The problems with the Philippine peso

By Dan Steinbock

In the recent quarter, the Philippine peso depreciated by 0.88 percent against the US dollar. It was the only currency in Asia to do so. Much of international media attributed this to President Duterte and his ‘unlawful’ policies. The number of such reports has increased since the last fall and have escalated through the spring. At best, these reports reflect an odd discrepancy between the fundamentals of the Philippine economy and the way it is portrayed internationally. At worst, they illustrate a gross misrepresentation of those fundamentals.

International media declared the real culprit as President Duterte. As Bloomberg’s Ditas B. Lopez put it, Duterte is “involved in unlawful killings and corruption.” The headline told the story: “Asia’s ugly duckling of the year is the Philippine peso, thanks to Duterte.” However, this negative narrative did not start in early 2017 when the Philippine currency actually began to depreciate. It had already begun in September 2016 when the peso was still 46 against the dollar. Rather than reflecting the news, it proactively shaped it.

The geopolitical peso story 

Like many others, the media confused former President Benigno Aquino’s stated economic goals with his actual achievements. No questions were posed regarding the rise of drug trade under Aquino’s watch and complicity of public officials in the country. Moreover, flawed drug wars statistics were quoted as accurate. Marginal figures (like Gary Alejano) with an anti-democratic mutineer record were presented as ‘opposition politicians’.  Senator Leila de Lima is portrayed as a figure of integrity, despite her gross abuse of public office and funds, and cooperation with drug lords. Vice President Robredo’s UN speech, which penalised her credibility, is presented as a testimony of courage. Most distressingly, most media accounts are quiet about the alleged Goldberg plan. This is the alleged regime change plan by the former US-Philippines ambassador to replace Duterte — one which calls for exploiting Philippine’s public and private sector similar to what such reports did.

Philippine peso among South-east Asian currencies

As the peso has depreciated against the US dollar, the Bangko Sentral (BSP) has put a positive spin on the story. In this version, the relative strength of the peso in the past, along with lower inflation, explains its currency stability. This narrative is largely true. Between 2009 and 2013, the peso strengthened against the US dollar from 49 to 41. In the past quarter, it has weakened to 50.

In international media, the fall was compared with the alleged strength of the Japanese yen, Korean won, and other currencies. Yet, comparing apples and oranges may not be useful. The peso is an emerging-economy currency; yen and won are advanced economy currencies. In the latter, per capita incomes are five times higher than in the Philippines. In Vietnam and Myanmar, per capita incomes are closer to those in the Philippines. In contrast to the peso’s 25% fall, the Vietnamese dong has weakened over 35% since 2009 and Myanmar kyat 55% since 2012.

A question of timing

There is still another problem with the international media accounts about the peso’s fall: it did not happen under Duterte’s watch. Rather, it began in the middle of the Aquino era, with the Fed’s exit from quantitative easing and the first rate hike around 2013 and 2016.

Last year, the Philippine Current Account did shrink to 1%, while the trade deficit soared to a record $25 billion, and the peso depreciated accordingly. Nevertheless, Philippine exports are expected to recover while remittances and business process outsourcing revenues should remain robust.

The stability of the peso has not disappeared. In fact, in early April, when all Asian currencies took hits, the peso bucked the trend by rising on strong net inflows to the Philippines equity market. What this suggests is that investors are looking past the international media narrative and are instead focusing on the probable gains of the Duterte economic agenda.

Strengthening dollar, weakening peso

As the Fed exited quantitative easing and initiated tightening, the US dollar hit its 14-year high last fall. This was fuelled by rising government bond yields, anticipated Fed hikes and expectations of Trump’s fiscal expansion via infrastructure stimulus.

What makes the peso trajectory harder to project vis-à-vis the US dollar is the uncertainty associated with the dollar. As the US must borrow ever more to finance its trade deficit, rising debt is pushing America deeper into the red. The deficit has reached almost half of US GDP.

In contrast, the Philippines continues to enjoy significant long-term economic potential. This is despite international investors having been spooked by their own media. As international focus lingers on political controversies associated with Manila’s regional rebalancing, the economic promise of the Duterte policies has been overlooked. However, that’s not about economic fundamentals, but geopolitics.

Dan Steinbock is the founder of Difference Group and has served as research director of international business at the India, China and America Institute (US) and a visiting fellow at the Shanghai Institute for International Studies (China) and the EU Center (Singapore).  

The original version of this commentary was published by The Manila Times on April 17, 2017

Feature Image Source: Pixabay