Analysis
100 Pesos to the Dollar, Eventually

Bangko Sentral ng Pilipinas Gov. Rafael Buenaventura this week said that there is no reason for the peso-dollar exchange rate to deteriorate because the country’s economic fundamentals are “not bad.” He is doubly wrong: the exchange rate cannot but keep falling and the fundamentals are a disaster.

By Sandra Nicolas
Bulatlat.com

chief to the secretaries of finance and economic planning – and indeed by bankers, industrialists, analysts and the economists-on-the-street.  

It’s a half-truth that certainly explains the little dips and rises of centavos here and there. But actually it’s the other half left unsaid that explains far more – including why the peso will eventually hit PhP100 to the dollar.

Back to basics

What’s up with the peso that it’s always down? The peso-dollar exchange rate is the price of the dollar in pesos. When the demand for dollars is high its price, or the peso-dollar exchange rate, rises. Conversely, when the supply of the dollar is large (compared to demand) its price, or the peso-dollar exchange rate, falls.

The peso-dollar exchange rate has inexorably been on the rise – or, put another way, the peso has been inexorably dropping – for over four decades now. This is because the country’s demand for dollars has persistently outstripped its supply of dollars.

The government acknowledges as much whenever it pines for more overseas Filipino worker (OFW) remittances and foreign aid, loans and investments while lamenting low export earnings and soaring import expenses. But what the government doesn’t acknowledge are the basic structural economic conditions that cause the peso to be so vulnerable in the first place.

The essential problem is that the economy simply doesn’t earn enough dollars for everything that it needs dollars for. Even worse, the measures it takes in a perennially short-sighted scramble for dollars are precisely what complicate and perpetuate this problem.

The country’s sources of foreign exchange, the most important of which are dollars, are straightforward: export earnings, foreign direct and speculative investments, foreign debt and OFW remittances. In principle we should generate enough dollars from these to pay for our imports of goods and services, for profit remittances by foreign investors and for foreign debt servicing. But in practice, as the ever-plunging peso shows, we clearly aren’t able to.

The fundamental problem lies in the engineered backwardness of the Philippine semifeudal and semicolonial economy. Domestic agriculture and, especially, industry have remained stunted – rural monopolies foster inefficiency and the free market doctrine of “comparative advantage” tells us to leave the complicated goods to industrial powers and just keep buying from them.

This results in our historical and continuing dependence on imports of a wide range of consumer, raw material, intermediate and capital goods. Nor is the economy able to accumulate capital on its own as seen in dismally low domestic savings rates. Though certainly a short-term reality, because domestic capacity can’t just be wished for overnight, the problem is that it has become a perpetual problem – there have not been any genuine strategic efforts at building domestic capacity where we can.

As a result, foreign exchange is constantly needed to pay for those imports and foreign capital is constantly needed to fill in domestic savings-investment gaps. But the only sources of dollars and capital that the government relies on are either viciously double-edged or, at best, unsustainable.

Double-edged dollars

Selective truth-telling is the highest form of deceit. The government extols the glories of our export trade, foreign investments and creditworthiness without mentioning their severe drawbacks in the context of persistent neocolonial backwardness.

There have been some US$20-25 billion worth of electronics exports annually in the past three years amounting to around 70 percent of the country’s total exports. But at least three-quarters of these earnings are directly paid out for imported components and technology – not yet even counting profit remittances and transfers, official and unofficial, by the overwhelmingly foreign investors. And consider that whatever raving about rapid export growth, the trade deficit just hasn’t stopped growing and has accumulated to nearly US$80 billion between 1980 and last year.

In terms of foreign direct investments, over US$15 billion has accumulated since 1973. But if the established pattern of such investments versus remittances of profits, earnings, dividends, commissions, fees and royalties as recorded by the BSP is any guide, there will be a net outflow with at least US$17 billion eventually being paid out. And these official figures don’t even capture capital surreptitiously taken out of the country through transfer pricing and its ilk.

Nor are the much larger flows of speculative investments any more meaningful apart from providing momentary boosts. While the government is eager to replicate the bubble years of the Ramos administration, it’s well known that this footloose capital leaves just as easily as it comes in. Net portfolio investments in the last eight years have swung wildly from a net outflow of US$351 million in 1997 to a net inflow of US$6.9 billion in 1999; there was a US$22 million net inflow in the first nine months of 2003.

