Challenging times

To be fair, even if Leni Robredo was president today, the peso to dollar exchange rate would still show historic weakness. That’s because it is largely a reaction to the US Federal Reserve’s interest rates hikes to fight inflation.

The strong dollar causes investors to shift to the higher yielding and “safer” dollar. The dollar is considered a safe haven in times of financial volatility. This is called capital flight from our perspective as an emerging market.

The difference a Leni Robredo presidency would have made among investors is credibility. Perhaps the peso may not depreciate as fast. But in the end, world economic factors rule.

The optimistic forecasts of our economic managers aside, we are facing challenging times. Finance Secretary Ben Diokno has always been hopeful, and hope is always good. But being realistic is even better because you prepare for any eventuality.

Here is how Fitch Solutions sees it for us: “Inflation is likely to remain elevated relative to the BSP’s target range of two to four percent and we expect the central bank to tighten monetary policy further to anchor inflation expectations.

“The Philippine peso has also come under significant pressure as a result of tightening credit conditions globally. With the US Fed likely to hike by a further 75 bps before end-2022, this will likely prompt the BSP to hike in tandem to safeguard external stability.”

There are other things too. The Russian invasion of Ukraine raised the price of oil, coal, and other commodities, specially wheat, corn, etc. This is reverberating on our economy.

Then there are the growing negative effects of climate change on natural weather patterns. More destructive typhoons, like the one we just had, affect food production.

Some people think the peso’s exchange rate with the US dollar is a measure of our economy’s health. It is actually more complicated.

We are particularly vulnerable because we are basically an importing country. We import almost everything we need from basic food like rice, pork, chicken, beef, vegetables, sugar and even salt.

Unlike our neighbors, we hardly export anything. We used to export sugar and copra, but not anymore. Most of our dollar earnings are from OFWs and BPOs, and from the assembly of semiconductors.

It is easy to see why the peso is falling fast. Look at the sharp increases in our trade deficit. We are spending more dollars than the dollars we earn. That puts pressure on the exchange rate.

For the first seven months of the year, our trade gap surged to $35.74 billion from $21.46 billion in the same period in 2021.

As a result, our overall Balance of Payments (BOP) position posted a deficit of $1.8 billion in July, a reversal from the $642 million BOP surplus recorded in the same month last year. BOP is a summary of the economic transactions of a country with the rest of the world for a specific period.

The cumulative BOP deficit for January-July this year rose to a $4.9 billion deficit, higher than the $1.3 billion deficit recorded in the same period a year ago.

Based on preliminary data, this cumulative BOP deficit reflected the widening trade in goods deficit. Also, more dollars flowed out of the country to pay for the government’s foreign debt.

Let us not be misled by a positive BOP every time we borrow abroad. The proceeds are booked as forex coming in and makes our negative BOP look positive. The details matter.

But of more significant interest to ordinary folks is rising prices of goods and services, otherwise known as inflation. My wife observed that prices of items in her grocery list have significantly increased in recent weeks.

The BSP’s latest baseline forecasts show that average inflation is still projected to breach the upper end of the two to four percent target range at a high 5.6 percent this year. The forecast for 2023 has also increased slightly to 4.1 percent.

Noting that price pressures continue to broaden, the Monetary Board (MB) raised the policy rate anew. Higher interest rate is supposed to suppress some demand pressures and lower inflation. That’s the theory anyway.

But there are limits. The MB’s raising of interest rates does little to mitigate energy and food price inflation. Also, raising interest rates will make the government need more funds to service its local debts.

In their statement following the last rate increase, the MB noted:

“The rise in core inflation indicates emerging demand-side pressures on inflation. Moreover, second-round effects continue to manifest, with inflation expectations remaining elevated in September following the approved minimum wage and transport fare increases…

“The risks to the inflation outlook remain tilted toward the upside until 2023 and broadly balanced in 2024. Price pressures may continue to emanate from the potential impact of higher global non-oil prices, pending petitions for further transport fare hikes, the impact of weather disturbances on prices of food items, as well as the sharp increase in the price of sugar.”

Realizing that raising interest rates can only do so much, the MB also “urged the national government to implement timely non-monetary interventions to mitigate the impact of persistent supply-side pressures on food and other commodity prices.”

That’s more urgent now in the aftermath of Typhoon Karding. Junior’s ability to adequately respond will now be severely tested.

First item on his headache list is rice. The typhoon hit Central Luzon, our main rice growing region just as the harvest season was starting.

The Department of Agriculture’s initial estimate of damage caused by Super Typhoon Karding to the agriculture sector is P141.4 million and is expected to rise. The typhoon affected 16,229 hectares of farmland and 740 farmers and fisherfolk, leading to the loss of 5,886 MT of produce.

Affected commodities include rice, corn, and other high-value crops. Will we have enough rice for Christmas?

Finally, there is also another factor affecting how the world sees the peso’s value. Political risk. It is high in the list of considerations currency traders have, and our political risk sucks.

Let us fix our economy by encouraging local and foreign investments, and reform our governance structures to make investors comfortable. Basic stuff.

Is Junior up to the challenge?

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco