Friday, February 10, 2006

Rallying Peso not an indicator

February 7, 2006


Contrary to the claim of Malacanang’s economic managers, a rallying peso
does not mean that the economy is resurging, says independent think-tank
IBON Foundation.

According to IBON senior researcher Sonny Africa, the peso appreciation is
far from being a categorical sign of a strengthening economy. “On the
contrary, it is due to a combination of unrelated factors, none of which
points to a robust economy,” he says.

The peso, which reached P51.74 per dollar last Monday, has been
appreciating relative to the US dollar mainly because there has been an
increase in the supply of dollars in the country. But the increase in the
supply of dollars is a result of factors that are actually disadvantageous
to the economy, such as OFW remittances and the inflow of “hot money”,
says Africa.

OFW remittances, recognized as the country’s single biggest net source of
foreign exchange, were equivalent to around 19% of gross national product
(GNP) over the period-- surpassing foreign exchange earnings of
electronics, garments and textiles net of imports, and export earnings
from raw materials and agricultural commodities. But according to Africa,
“The government cannot take credit for the efforts of millions of OFWs
seeking decent lives for themselves and their families and, indeed, it
should even be scored for not creating the conditions for enough decent
work within the country.”

The second major source of increased foreign exchange has been portfolio
investments. So-called “hot money” increased 452% in the January-September
2005 period compared to the year before, to a net inflow of US$3.2
billion. But these net portfolio investments are mainly the result of
excess global liquidity coming into the Asian region stemming from a long
period of very low short-term interest rates in virtually all the
developed economies. More importantly, these flows remain basically
external sources of foreign exchange that expose the country to external
shocks far beyond its control, says Africa.

Part of the factor that brought in “hot money” flows is the full
implementation of the reformed VAT this month. This only shows that
foreign investors are certainly more concerned about the implementation of
the amended VAT law than the condition of the people, adds Africa. “Public
sector creditworthiness ultimately influences to what extent they can feel
secure that their footloose investments and its profits can be pulled out
of the country,” he says.

“The most important question is if the increase in dollar supply, and the
corresponding peso appreciation, is due to a fundamental strengthening of
the real economy– which would be the case if domestic agriculture and
industry are producing goods that other countries are demanding and so
need to buy pesos with which to purchase these,” says Africa,
“Unfortunately this isn’t the case.”

“Thus, against the backdrop of deepening misery of millions of poor and
hungry Filipinos and the problems of an ailing economy, the gloating by
the country’s economic managers about the appreciating peso is
unwarranted,” says Africa. (end)

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