The dollar to peso exchange rate should be $1 = P54

At this time when the bigger problem is to re-grow the Philippine economy that has been pummeled by quarantine, the government needs all the initiatives to jumpstart businesses that have been idle or closed, and restore the purchasing power to consumers. Managing the foreign exchange rate is part of the options of the Bangko Sentral ng Pilipinas (BSP), being part of the government, in infusing additional liquidity to the financial and banking system.

The classic response of economists since the Great Depression and in subsequent economic meltdowns worldwide in individual countries has always been to pump prime the economies by injecting additional liquidity into the system. Governments would go on a deficit spending, i.e. spend more than their tax collections and other revenues, by borrowing from the private sector, from foreign/multilateral institutions or from their Central banks. As long as the debts are paid interests and its proportion to the total economy or GDP is not excessive, these debts can be carried forever. The rest of the world including the Philippines are doing this now, that all the COVID-19 mitigation expenses, subsidies and business bailouts and support will likely reach $20 trillion before the end of the year. This is 25% of the global GDP in 2019. Whether this will succeed, and how fast and effectively it will revive the economies is the issue. It is also a matter of how and when these actions are done by the governments and the monetary authorities.

So far, the Philippine government have disbursed P240 billion as subsidies to the lower class and for medical needs for the COVID-19 pandemic. The local government units must already have disbursed another P40 billion. The private sector from companies and families, probably have contributed another P100 billion. Then there is another P1.3 trillion economic stimulus package that will be passed next month. The BSP has lowered benchmark interest rates, lowered required reserves, and bought up government securities. Some emergency loans have been disbursed by the GSIS, SSS, and Small Business Corporation. But it seems there is still not enough liquidity and the businesses are apprehensive that there will not be low interest loans for them to continue their businesses.

The problem is in the delivery. The government is not able to deliver the funds or liquidity to the recipients as demonstrated by the SAP subsidy distribution, plagued by problems and taking many weeks. Then the government funds for the gov’t agencies and the local government, including for the infrastructures aren’t disbursed because of the lack of absorptive capacities of the agencies or local units. The government has the money, but it isn’t being disbursed productively and effectively due to bureaucracy and leakages due to corruption. The additional liquidity provided by the BSP is stalled in the banks as the banks are hesitant to lend due to the diminished credit quality of the borrowers. The banks are parking their excess funds in government securities even at 1.5% for less than 1 year, 2.45% for 10-year bonds and 2.95% for 25-year bonds.

To resolve this dilemma, the BSP has to infuse more liquidity to the financial system by buying more dollars to bring up our international reserves to $100 billion by June 30, thereby infusing another P500 billion to the economy. The lower OFW remittances, BPO earnings and exports will deteriorate the peso-dollar exchange rate to P54 in a year’s time, so the BSP should just take advantage of the possible exchange profits. This will also be good for the repatriated and the remaining OFW families, BPO workers and exporters. The BSP should also accelerate the promised reduction to single digits the banks reserve requirement by June to infuse another P400 billion to the economy.  These infusions will bring benchmark interest rates and gov’t borrowings to 2% and push banks to lend to private borrowers at 4% to 7%.

The concern of the BSP that these moves will cause inflation to rise, which is anathema to their inflation targeting mandate, is mitigated by the reality that “money velocity” slows down by half during crisis times as people hoard cash or savings. If money velocity is 2 in normal times, it will be 1 in the “new normal” for a long time. These are times for the BSP to be more aggressive and immediate in their actions.