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Who is afraid of a strong peso?


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An interesting thread.

 

I have respect for the Daily Inquirer in general and Eddie Yap in particular.  His commentary avoids the sickly chauvinism of other articles and presents a fairly well-balanced record of the present situation (and basic macro economic theory for that matter).  I believe Skywalker was a little severe in referring to ‘the only pertinent sentence’ in his post, perhaps as a self declared economist Skywalker was looking for more depth in the analysis.

 

I assume that smokey’s intention in making the original post is to seek opinion on how the current strong Peso affects us all and whether we believe it will continue at this level.  I would be surprised if any of us was qualified to comment on whether the Peso is being held at an artificially high level.  Skywalker is correct when he says (with tongue in cheek?), ‘… the right value of a currency is the best value.’

 

Many resident expatriates in the PH have an income sourced in a foreign currency, typically pensions.  Half my household income comes from the UK in GBP.  The current exchange rate is hurting and many of our plans have had to be deferred.  I doubt whether we could have survived without our accompanying Peso income.  I happen to believe the Peso will weaken but do not have the opportunity to save GBP for the time when that happens.

 

So why do I believe the Peso will weaken?  It has rightly been pointed out that it is not so much the performance of the PH but the weakness of other major economies that has contributed to the present exchange rate.  Once the USA and European economies recover (I’m less hopeful for the UK economy) then pressure will be brought once more on the Peso.  I also believe that there is political pressure being exerted on the PH agencies to glamorize economic results and thus bolster worldwide confidence in the Peso.

 

Recently much was made of the 6.6% growth in 2012 in GDP.  Yet few mention that 2011 was a ‘low base’ year.  There was also a large statistical anomaly in one month that should have been rectified resulting in a lower growth figure.  Yet the year on year growth figure for that month was revised from 7.1% to 7.2%!  (Also assuming the workforce grew by 2%, the ‘real’ growth in GDP is 4.6%.)  Now compare the 6.6% growth in GDP with Thailand’s 18%; a stronger economy grew three times more than an admitted weak economy - not exactly what you'd expect.

 

So why do the agencies glamorize the economic results?  Eddie Yap lists the economic reasons for achieving better credit ratings and stronger Peso but fails to mention the political kudos.  The latter gives the politicians reason for self congratulation but leaves the populace, at least in my observation, feeling no better off than before.

 

Economic growth and a strengthening Peso go hand in hand yet there is doubt whether even the present growth rate can be maintained.  In 2012 nearly one million jobs were lost; not a good indicator of continuing growth.  In 2012 the FDI (Foreign Direct Investment) in the PH was the lowest in the ASEAN countries (bar perhaps Laos); an indication that foreign long-term confidence in the PH is lacking.  The foreign investment that P-Noy boasts of is ‘hot money’ parked on the stock market.  This money will emigrate once the foreign markets are considered safe again.  The infrastructure of the PH is sadly lacking and the PH seems to lack the will or funds to correct this (despite the PPP projects).  The ‘protectionism’ frightens foreign investment away.

 

In conclusion, I for one believe that the present PH economy is threatened.  If no one takes immediate action then it is likely that the Peso will weaken.  It may take a few years but I would not be surprised to see rates of 50 (or even 55) to the USD in three or four year’s time.



 

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I for one believe that the present PH economy is threatened.  If no one takes immediate action then it is likely that the Peso will weaken.  It may take a few years but I would not be surprised to see rates of 50 (or even 55) to the USD in three or four year’s time.

 

I hope your vision will become true earlier.

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smokey

yes your correct and a jeep ride was 10 cents ..  i remember my step dad telling me how after WW2 he could of bought a lot on Hollywood blvd . for 6,000 dollars that today would be worth 6 million and i said wow ... and then i asked what was his pay and he said 80 dollar a week ,,  sure the peso was 3 to the dollar but a peso was a lot of money back then in relationship to goods you could buy ///  i think it might take 2 more years but the peso will weaken when the west has more of a recovery already real estate is starting to creep up ..

 

 

my wife figured it out fast... when you work one day in the philippines you can earn enough money to feed your family , so you cant afford to miss any work in the us you work one day and you can feed your family for one week...

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smokey

An interesting thread.

