Bu-lat-lat (boo-lat-lat) verb: to search, probe, investigate, inquire; to unearth facts

Issue No. 22                        July 15-21,  2001                    Quezon City, Philippines

NEWS ANALYSIS
P53 to $1: Whose Fault is it Anyway?

It doesn't take an economist to unearth the truth about the current peso devaluation. Economic bureaucrats keep on blaming the political crisis of the day, speculators or, better yet, a "regional phenomenon" which the country is an unfortunate victim of and has no control over. The people know better. If there's anything four decades of a free-falling peso tells us, it's that the problem goes much deeper. President Macapagal-Arroyo, who is now presiding over the peso's fall, may have to look farther back too—some 40 years ago when her own father began the now-familiar cycle of peso devaluation.

BY SANDRA NICOLAS
www.bulatlat.com

Continuing its decades-long fall, the peso last July 11 fell to P53.07 to the US$1. The peso’s Friday the 13th closing level of P53.17 is the lowest so far under the administration of President Gloria Macapagal-Arroyo.

P53 must be some kind of psychological barrier because a week earlier, the Bangko Sentral ng Pilipinas (BSP - Central Bank of the Philippines) intervened very strongly in the foreign exchange market when the peso fell to P53.10 in intraday trading. The BSP successfully defended the peso with around US$40 million, some one-fourth of total volume turnover for the day, and the peso closed at P52.93. But after a week-long lull, the peso finally breached P53 to the US$1.

We can be generous and not fault the BSP for the miserable and failed attempt at stemming the decline of the peso. After all, it only has a piddling US$14 billion or so in international reserves with which to fight the relentless pressure against the peso due to the economy’s fundamental backwardness.

Blame economic backwardness

Because therein lies the crux of the problem of the peso’s perpetual free-fall. The basic problem is that the Philippines needs more dollars (to pay for imports and other payments abroad) than it gets (from exports, investments, loans and grants). 

As the country’s demand for dollars increases, the “price” of the dollar—the number of pesos needed to buy it—goes up. This is all a falling peso means: more pesos are needed to buy dollars. And the country’s demand for dollars perpetually exceeds its supply because its agriculture and industry has been kept so backward for generations. Worse, the short-term palliatives so favored by governments—foreign investments and loans—only mean greater capital outflows (and dollar repayments) in the long-run.

A quick look at the balance of trade and investment in the past decades will help put the problem into context. The ultimate measure of a country’s productive capacity is in the goods that it produces. Economic planning in the Philippines, however, has been more about promoting elite and foreign interests than about genuinely building domestic agricultural and industrial capacity.

The country needs dollars to pay for imports of consumer and producer goods which it can’t produce. But its receipts from its exports are never enough to cover this because the goods we produce have such low value-added.

This is why the country has been having merchandise trade deficits virtually every year since 1949! In all this time, there were only three years of surplus: in 1963, 1966, and 1973. But mostly they were “surpluses” because imports fell drastically following severe balance of payments crises, not because we fundamentally earned more from goods exports than we spent on goods imports.

Recall that the country's worst ever trade deficits were in 1996 (US$11.3 billion) and 1997 (US$11.1 billion) when then President Fidel Ramos was praising globalization to high heavens as the country's economic nirvana. Recall too how the peso correspondingly lost 39 percent of its value in 1998, to P40.90 from P29.47 a year earlier.

Entice investors, keep borrowing

But, as government economists are wont to say, the country can also get dollars from foreign investors. True, but then foreign investors bring in funds only to the extent that they can make a profit out of doing so—leaving the country, in the end, on the losing end. The foreign exchange decontrol program initiated in 1962 by then President Diosdado Pangan Macapagal—the father of Malacañang’s current occupant—was a watershed where foreign investors obtained much greater freedom to remit capital from the Philippines. There can be little doubt that they have been having a profitable time since Macapagal launched his "open door" policy for American investors.

From 1961 to 1998, there had been US$8.37 billion in new foreign direct investment (FDI) in the country. But subtracting the US$9.50 billion in remittances of profits, earnings, dividends, commissions, fees and royalties, gives a net outflow from the country of US$ 1.13 billion. These figures are also unable to capture capital surreptitiously taken out of the country through intra-company transactions like transfer pricing and the like.

But one may ask, if the Philippines isn’t getting enough dollars from its export earnings and FDI, where is it getting the balance of dollars to pay for everything it imports and otherwise pays abroad? In the past two decades, the export of cheap Filipino labour has grown to become the country’s number one net foreign exchange earner—bringing in perhaps US$11 billion last year, through formal and informal channels. The country’s reliance on this has reached absurd levels where anywhere from 8 to 11 million Filipinos (10 to 15 percent of the population) have had to go abroad—many times at great risk—to find jobs.

And of course there is foreign borrowing. The country’s external debt stock at the start of 2001 was officially US$52.1 billion—a far cry from the US$ 0.2 billion it was in 1961. Borrowing which, of course, means amortization and interest payments. In the past five years, over US$25 billion was paid out for debt servicing.

Incompetent at best, deceitful at worst

The point is that our economic managers are way off-track when they blame speculators, regional economic woes, Abu Sayyaf kidnappings and the like for the peso free-fall. Isn't this what Estrada himself had been singing all along, too? And for weeks now, this has been the annoying refrain from BSP Governor Rafael Buenaventura, Finance Secretary Jose Isidro Camacho and President Arroyo herself.

When the public asks why the peso’s so weak, they are fundamentally asking not why it fell a few pesos or centavos in the past days or weeks but why it’s so disastrously low overall. Yes, these proximate factors matter but by far the most significant factor is the basic backwardness of the economy—a result of not pursuing genuine programs of agrarian reform and nationalist industrialization. In the absence of these the peso cannot but keep on dropping.

The blindness of the government economists is clear. When it comes to stemming the peso’s decline, all they look forward to are increased foreign borrowings, increased foreign investments and a recovery in the country’s mono-export product, semiconductors. Precisely the fixation that is at the core of the peso’s problems.

It’s virtually certain that Arroyo’s administration will preside over the weakest peso since the foreign exchange decontrol program initiated by her father in 1962. The record closing low so far of P54.79 on the eve of her taking office was, for a neocolonial economy, not an aberration.

But it’s not a case of the daughter paying for the sins of the father. Rather it's the Filipino people paying for the sins of governments, including the present one, which take the interests of the country’s elites and the foreign monopolies ahead of the people's. www.bulatlat.com

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