Business World, 14 February 2013


The growing strength of the euro, accompanied by Japanese authorities’ moves to push down the yen, has rekindled talk of “currency wars.” With Europe still in search for new sources of growth, a strong euro — quoted at between $1.33 and $1.37 — could make euro zone exports look more expensive and unattractive. And while a weaker yen may provide relief for Japanese exporting firms, it threatens countries like Germany, one of the world’s biggest exporting country.

The biggest threat to an orderly way out of this potential “currency war” is the absence of a coordinated decision-making to address the issue. There appears to be no consensus among G20 countries, the body that is supposed to coordinate policies around the world, on what to do about the discordant policies on the exchange rate.

French President Francois Hollande argued that the external value of the euro should not be left to market forces at the moment. He wants the euro zone to arm itself with a policy for the foreign exchange rate. Germany and the European Central Bank, however, have taken the position that the euro is not over-valued.

ECB president Mario Draghi, in an attempt to talk down the growing strength of the euro, expressed concern about the strength of economic recovery in the euro area.

The change in direction in Japanese monetary policy which has the effect of pushing down the yen is a concern for South Korea; its currency, the won, has appreciated against the yen.

But Germany is equally worried with this turn of event: German Finance Minister Wolfgang Schaeuble expressed “deep concern” about Japan’s new policy, and Jens Weidmann, the president of the German central bank, has said he is worried that there could now be a “race to devaluation.”

Should the race to devaluation take place, where would that leave the Philippines? If there is no change in Bangko Sentral’s foreign exchange policy of letting market forces dictate the value of the peso, then the peso will appreciate further.

This will attract more “hot money” investors. They will bet, as they are betting now, that the Philippine peso would strengthen further. ₱38 to $1 is not far-fetched.

Policy makers know that “hot money” or “hit-and-run” money is destabilizing: coming in droves during “good” times, but exiting just as fast during “bad” times. Hot money exaggerates the “good” when times are booming, and exacerbates the “bad” when things begin to unravel. But will they act?


What are the economic consequences of an even stronger peso?

Philippine exports which at the moment are barely surviving will contract. Manufacturing output will decline, further exacerbating the already serious joblessness problem.

As Philippine exports become more costly and uncompetitive, exports will fall. At the same time, imports will soar as the costs of foreign goods decline. The net effect will be that less jobs will be created at home and more jobs will be created abroad.

The impact on business process outsourcing (BPO) firms will definitely be negative. Their operating profit margin will thin, as their initial dollar budget, in peso terms, falls, while their peso operating costs (for salaries and wages, rentals, utilities, and others) increase.

The peso value of overseas remittances will further decline, resulting in lower aggregate demand and hence lower gross national income (GNI). Assuming that government statistics on overseas Filipino workers are accurate, then more than half (number of OFW workers times average family size of five) of Filipinos would suffer as a result of the peso appreciation. Again, this will translate into more job losses.

The impact on government finances is unclear. The benefit to the government will come in the form of lower servicing of foreign debt. The cost will come in terms of lower tariff duties: as the peso appreciates in value, the peso value of imports fall, other things the same, and hence lower taxes. Moreover, since some imports will displace local outputs, this would translate into lower value added taxes. Whichever dominates — benefits or costs — will determine the outcome.

On the spending side, as OFW families feel the pressure of the shrinking peso, they will cope by sending their children to public schools instead of private schools, and to public hospitals instead of private ones. This would mean additional public spending for social services.

But who are the clear winners? A stronger peso will mean lower inflation — maybe closer to the lower limit of the government’s official target of 3% to 5%. Big winners are those who consume a large amount of imported goods.

Filipinos who love to travel abroad are big winners, too.


Policy makers will be faced with two options: 3% inflation rate with zero (potentially negative) job creation or 5% inflation rate with significant job creation. For a labor surplus economy with serious unemployment and poverty problems, the choice should be clear. My bet is that most workers would prefer slightly higher prices as long as they are employed than being jobless under a low-inflation regime.

There is nothing worse than being jobless, especially during these difficult times. Absolutely nothing.

For the young who have invested so much time, money and effort to get a good college education, there is nothing more alienating and frustrating than starting their adult, post-baccalaureate life being unemployed or underemployed. That’s like robbing them of their hopes and dreams. Yet, about half of the jobless, are either college undergraduate or graduate.