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Saturday, May 18, 2024

Free fall

“To discourage you from changing your pesos into dollar, you have to be penalized. That penalty is the higher dollar rate against the peso”

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The Philippine peso has sunk to its lowest since the currency was adopted at the then fixed exchange rate of P2 to $1 in 1946. Not to worry though.

The Philippines is one of the strongest and most dynamic economies in Asia. It will grow by an average of 6.5 percent per year – until 2028.

President Marcos Jr. has the most experienced economic team ever assembled by any chief executive, on top of the economy.

In February 1970, the government unpegged the peso from the US dollar to trigger a massive 69 percent devaluation, from P4 to P6.76 per dollar. Today, the peso hovers at P59 for every dollar. You can say the peso is at its historic 76-year low.

Albay Rep. Joey Salceda, a topnotch analyst, thinks the peso could sink further, to P65 to P68 per dollar which means the peso is about to be devalued, by as much as 34 percent, from its end-2021 average of P50.774, and by 41.56 percent, from its end-2020 average of P48.036 per dollar.

In 20 months thus, the peso will lose 41.56 percent of its value. The P100 you had in end-2020 will be equivalent to just P58.44 by end-2022.

Put another way, if you had $10,000 (or P480,360 in end-2020, that $10,000 can be exchanged for P680,000, a gain of P199,640 or 41.56 percent by end-2022.

Since the transaction is in dollar, the P199,640 gain is tax free, for an effective gain (assuming a 20 percent tax) of 61.56 percent in just 18 months.

The peso began moving down, against the US dollar, on June 4, 2021 – when the peso-dollar rate was just P47.568. Since June 2021, til Sept. 27, 2022 rate of P58.51, the Philippine currency has lost 23 percent of its value.

Why is the peso sinking?

The No. 1 reason is the strong dollar. The American currency is strong because the US Fed or central bank wants to bring inflation down to just two percent from 6.3 percent in July 2022.

To contain inflation, the Fed has increased its policy interest rate, three times, each by 0.75 percent, to 2.25 percent this year – its highest since 2008.

The Fed plans to raise its policy rate further to 4.75percent in 2023. From zero to 4.75 percent in less than a year – that’s super massive. The Fed has indicated it will continue increasing interest rates until “it gets the job done.”

Previously, in 1994, the biggest interest rate increases imposed by the Fed were a total 2.25 percentage points, after which it began cutting interest rates.

Since money commands higher yields in the US than here in Manila, naturally the tendency is for money in Manila to fly to America.

So you exchange your pesos into US dollars. Since dollar supply is not enough or is limited, the dollar reserves has gone below the $100-billion mark (to $98.97 billion as of end-August 2022), from its peak of $108 billion in 2021.

To discourage you from changing your pesos into dollar, you have to be penalized. That penalty is the higher dollar rate against the peso.

Demand for the US dollar is strong. This is because of food consumed by Filipinos is imported; 92.2 percent of all oil in the Philippines is imported, per Joey Salceda’s data.

America’s relentless rate increases are causing turmoil worldwide. There is no immediate relief in sight.

Reports The Economist in its latest issue, however: “Around the world, financial markets look increasingly distressed. In Britain government-bond yields have surged (see chart) and sterling has slumped, prompting the Treasury and Bank of England to issue statements attempting to soothe markets.

“In Japan the government has intervened in foreign-exchange markets to stem the fall in the yen for the first time since 1998.

“In China the central bank has increased reserve requirements for foreign-exchange trading, in a bid to restrain currency outflows.

“At the heart of the turmoil is the relentless rise of the American dollar and global interest rates. There is little relief on the horizon.

“Each market has its own idiosyncrasies. Britain’s new government plans the country’s largest tax cuts in half a century. Japan is attempting to keep interest rates at rock-bottom levels, bucking the global trend.

“China’s government is struggling with the consequences of a “zero-covid” policy that has isolated it from the world.

“But all face a shared set of challenges. Most of the world’s currencies have weakened markedly against the dollar. The dxy, an index of the dollar’s worth against a basket of rich-world currencies, has climbed 18 percent this year, reaching its highest in two decades. Persistent inflation in America and the simultaneous tightening of monetary policy are making markets febrile.

“Just before the wild volatility of the past week, the Bank for International Settlements, a club of central banks, noted that financial conditions had turned, as central bankers’ commitments to interest-rate rises were priced in by markets and liquidity in the American government-bond market deteriorated. After a brief and modest uptick in August, global stocks have hit new lows for the year: The msci All Country World Index is down by 25 percent in 2022.

“Stress is clear elsewhere, too.

“American junk-bond yields have climbed back to almost 9 percent, more than double their level a year ago. Corporate bonds that are just inside investment-grade quality, with ratings of bbb, yield almost 6 percent, the highest for 13 years, according to Bloomberg.

‘Volatility is expected by corporate treasurers, investors and finance ministries. Hedges are purchased and plans made accordingly. But conditions have now strayed far beyond expectations.

“Just a year ago, few forecasters predicted double-digit inflation in many parts of the world. When markets perform worse than anyone had previously expected, problems emerge and policymakers face a menu of bad options.

‘The Federal Reserve’s commitment to crushing inflation no matter the cost is clear.”

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