There has been some recent wrangling over the plight of OFW families because the peso has risen. One foreign bank active in local financial markets has predicted a P40 to US$ exchange rate for 2013-14. In an academic paper, Prof. Gerardo Sicat of the University of the Philippines has raised the issue of whether the economic managers, mainly the central bank (the BSP) and the fiscal authorities, should do something about the matter. Sicat’s main beef is that the government has adopted a very conservative fiscal policy that has contributed to the peso appreciation.
The conventional wisdom is that the peso has strengthened because foreigners are optimistic about the domestic economy, and they have been a major factor behind the recent stock market gains. The peso rise has hurt the families receiving dollar remittances as well as our local exporters and the call center-BPO sector, but then at the same time it benefits those who own peso assets. This piece of arithmetic is also a given, although some people seem to focus more on the supposed ill effects of peso appreciation. The latest IMF report considered the peso ‘not overvalued’ in 2011 and early 2012 when the US$ rate was P43.3. Observers like Prof. Sicat are right to ask whether a P40 rate might be overvalued.
Let us assume for argument that the peso should be brought down to ‘more realistic’ levels. Here it seems that either way, the BSP faces a ‘damned if you do, and damned if you don’t’ proposition. It can either ease monetary policy (lowering interest rates) to bring the peso down, or tighten monetary policy to weaken inflationary pressures that arise from too much (foreign) money coming in. Either way, the outcome, it seems, is simply to aggravate the problem.
If the BSP thinks that foreign investors are wrong, then it should lower interest rates to discourage capital inflows. But this would move up the (already bubbly) domestic stock and real estate markets, and it would also encourage more capital inflows even as it allows the monster of inflationary pressure to awaken with a certain vehemence. The peso would continue to strengthen, and those who worry about the economy would wonder when the peso uptick might end, and what kind of crash would ensue.
If, on the other hand, the BSP were to tighten monetary policy to ‘sterilize’ capital inflows because it worries about domestic asset inflation, then some exchange rate speculators will have a field day parking excess liquidity in peso assets with little risk of losing on the carry trade (borrowing in foreign currency to buy peso assets, and betting the peso continues to rise). And again, the peso will continue to rise, but this time because of the carry trade. This also results in a guessing game as to when the BSP would reverse course to correct a situation where it simply helps speculators get rich.
It seems then that, correctly, the BSP probably does nothing and then says little about the matter. The BSP reacted to Sicat’s paper by citing its announced policy of largely leaving the peso rate to market forces while countering very volatile movements. Interestingly, the BSP also hints that part of the peso appreciation is ‘warranted.’
Still it appears that the BSP has been tight-lipped. Why? One answer is that, when what you do or say can be misinterpreted, the less said the better. Another possibility is that the BSP has this year applied a too-easy or not-too-tight monetary policy that, because of fiscal policy, somehow boomeranged into a peso appreciation amidst a latent asset inflation bubble, and now its hands are tied. Both views make sense to economists watching the peso closely, but who in government will want to explain to ordinary folks that modern macroeconomics often cannot give our policy makers dependable answers?