 

I have respect for the Daily Inquirer in general and Eddie Yap in particular.  His commentary avoids the sickly chauvinism of other articles and presents a fairly well-balanced record of the present situation (and basic macro economic theory for that matter).  I believe Skywalker was a little severe in referring to ‘the only pertinent sentence’ in his post, perhaps as a self declared economist Skywalker was looking for more depth in the analysis.

 

I assume that smokey’s intention in making the original post is to seek opinion on how the current strong Peso affects us all and whether we believe it will continue at this level.  I would be surprised if any of us was qualified to comment on whether the Peso is being held at an artificially high level.  Skywalker is correct when he says (with tongue in cheek?), ‘… the right value of a currency is the best value.’

 

Many resident expatriates in the PH have an income sourced in a foreign currency, typically pensions.  Half my household income comes from the UK in GBP.  The current exchange rate is hurting and many of our plans have had to be deferred.  I doubt whether we could have survived without our accompanying Peso income.  I happen to believe the Peso will weaken but do not have the opportunity to save GBP for the time when that happens.

 

So why do I believe the Peso will weaken?  It has rightly been pointed out that it is not so much the performance of the PH but the weakness of other major economies that has contributed to the present exchange rate.  Once the USA and European economies recover (I’m less hopeful for the UK economy) then pressure will be brought once more on the Peso.  I also believe that there is political pressure being exerted on the PH agencies to glamorize economic results and thus bolster worldwide confidence in the Peso.

 

Recently much was made of the 6.6% growth in 2012 in GDP.  Yet few mention that 2011 was a ‘low base’ year.  There was also a large statistical anomaly in one month that should have been rectified resulting in a lower growth figure.  Yet the year on year growth figure for that month was revised from 7.1% to 7.2%!  (Also assuming the workforce grew by 2%, the ‘real’ growth in GDP is 4.6%.)  Now compare the 6.6% growth in GDP with Thailand’s 18%; a stronger economy grew three times more than an admitted weak economy - not exactly what you'd expect.

 

So why do the agencies glamorize the economic results?  Eddie Yap lists the economic reasons for achieving better credit ratings and stronger Peso but fails to mention the political kudos.  The latter gives the politicians reason for self congratulation but leaves the populace, at least in my observation, feeling no better off than before.

 

Economic growth and a strengthening Peso go hand in hand yet there is doubt whether even the present growth rate can be maintained.  In 2012 nearly one million jobs were lost; not a good indicator of continuing growth.  In 2012 the FDI (Foreign Direct Investment) in the PH was the lowest in the ASEAN countries (bar perhaps Laos); an indication that foreign long-term confidence in the PH is lacking.  The foreign investment that P-Noy boasts of is ‘hot money’ parked on the stock market.  This money will emigrate once the foreign markets are considered safe again.  The infrastructure of the PH is sadly lacking and the PH seems to lack the will or funds to correct this (despite the PPP projects).  The ‘protectionism’ frightens foreign investment away.

 

In conclusion, I for one believe that the present PH economy is threatened.  If no one takes immediate action then it is likely that the Peso will weaken.  It may take a few years but I would not be surprised to see rates of 50 (or even 55) to the USD in three or four year’s time.

 

 

 

i think and its not well received by the Philippines the only way to ride the wave in the same cart as the other countries it to allow business to flourish in the Philippines and as long as foreigners can not own land and as long as companies funded 100% by foreigners who assume all the possible loss yet they find themselves having to deal with a 40% stake  this will be hard to do... there is way to much protectionism going on which keeps the serious players out ,,,   

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USMC-Retired

Outside of us that rely on the western currency to live this may be good news for the Government yet it is bad news for the people here.   This government operates on the flow of remittance from OFWs to point it is 12% of the GDP. 

 

It is not like they will have more Dollars Euros Pounds or Riyals in their paycheck.    So that amount of money that flows in will be less after exchange.  Which inturn is less buying power and less goods and services provided.  

 

Additionally the trade exports right now have fallen back to 2010 levels.  This also is hurting the system.  In the first quarter when the Peso to Dollar was hovering at 42 the trade seemed solid then as the Peso spiked up the trades slowed in the 2nd of this year.    

