* This is my article two days ago in TV5's news portal,
http://www.interaksyon.com/business/51944/fat-free-economics--why-the-peso-is-appreciating----------
There has been a number of rather positive news about the
Philippine economy at the end of last year extending up to the New Year. Among
the more prominent ones are the impressive growth in the stock market, the high
third-quarter GDP growth, and the peso appreciation. The latter is often seen
as an indicator of confidence in the local economy by investors abroad, whether
institutional or individual.
They bring their foreign currencies into the Philippines
for investment, tourism and recreation, support for families and friends here,
and for various other reasons. These increase the demand for the Philippine
peso relative to other currencies, at least temporarily, resulting in the peso
appreciation. Here are some relevant numbers.
Among developed and emerging economies in Asia, only the
South Korean won had a larger appreciation than the peso. The Indonesian
rupiah, Japanese yen, Indian and Pakistan rupees even depreciated relative to
the US dollar (see Table 1).
When the peso (or other currencies) appreciate relative
to a major currency, many sectors benefit like importers, Filipinos who are
travelling abroad, other foreign currency buyers. The prices of imported
petroleum products can go down even if world prices have stabilized or slightly
increased, benefitting the transportation, industrial and other sectors of the
economy.
Some sectors though are worse off, like the families of
the OFWs, exporters, and business process outsourcing (BPO) firms. There
are winners and losers in every change in economic conditions. It is just a
question of how much is the net gain or net loss for the whole economy.
What could be the main contributors to the peso and other
Asian currencies’ appreciation or depreciation?
The most proximate explanation is the current account
balance, which comprises exports less imports of goods and services
(merchandise and non-merchandise trade, overseas remittances) and transfers. So
countries that have negative or low balances tend to suffer currency
depreciation.
Then there is capital account balance, or the net result
in the inflows minus outflows of capital like foreign direct investments, stock
market investments, and foreign debt less repayment. But there is sometimes a
lag between the capital account balance and currency changes.
Another factor is the budget balance although the
causality between this and currency movements is not very clear, more of a
slight interrelationship. Nonetheless, countries that have persistently high
budget deficits and high public debt are candidates for future fiscal and
economic instability. Below are some numbers to crunch.
Source: same as Table 1
Short-term, three-month interest rates are included in
the above table. With the exception of Hong Kong and Japan, countries that
experienced currency depreciation or low appreciation – Vietnam, Indonesia,
India and Pakistan – have high interest rates. The foreign exchange risk seems
to have been “converted” into interest rate risk.
Hong Kong and Japan are able to escape this trend mainly
because of their mature and stable credit markets. The bulk of Japan government
debt, for instance, is not with foreign lenders but with Japanese nationals, so
foreign currency risk from public debt is significantly reduced or limited.
The challenge for the Philippine economy is to limit
those government-generated risks like persistent budget deficits and
ever-rising public debt, and government business bureaucracies that limit and
sometimes scare investment and entrepreneurship in some sectors of the economy.
As economic uncertainty in the US and Europe linger, many
businesses and entrepreneurs there are looking for alternative economies where
they can jump ship. The rise in stock market investments is a good indicator
for the Philippines but that is insufficient given the high degree of poverty
and unemployment in the country. This is despite the argument I made in an earlier
column that some unemployment is voluntary and indicates “joblessness by
choice” due to a high “reservation wage” among job seekers.
As economic optimism outpaces pessimism, the unemployment
condition may not necessarily decline as more people raise their “reservation
wage” in anticipation of better economic and business opportunities to come.
What is important is that economic growth should remain high; the economic pie
should continue to expand fast. Government policies that tend to discourage
more entrepreneurship should be drastically cut or eliminated.
See also:
Fat-Free Econ 32: GDP Growth, Stockmarket and Rule of Law, December 01, 2012
Fat-Free Econ 33: Institutions and Why Governments Fail, December 09, 2012
Fat-Free Econ 34: Rise in Unemployment Rate Not Exactly Bad, December 20, 2012
Fat-Free Econ 35: World's 25 Largest Economies in 2012, January 02, 2012
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