{"id":104952,"date":"2017-04-18T10:04:16","date_gmt":"2017-04-18T14:04:16","guid":{"rendered":"http:\/\/countingpips.com\/?p=104952"},"modified":"2017-04-18T10:04:16","modified_gmt":"2017-04-18T14:04:16","slug":"the-philippine-peso-squeeze","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/04\/the-philippine-peso-squeeze\/","title":{"rendered":"The Philippine Peso Squeeze"},"content":{"rendered":"
April 18, 2017<\/div>
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By Dan Steinbock<\/strong><\/p>\n

In the first quarter, the Philippine peso depreciated against the US dollar. Internationally, this was attributed to President Duterte\u2019s policies. In reality, it has a lot to do with the expected US rate hikes. But there is a reason why misguided geopolitics now overshadows Philippines.<\/strong><\/p>\n

In the recent quarter, the Philippine peso depreciated by 0.88 percent against the US dollar. It was the only currency in Asia to do so. For the first time since 2009, the peso drifted to 50 per US dollar.<\/p>\n

Much of international media attributed the fall to President Duterte and his \u201cunlawful\u201d policies. The number of such reports has increased since last fall and escalated through the spring, particularly in US-based media, including some of the largest global financial news hubs.<\/p>\n

At best, these reports reflect an odd discrepancy between the fundamentals of the Philippine economy and the way it is portrayed internationally. At worst, they illustrate a gross misrepresentation of those fundamentals.<\/p>\n

The geopolitical peso story<\/strong><\/p>

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As the peso peaked at 50.40 in early March, international media saw the real culprit in President Duterte. who is \u201cinvolved in unlawful killings and corruption,\u201d as Bloomberg\u2019s Ditas B. Lopez put it. The headline told the story: \u201cAsia\u2019s ugly duckling of the year is the Philippine peso, thanks to Duterte.\u201d<\/p>\n

Actually, this narrative did not start in early 2017 when the Philippine currency began to weaken against the US dollar. It did not reflect news; it proactively shaped news. It began already in September 2016 when peso was still 46 against the dollar. From January 2017 back to September 2016, the Bloomberg author\u2019s Philippine stories included \u201cSoutheast Asia’s Worst-Performing Currency Is in for Another Tough Year,\u201d \u201cPhilippine Peso Completes Worst Month in 16 Years,\u201d \u201cDuterte’s Peso Rout Runs Counter to the Booming Philippine Economy,\u201d \u201cPhilippine Officials Seek to Soothe Investors Spooked by Duterte.\u201d<\/p>\n

Bloomberg was not alone. In the Barron\u2019s (March 22, 2017), William Pesek\u2019s headline tells the story: \u201cPhilippine peso\u2019s troubles just beginning.\u00a0The peso is down 8% and investors are dumping stocks amid doubts about Duterte\u2019s economic agenda.\u201d Here the peso is seen \u201cbuckling under the weight of a chaotic and distracted administration,” and “lots of body bags, more than 8,000 and counting.” The peso\u2019s fall is attributed to \u201cimpeachment talk\u201d (about Duterte). In the past investors, were \u201cclamoring for peso assets thanks to predecessor President Aquino\u2019s structural upgrade drive.\u201d<\/p>\n

Like many others, Barron\u2019s mistook Aquino\u2019s stated economic goals with his actual achievements. No questions are posed about the dramatic rise of the drug trade under Aquino’s watch, the complicity of public officials, and media silence about the drugs. Instead, marginal figures (Gary Alejano) with an anti-democratic mutineer record are presented as \u201copposition politicians.\u201d Flawed drug wars statistics is quoted as accurate. Senator Leila de Lima is<\/p>\n

portrayed as a figure of integrity, despite her gross abuse of public office and funds, and cooperation with drug lords. And Vice President Robredo\u2019s UN speech, which penalized her credibility, is presented as testimony of courage.<\/p>\n

Most distressingly, most of these accounts are quiet about the alleged Goldberg plan<\/a>\u00a0– that is, the alleged regime change plan by the former US Philippines ambassador to replace Duterte – which\u00a0advocated exploiting the Philippine public and private sector, along with international NGOs and international media, exactly in the way that these reports have done.<\/p>\n