 

These two combinations will have the BSP worried about the overall economy.  It is an affect of hot money in the country and not a real true turn of events.   There will be a cooling off of this hot money in the future.   The BSP must control this hot money because if the peso spikes much more both those two above conditions would take a serious hit.   It could actually collapse the entire economy here.   This is being seen in China right now as hot money is pouring out of China.   Which has sent China into recession.  Unlike China the Philippines has nothing to guard against it so as the scales start to tip on the Philippines with  this inflow of sudden capital. Either the BSP will get a hold of it and stop it or it will drive the peso so high it becomes a bad investment.    Affecting the look of the investment prospects here and people will go else where.   If that were to occur the collapse of the Peso could result.    This is exactly what happen in 1997 when the investors pulled out and called markers.  

The peso was on a free fall from 26 to the dollar until they could finally adjust by then it reached 54 pesos to the dollar in 2001.  So they are one scandal one corruption one glitch in the system where this could cause chaos.  

 

Good read on this.  

http://business.inquirer.net/107643/hot-money-inflows-more-than-doubled-in-jan

Edited by USMC-Retired
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Really the ADB should know better - USMC-Retired's link has the headline, 'OFW remittances make up 12% of RP's GDP - ADB.'  OFW remittances are not part of GDP but part of GNP (or GNI as it is now termed).  If the Philippines is counting the remittances as GDP then it is doing so incorrectly; I have never yet been able to determine the truth of this.  However even if the remittances are included then it should make no difference to the year on year comparisons (apart from any fluctuation in the remittances themselves).  Hopefully the truth is that OFW remittances are equivalent to 12% of GDP.

 

The Philippine economy is fairly unique in the respect of such a significant inflow of cash.  And it's hard to measure.  Central government has to rely on clearing bank returns and the declaration made on immigration cards.  There is probably as much again undeclared.

 

This money enters the economy at the consumer level and boosts demand for consumer goods which from a government's point of view is not always the best policy.  Very little of this money is invested in long-term developments.  So the motor vehicle, white goods, housing, education and medical markets flourish while infrastructure projects never happen.

 

Regarding the 'hot money, USMC-Retired's concern about money flowing from China to the PH and driving up the Peso exchange rate is valid in the short term.  I don't see what the BSP can do about this and if anyone knows what Assistant Governor Ma. Cyd Tuaño-Amador means by, 'We have a deep policy toolkit in responding to a surge in capital flows' then please explain it to me.  'Free fall' is a real possibility when the 'honeymoon' is over.

 

But even this hot money presents an opportunity.  It is either invested directly in the stock market or in funds which themselves consist of stocks.  This capital is available to the companies for investment in new ventures and expand existing ones, but there is little or no sign of this happening.  Instead there are increased dividends and profit taking.

 

PS. With respect to the measurement of remittances it may be possible to gauge a figure from money changers returns - but then there is the dilemma of how much has already been declared.

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Skywalker

 

This is exactly what happen in 1997 when the investors pulled out and called markers.

 

Nearly right, except that the crisis in 1997 wasn't just RP, and it wasn't just investors calling in markers!  It was an explosion of crisis of confidence in a bubble based on corruption, lies and manipulation.  Many banks went down the tubes.  There was a huge overexposure of debt, based on speculation and (of course) greed.

 

For a more recent example look at the PIIGS Countries in Europe, an ongoing crisis that is also being carefully managed so it doesn't look like the failed model that it really is.

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Skywalker

 

infrastructure projects never happen.

 

This is comedy right? You surely understand that with Government contracts being as transparent as a plate of sheet steel, the resulting corruption stifles everything, since everybody knows what is going on, and everybody wants a piece of it.

 

Infrastructure investment generally comes from tax revenue, but in a region not blessed with individual tax payers (like for instance Greece, Spain, and just about every other Mediterranean Country!) the money to pay for these investments may have to come from private investors, who will expect and require a healthy return on their money.  Hence - almost no infrastructure improvements since the Americans left. 

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Headshot

Well, what happens in the Philippines will be of no concern to me if the US dollar collapses against the Philippine peso. I would no longer be able to live here. I would imagine that most foreigners living here would be in that same situation is their home country's currency took a dive against a stronger peso. Most foreigners who retire here are receiving their income in their home country's currency, so it hurts when the value drops against the peso.

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USMC-Retired

The economy revolves to much around other currencies and is not self supportive.  Unless the dollar collapses on the world stage then the peso strength is not going to rise to much.  It is counter productive to the people and government.   It is showing signs that it is at the tipping point now with trade down. 

