Wednesday, August 26, 2015

Currency wars: Thailand shivers but Philippines has lESS to fear

Fears of currency wars - when governments deliberately depreciate their currencies to help boost demand for their exports - are intensifying. The recent move by Vietnam to devalue the dong after China allowed the yuan to weaken early this month has fuelled the global anxiety.


Countries that rely heavily on exports - be they emerging markets such as Vietnam, Thailand, Indonesia and Malaysia or developed economies like Japan and South Korea - maintain a close watch on their currencies to keep them competitive against those of other export-dependent countries. Japan and South Korea, for instance, have been at odds after Tokyo moved to weaken the yen. Seoul complained that the yen's weakness against the dollar was making it harder for Korean exporters to compete. Last year, South Korea retaliated, and after 12 months the won fell in value against the dollar by about 15 per cent.

The Philippines used to rely on exports of commodities such as metals, sugar and coconut oil to fuel its economy. Today, although its economy has become less dependent on commodity exports, the Bangko Sentral ng Pilipinas (BSP) still ensures that the value of the peso remains inexpensive relative to the currencies of the Philippines' regional competitors.

With the Philippines no longer so dependent on exports, it would be impractical for the country to join the currency wars and force the peso down against the dollar. As BSP deputy governor Diwa C Guinigundo has warned, directly devaluing of the currency or reducing interest rates to induce its weakening would not make much sense, and there could be unintended and unwelcome consequences.

True, a weaker currency can help exporters. However, it also makes imported goods more expensive for the local population. Also, the cost of servicing foreign debt rises with a weaker currency. Philippine exporters might lose competitiveness in other countries where currencies have weakened substantially.

Dependent on exports

Note, however, that the countries that are devaluing their currencies have economies that rely heavily on exports. In contrast, the Philippine economy stands on domestic pillars, namely, consumption fuelled by billions of dollars in remittances and BPO (business process outsourcing) earnings, private investments in manufacturing and property, and increased government spending.

This is not to say that the Philippines will be totally spared the effects of an outbreak of currency war elsewhere. With all bets now on US interest rates increasing next month, "hot money" (foreign funds invested in short-term instruments such as stocks and bonds) is leaving emerging markets, and the Philippines has not been spared. This will add pressure to the peso as the demand for dollars increases. Once the peso weakens, government and private corporations, which have borrowed offshore in dollars, will need more pesos to service those obligations.

The Philippines may take comfort in the fact that currency wars would make a more severe impact in export-dependent countries. Oil-exporting Indonesia and Malaysia, for example, will suffer from the combined effects of a weaker currency (after "hot money" leaves) and collapsing crude prices (down by more than half since last year).

Most economists frown on currency wars, branding them "desperate measures" that destroy domestic consumption and incomes, private sector investment and the country's overall credibility.

Capital flight and debt worries

Currency wars also trigger capital flight that, in turn, adds pressure on the currency, causing it to weaken further.

Experts also cite the risk of governments and corporations borrowing abroad to take advantage of lower interest rates outside the country. Sharp depreciations in the value of their currencies will only make servicing the debts more expensive, thus negating the cheap nature of the borrowed funds. The fact is, many emerging market-countries and their banks and corporations have been borrowing in dollars to get access to lower interest rates.

Philippine exporters who are complaining should listen to Guinigundo. Competitiveness for exporters, he points out, comes easy with devaluation. However, the more durable and sustainable sources of external competitiveness go beyond that. They include a lower cost of electricity, lower cost of doing business, better quality goods and quick turnaround time. Philippine Daily Inquirer

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