Peso among Southeast Asian currencies<\/strong><\/p>\n

As the peso has depreciated against the US dollar, the Bangko Sentral (BSP) has put a positive spin to the story. In this narrative, the relative strength of the peso in the past plus lower inflation explains the currency stability.<\/p>\n

The story is largely true. Between 2009 and 2013, the peso strengthened against the US dollar from 49 to 41. In the past quarter, it weakened to 50.<\/p>\n

In international media, the fall was compared with the alleged strength of the Japanese yen, Korean won and other currencies. Yet, comparing apples and oranges may not be useful. The peso is an emerging-economy currency; yen and won are advanced-economy currencies. In the latter, per capita incomes are five times higher than in the Philippines.<\/p>\n

In Vietnam and Myanmar, per capita incomes are closer to those in the Philippines. In the past years, their currencies have also experienced strong depreciation. In contrast to the peso\u2019s 25% fall, the Vietnamese dong has weakened over 35% since 2009 and Myanmar kyat 55% since 2012.<\/p>\n

There is still another problem with the international media accounts about the peso\u2019s fall. It did not happen under Duterte\u2019s watch. Instead, it began in the middle of the Aquino era, with the Fed\u2019s exit from quantitative easing and the first rate hike around 2013 and 2016. That\u2019s when the peso fell from 41 to 48 per dollar.<\/p>\n

Last year, the Philippine current account did shrink to 1%, while the trade deficit soared to a record $25 billion, and the peso depreciated accordingly. Nevertheless, Philippine exports are expected to recover while remittances and business process outsourcing revenues should remain robust.<\/p>\n

The stability of the peso has not disappeared. In fact, in early April, when all Asian currencies took hits, the peso bucked the trend by rising on strong net inflows to the Philippines equity market. What this suggests is that investors are looking past the international media narrative and are instead focusing on the probable gains of the Duterte economic agenda.<\/p>\n

Strengthening dollar, weakening peso<\/strong><\/p>\n

As the Fed has exited QE and initiated tightening, US dollar hit its 14-year high\u00a0last fall. It has been fueled by rising government bond yields and the Fed\u2019s anticipated hikes) and expectations of Trump\u2019s fiscal expansion\u00a0via infrastructure stimulus.<\/p>\n

What makes the peso trajectory harder to project vis-\u00e0-vis the US dollar is the uncertainty associated with the dollar. As the US must borrow ever more to finance its trade deficit, rising debt is pushing America deeper into the red. In the last quarter of 2016, foreign ownership of US debt outpaced US claims on foreigners by $8.4 trillion, which means\u00a0a deficit that\u2019s almost half of US GDP.<\/p>\n

In contrast, the Philippines continues to enjoy significant long-term economic potential, even though – after\u00a0months of misguided stories about the Philippine economy – international investors have been spooked by their own media.<\/p>\n

As international focus lingers on political controversies associated with Manila’s regional rebalancing, the economic promise of the Duterte policies has been ignored. However, that’s not about economic fundamentals but about geopolitics.<\/p>\n

About the Author:\u00a0<\/strong><\/em><\/p>\n

Dan Steinbock is the founder of Difference Group and has served as research director of international business at the India, China and America Institute (US) and a visiting fellow at the Shanghai Institute for International Studies (China) and the EU Center\u00a0(Singapore). For more, see http:\/\/www.differencegroup.net\/\u00a0<\/a><\/p>\n

The original version of this commentary was published by The Manila Times on April 17, 2017<\/p>\n

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By Dan Steinbock In the first quarter, the Philippine peso depreciated against the US dollar. Internationally, this was attributed to President Duterte\u2019s policies. In reality, it has a lot to do with the expected US rate hikes. But there is a reason why misguided geopolitics now overshadows Philippines. In the recent quarter, the Philippine peso […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-104952","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104952","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=104952"}],"version-history":[{"count":1,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104952\/revisions"}],"predecessor-version":[{"id":104953,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104952\/revisions\/104953"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=104952"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=104952"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=104952"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}