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The economy revolves to much around other currencies and is not self supportive.  Unless the dollar collapses on the world stage then the peso strength is not going to rise to much.  It is counter productive to the people and government.   It is showing signs that it is at the tipping point now with trade down. 

 

I think you give the Philippines' money managers way too much credit for intelligence.

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USMC-Retired

if they allow the trend to continue it will collapse.  They have to cap it at some point.  Otherwise a collapse is imminent.  This is not a country that generates huge amounts of exports it is a service related industry here.   That accounts for 56% of its GDP.   The value versus the cost will no longer be competitive.  Call centers, Web Design, IT and imported service industries will take a hit.  Then you have one big gainer for the Government which is already weak on tax collection and that is tourism.  The non-competive rate with other destinations will additionally start to hit. These costs will continue to rise as the peso gains strength.  They will begin to pull those assets to look for better stomping grounds that are cheaper.  

 

Looking at the data the point where the peso needs to remain a value is 42:1 as we are seeing already exports, tourism and remittance were all down in the second quarter of this year.  It all may be good for the government.  However it will drive this country further into poverty.  With an eventual collapse of this hot money.  

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if they allow the trend to continue it will collapse.  They have to cap it at some point.  Otherwise a collapse is imminent.  This is not a country that generates huge amounts of exports it is a service related industry here.   That accounts for 56% of its GDP.   The value versus the cost will no longer be competitive.  Call centers, Web Design, IT and imported service industries will take a hit.  Then you have one big gainer for the Government which is already weak on tax collection and that is tourism.  The non-competive rate with other destinations will additionally start to hit. These costs will continue to rise as the peso gains strength.  They will begin to pull those assets to look for better stomping grounds that are cheaper.  

 

Looking at the data the point where the peso needs to remain a value is 42:1 as we are seeing already exports, tourism and remittance were all down in the second quarter of this year.  It all may be good for the government.  However it will drive this country further into poverty.  With an eventual collapse of this hot money.  

 

I agree with everything you said here. However, how many times have you seen decisions made based on what's best for the person making the decision rather than what's best for the country? The Philippines could easily tie the PHP to the USD at 42:1. Other countries have done it and have reaped benefits from doing so. Since most of the Philippines' service industry is tied to the US, tying the currencies would make sense for them. It would be good for both businesses and the Philippines. Unfortunately, those two things don't always enter into the equation when decisions are made here.

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if they allow the trend to continue it will collapse.  They have to cap it at some point.  Otherwise a collapse is imminent.  This is not a country that generates huge amounts of exports it is a service related industry here.   That accounts for 56% of its GDP.   The value versus the cost will no longer be competitive.  Call centers, Web Design, IT and imported service industries will take a hit.  Then you have one big gainer for the Government which is already weak on tax collection and that is tourism.  The non-competive rate with other destinations will additionally start to hit. These costs will continue to rise as the peso gains strength.  They will begin to pull those assets to look for better stomping grounds that are cheaper.  

 

Looking at the data the point where the peso needs to remain a value is 42:1 as we are seeing already exports, tourism and remittance were all down in the second quarter of this year.  It all may be good for the government.  However it will drive this country further into poverty.  With an eventual collapse of this hot money.  

why do you say this?

 

if somebody pays you to do something, what difference does it make if you give them a widget or give them advice?

 

service industries are great. They tend to be higher value (thats why the UK is so desperate to keep the City) , and in general dont require huge amounts of infrastructure and more importantly dont create huge amounts of polution that have to be cleaned up (look at China which is rapidly becoming a total shit hole)

 

and the advantage for the phils is you can train anybody to work in foxconn in days.  good enough english for a call centre takes years.

 

take a look at this chart!  http://en.wikipedia.org/wiki/List_of_countries_by_GDP_sector_composition

 

you will see a strong correlation between wealth and % of services as GDP.

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USMC-Retired

So when does it not become effect to export services to the Philippines and send it to another country?  It works well if you have industry behind your services.   When your service becomes more expensive then your competitors for equal value they leave.

 

A call center with 500 employees are paid 260 pesos a day.   That does not matter what the exchange rate is.  That company pays 3.9 million pesos a month in salary.  ( At 40 it is $97,500 and at 45 its  $87,000)   There is a point when that becomes not worth it.   Also all the other things that go to operating here rent, utilities, taxes, and such.  

 

Wealth to service is a model only when services are not imported.  Everything here is imported as the Philippines produces very little.  

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