The government also beams at whatever creditworthiness in foreign creditors’ eyes the country has and proudly announces successful borrowings abroad. Yet consider how the country still has a record high, and climbing, foreign debt stock of US$56.3 billion, as of September 2003, while having already paid out some US$85 billion since 1970. A staggering US$7.5 billion will be paid this year alone.

In short, the government in all these decades has persistently relied on raising dollars in the short-term in ways that mean net dollar outflows over the long-term. Yet there is also, inescapably, a persistent and rising dependence on imports – which increased from being a little over 20 percent of gross domestic product (GDP) in the early 1980s to around half last year, or US$38.5 billion in imports compared to US$80.4 billion in GDP. These two factors combined are the fundamental reasons for the relentless downward pressure on the peso all these decades.

As things stand, the major Filipino source of dollars of the economy is our OFWs. Migrant workers officially sent back US$7.6 billion in 2003, and perhaps US$4-5 billion more unrecorded for going through informal channels, which is about 15 percent of GDP, some 35 percent of estimated total export earnings of US$36.3 billion and thrice net earnings from semiconductor exports of just around US$4.5 billion. The country is the most overseas remittance-dependent economy of any significant size in the world, surpassing even India and Mexico whose overseas remittances are less than 2 percent of their GDP.

Wrong problem, wrong solution

And yet the relentless downward pressure on the peso is matched by a relentless avoidance of addressing the real roots of the problem. Since the problem is clearly structural the solution must likewise be structural: true agrarian reform unleashing the vast peasantry’s productive potential and creating a large domestic market combined with national industrialization for a truly modern, productive, and strong economy.

The official line, however, is well-summarized by President Macapagal-Arroyo’s lament about “transitory pressures.” The half-truth is that the peso really is affected by short-term movements in speculative investments, hesitant foreign direct investment and collapsing export markets.

If these were the only problems the desperate calls for sobriety among the country’s political players, the whining about low country ratings by international creditor and investor agencies, the “crackdown” on speculators, and the despair about unstable regional and global markets might be forgiven. Jittery foreign investors in particular can easily become wary and hesitate to invest, easily shaving off many centavos from the peso in a short time. But these cannot explain the long-term fall in the peso spanning decades.

As argued earlier, they’re not the root problems and the larger question is why the country – like its other neocolonial neighbors in the region – is so vulnerable to begin with. The country’s fundamental vulnerability which must be addressed is its engineered backwardness. Engineered by whom, it may be asked?

Looks, walks, and talks like a duck

Consider the nearest thing to “long-term” solutions to the peso’s fall that the government proposes and will continue to push, no matter who wins the next elections.

It wants to attract foreign investments at all costs: selling-out “bad” financial assets at fire-sale prices, providing absurdly generous incentives to investors in export enclaves, completely privatizing public utilities such as the power sector, and changing the Constitution to remove nationality requirements. Even anti-corruption campaigns sometimes seem less against its intrinsic undesirability than simply because it deters investors.

It wants to borrow even more from foreign creditors and to this end is prepared to guarantee debt repayments in perpetuity even at the expense of vital and historically badly underfunded social services of education, health and housing. At the same time, foreign funding will be going mainly to infrastructure projects in areas of “foreign investment potential” and which will even be undertaken by foreign contractors.

It wants to further open up the economy to imports of foreign goods and services to establish, beyond all reasonable doubt and even at the cost of gravely unreasonable damage to the domestic economy, its commitment to free markets.

As it is, the government is most enthusiastic in pitching for these because they are what will please foreign investors. But the U.S. government is also conspicuously “in support” of all this. For instance, it spent US$41.2 million for the Accelerating Growth, Investment, and Liberalization with Equity (AGILE) program to write and lobby for dozens of market-oriented Philippine laws. Currently there is the US$5 million USAID-funded Sustainable Energy Development Program “advising” the Department of Energy and the Energy Regulatory Commission.

But these sorts of policies are precisely what have been so catastrophic and are precisely what will, before the decade’s end, probably drive the exchange rate to PhP100 to the dollar and beyond. What then to make of domestic policy-making determined not by what benefits the people but by what unambiguously profits foreign interests? Sounds like imperialism. Bulatlat.com

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