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Dovish

The peso, it appears, has resumed its slide against most other currencies. Some analysts argue the peso’s softening is due to the dovish position taken by the BSP.

While the US adjusted its interest rate, our Monetary Board kept domestic rates steady. The expectation, however, is peso interest rates will be adjusted outwards sometime in the last quarter. That should help prop up the peso’s exchange rate.

Our monetary authorities are generally inclined to allow market forces to determine the peso’s value. Hefty remittance inflows and earnings from our robust BPO sector encourage this hands-off posture.

From the years when we had a healthy balance of payments profile, the country accumulated large international reserves that kept our exchange rates stable.  Our current gross international reserve is over $80 billion. This is due largely to the earnings of our migrant workers.

Lately, however, several factors worked against the peso’s exchange value. Government’s Build, Build, Build infra program will drive up importation of capital goods at a time when our exports seem to be weak. Foreign hot money, responding to better rates elsewhere, left our equities market for better earnings abroad. It is foreign selling that holds back our stock index from more reliably settling above the 8,000-point level.

Add to these the factor of “carry trades” or the practice of investors to borrow from countries with low interest rates to invest in countries with a higher interest rate regime. At some point, our monetary authorities will have to address this factor. If we keep our interest rates significantly lower than other jurisdictions, we could be vulnerable to carry trades.

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We could be nearing the end of the low interest rate regime brought about by international responses to the financial crisis of 2008. That low interest rate regime is the outcome of governments flushing money into their economies through large-sale bond purchases to spur growth.

The low interest rate regime encouraged businesses to borrow and invest. It helped ease cost of servicing sovereign debt. It encouraged countries to borrow and invest in strategic infrastructure upgrades.

Unfortunately for us, we did not profit optimally from the low interest rate regime globally. For six years, under the Noynoy Aquino administration, our government chronically underspent rather than pro-actively adopt expansionary measures.

When debt was cheap, we should have borrowed to the hilt and grow our economy faster. Diffidence rather than aggressive management was the hallmark of the previous administration, unfortunately.

Former president Noynoy Aquino was disposed to work less than work hard. He was indifferent to epochal opportunities and rare conjunctures. In addition, his Cabinet team was laid back at best and incompetent at worst. The Common Station that will link three commuter train lines will be a monument to the six years when nothing was done to realize this project.

By contrast, the Duterte administration seems hell-bent in pushing forward the modernization of the country’s logistics backbone. Unfortunately, the low interest rate regime might be quickly ending. This means we will have to pay more interest for the money we will need to borrow to finance the infra program.

There are winners and losers whenever the currency moves.

A cheaper peso will produce a financial windfall for families dependent on remittances. It will also spur our exports. However, a weaker peso could also force up the inflation rate.

A cheaper peso will, of course, cause fuel prices to rise since nearly our entire oil consumption is imported and paid for in dollars. It will make all imported goods, including capital goods, more expensive. Even electricity and water rates will rise because of dollar denominated debts invested to improve service.

We will have to trust our monetary authorities to develop a calibrated response to maximize gains and minimize costs for the economy.

In my unscientific and completely anecdotal view, however, the number of friends who vacation abroad during the long weekends suggests our currency remains overvalued even as it has fallen against the dollar.

Dinosaurs

Many vulnerable commuters are relieved the wildcat jeepney strike called for last Monday and Tuesday ended a complete flop.

The threatened strike, however, did cause economic damage. Classes were suspended in many areas for fear students will be stranded. Work was disrupted in many companies. There was distress everywhere.

Those of us who depend on services by networked transport services wish the LTFRB will be as harsh on the jeepney drivers. Jeepneys, no matter how obsolete they are, remain public services with a commitment to the riding public. They should not allow a wildcat strike such as this one intending to hold government hostage to scuttle a well-intentioned program.

The strike earlier this week meant to stop a modernization program, supported by soft loans, to encourage a shift to either electric or Euro-4 compatible engines. The striking drivers want no change at all.

Jeepneys may be a cultural icon. But they have become dinosaurs in the age of efficient transport. They are responsible for the murderous air pollution enveloping our cities. They tend to violate every traffic rule in the book. They are dangerous machines that load passengers at the back and force commuters into the most uncomfortable position imaginable during the ride.

While countries like China and Britain are seriously considering banning the production and sale of internal combustion engines sometime in the near future, these striking drivers want to keep on the roast the worst possible example of diesel transport.

Government should not allow itself to be blackmailed by drivers of this most obsolete mode of public transport.

 

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