Business World, 26 June 2013


The Philippine Stock Exchange index (PSEi) plunged below 6,000 Monday to a near six-month low while the peso hit its weakest in 17 months. On the surface, President Aquino and his economic men appear to be unperturbed. That’s a good sign. By contrast, many stock traders and fund managers, who in the past benefited from the exuberant stock exchange and who bet that the peso would continue to appreciate, are pressuring monetary authorities to do something to reverse the depreciating peso. Doing so would be a monumental mistake.
For me, doing nothing is a better option than trying to defend the peso.

The Philippines is in a much better place now than where it was before (a state of affairs characterized by rising unemployment, declining exports, and low and falling foreign direct investments. The “hot money” is exiting in a big way while the peso has moved to a more competitive level. As a result, the likelihood of sustained and inclusive growth is much better now than before.

For too long, monetary authorities were cracking their brains looking for ways to stem the tidal wave of footloose capital. They know too well the evils of hot money. While it caused the PSEi to soar, it moved the peso to appreciate. The strong peso cut the spending power of the families of overseas Filipino workers (OFWs), sapped the energy of Philippine exports, and cut the profitability of the BPOs.

Now that the peso has weakened against the US dollar, Philippine authorities should embrace, not fight, it. They should think of what’s the greatest good for the greatest number.

There are clearly more winners than losers from a peso depreciation. The OFWs and their families are big winners. With an estimated 10 million OFWs, and assuming an average family size of five, this means that some 50 million Filipinos are directly benefited by the weaker peso. That’s more than half of the 93 million Filipinos!

But the economy in general is a major winner too. Imagine the $21-billion overseas Filipino workers’ (OFW) remittances. The $21 billion would translate into ₱924 billion, if the peso-dollar rate were ₱44:$1 and ₱861 billion if it were ₱41:$1, for a difference of ₱63 billion. With a multiplier of about five (assuming higher marginal propensity to consume of 0.8 among OFW families), this would translate into ₱315 billion of incremental spending for consumer goods and consumer durables.

Higher consumer spending means higher VAT collections for the government. That should make Finance Secretary Cesar Purisima happy.

Imagine, too, how much additional tariffs the Bureau of Customs might collect with a weaker, rather than stronger, peso. With a weaker peso, the peso value of imports will increase. And since tariff rates are ad valorem (based on peso value), then taxes on imports will increase.

Imagine how many Filipinos will be benefited by higher government spending for education, health, social welfare, public infrastructure and other public goods.

Thus, I’m puzzled by Mr. Purisima’s statement that the government is more concerned with the volatility in the exchange rate rather than the downward movement of the stock market.

I understand that a weaker peso means higher peso cost of servicing the Philippines’ dollar debt. But a weaker peso might turn out to be a net gain for the government. The increased tax collections from VAT and imports might be sufficiently large to offset the higher servicing of our foreign debt.

The other big winner is the Bangko Sentral ng Pilipinas. With a weaker peso, the BSP’s financial picture has dramatically changed overnight — from a horrendous loser in the last three years to an impressive winner in 2013.

The BPO industries are big winners too. From thinning profit margin, their financial outlook has been drastically reversed. They are now facing a brighter, more profitable 2013. Think of more than half a million workers employed in the BPO industries who will be benefited by a weaker peso.

Joblessness should be the focus of our policy makers. It has a higher probability of being addressed with a weaker, rather than stronger, peso. A weak peso would improve the competitiveness of Philippines labor-intensive exports. That would add up to more decent jobs.

A weak peso will also help develop the Philippines’ import-substituting industries. With a weaker peso, prices of imported goods will rise, giving local industries a fighting chance to compete with foreign producers of imports.

The negative impact of higher imports on job creations is well known: higher imports of goods that could be produced domestically means creating jobs abroad while depressing jobs at home.

The big losers are those who play in the stock market. But the PSE plunge should not be a major concern. It has been boosted in the past by “hot money” which economists best described as destabilizing (magnifies the “good news” when the market is booming, and exacerbates the “bad news” when the market turns sour).

Those who live by “hot money,” die by “hot money.” Excessive profits have been made in the past. Now there is rush for the exit, with the Johnnies-come-lately ending up holding the empty bags. Should we pity them? Nah. Greed deserves no compassion.

The biggest losers from this turn of events are policy makers who believed, or made to believe, that a rising PSE index means necessarily a strong economy. False.

Lack of decent jobs is the Philippines’ most crucial problem. A peso depreciation might stoke inflation, warn some worrywarts. But the reality is that inflation has been pretty tame — lower than the government’s official inflation target. Moreover, given a choice, the unemployed would prefer gainful employment to slightly higher prices anytime.

The recent turn of events has shown that the stock market performance is a weak barometer of economic performance. While it benefits a few, a strong PSE is not, and will never be, the solution to the country’s unemployment and underemployment problem.

Here’s the moral of the story for those who governed: be guided by the principle of utilitarianism, attributed to Jeremy Bentham, a British gentleman, jurist, philosopher and social reformer. They should always act for “what’s the greatest good for the greatest number.”

All things considered, the Philippines is in a better place now than where it was before the PSEi plunged and the peso weakened. Policy makers should build on these twin events rather than fight it, or worse, reverse it.