we know that he will change the systems there to be more efficient and effective. Education builds our nation strong. I believe it�s the foundation that we must nurture so we as a nation will not perish. Yes it�s true that Neri did a wonderful job in NEDA and that he has been fighting against the Palace�s grandeur dreams. But, don�t you think he�ll still be the same Neri that will fight whatever is needed to change CHED and maybe in the long run DepEd? Jerahmeel Fandrall Chen, (by email), August 01, 2007 (It does not erase the fact that he was being �temporarily� moved from NEDA because he had the nerve to say that the Empress had no clothes. He will most likely be fired, or forced to reign, from the Cabinet soon. ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Dear Antonio, Would you therefore recommend that the government fixes the value of the peso like the Chinese fix theirs? Regards, Doug Adam, (by email), August 01, 2007 (Doug, see my reply to JMC Nepomuceno above. ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Hello, idol Tony! You said "To crow about the strong peso and the record-breaking stock market - both of which are due largely to the influx of hot money - as President Arroyo does, and to be annoyed when told that it is actually harmful to the economy, as she is, makes one wonder where she got her doctorate in economics. Not the Balic-Balic School of Economics, I trust." My comment: You've got a point there. Balic-balic school comment is not a good thing. You only have few classes in economics (here and in the U.S. ) in your lifetime (you are brilliant though) but PGMA got economics degree/PhD in the U.S. She knows what she's doing and she's the second most brilliant president of the Philippines (next to Marcos brainwise). the only sad problem is she can't do everything by herself. - to manage, advice, overlook, watch, teach, explain, implement, govern, etc to all departments and critics. Time is running out. Let's see what she can do in 3 years. I believe it's a positive future. LF, [email protected], August 01, 2007 wwwwwwwwwwwwwwwwwwwwwwwwwwwwwww It seems that the state of the peso is a good example of the "damn if you do, damn if you don't" situation. For those of us whose knowledge of economics is what we remember of Eco 101 from a generation ago, what is there to do? Remy Marmole�o, (by email), Aug.06, 2007 (Unfortunately, there is nothing we can do except hope for a better set of leaders in 2010 or earlier. ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwwwww Hi Mr. Abaya, thanks always for provoking thoughts. Talking about your "Strong Peso Hurts" article, I may ask...so what hurts more, a stronger peso or a weaker Peso? assuming both increases and decreases in the Peso value have the same percentage.. Yes, when the Peso strengthens, some sectors howl with pain. They talk about how "incomes" would decrease because our export products would be expensive and thus be less competitive in the global market. And yes, factories have to lay off employees because they can hardly sell their now more expensive products etc. etc. etc.. These sectors howl so much that you would pray the Peso devalues extensively the next day and God save the Philippines . Ironically, when the Peso's value decreases, another sector howls with the same intensity. The "victims" of a devalued Peso would claim that their raw materials are now more expensive...usually starting with oil of course. They claim they have to adjust prices to cope up with the lesser Peso or if not they may have to lay off employees to save expenses which have gone so high as a result of a devalued Peso..and etc. etc etc.. Some would say, it�s better for our Peso to loose or gain in value as long as the changes are not abrupt. This will give time for both howlers of the opposing side time to adjust or get used to the Peso's new value. They could be right... Come to think of it..when the Peso strengthens, howlers emphasize income loses..If the Peso weakens, the other howlers emphasize loses due to increased costs...some call it "lesser purchasing power". Of course there's a big bias here somewhere...it depends on which side of the fence you are. Respectfully, Tlm Paras, (by email), Aug. 07, 2007 (I favor a fixed exchange rate, like China�s and Malaysia�s, but I do not think PGMA has the political will to defy the dictates of the IMF and the promptings of the credit rating agencies, which have incestuous relationships with currency speculators like George Soros. Besides PGMA is a disciple of Free Trade and Globalization, in which the free movement of Capital is a revealed Truth. ACA) wwwwwwwwwwwwwwwwwwwwwwwwwwwwwww (Forwarded to Tapatt by Doug Adam) Uncle Sam, Your Banker Will See You Now By Paul Craig Roberts Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. 08/08/07 "ICH" --- - Early this morning China let Washington, and Wall Street, know that it has them by the short hairs. Two senior spokesmen for the Chinese government observed that China �s considerable holdings of US dollars and Treasury bonds �contributes a great deal to maintaining the position of the dollar as a reserve currency.� Should the US proceed with sanctions intended to cause the Chinese currency to appreciate, �the Chinese central bank will be forced to sell dollars, which might lead to a mass depreciation of the dollar.� If Western financial markets are sufficiently intelligent to comprehend the message, US interest rates will rise regardless of any further action by China . At this point, China does not need to sell a single bond. In an instant, China has made it clear that US interest rates depend on China , not on the Federal Reserve. The precarious position of the US dollar as reserve currency has been thoroughly ignored and denied. The delusion that the US is �the world�s sole superpower,� whose currency is desirable regardless of its excess supply, reflects American hubris, not reality. This hubris is so extreme that only 6 weeks ago McKinsey Global Institute published a study that concluded that even a doubling of the US current account deficit to $1.6 trillion would pose no problem. Strategic thinkers, if any remain who have not been purged by neocons, will quickly conclude that China�s power over the value of the dollar and US interest rates also gives China power over US foreign policy. The US was able to attack Afghanistan and Iraq only because China provided the largest part of the financing for Bush�s wars. If China ceased to buy US Treasuries, Bush�s wars would end. The savings rate of US consumers is essentially zero, and several million are afflicted with mortgages that they cannot afford. With Bush�s budget in deficit and with no room in the US consumer�s budget for a tax increase, Bush�s wars can only be financed by foreigners. No country on earth, except for Israel , supports the Bush regimes� desire to attack Iran . It is China �s decision whether it calls in the US ambassador, and delivers the message that there will be no attack on Iran or further war unless the US is prepared to buy back $900 billion in US Treasury bonds and other dollar assets. The US , of course, has no foreign reserves with which to make the purchase. The impact of such a large sale on US interest rates would wreck the US economy and effectively end Bush�s war-making capability. Moreover, other governments would likely follow the Chinese lead, as the main support for the US dollar has been China �s willingness to accumulate them. If the largest holder dumped the dollar, other countries would dump dollars, too. The value and purchasing power of the US dollar would fall. When hard-pressed Americans went to Wal-Mart to make their purchases, the new prices would make them think they had wandered into Nieman Marcus. Americans would not be able to maintain their current living standard. Simultaneously, Americans would be hit either with tax increases in order to close a budget deficit that foreigners will no longer finance or with large cuts in income security programs. The only other source of budgetary finance would be for the government to print money to pay its bills. In this event, Americans would experience inflation in addition to higher prices from dollar devaluation. This is a grim outlook. We got in this position because our leaders are ignorant fools. So are our economists, many of whom are paid shills for some interest group. So are our corporate leaders whose greed gave China power over the US by offshoring the US production of goods and services to China . It was the corporate fat cats who turned US Gross Domestic Product into Chinese imports, and it was the �free trade, free market economists� who egged it on. OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO |