By Amado P. Macasaet
Free market economies go through two cycles: Expansion and contraction. The US economy contracted severely when its home mortgage market collapsed. The contraction was so severe the Fed had to sell $85 billion a month in state bonds to create money, solve the unemployment problem mainly to create more jobs that in turn pushes demand.
While Federal support was at work, the dollar continued to weaken against all currencies. The dollar’s weakness is the peso’s strength, contrary to the general belief that every time the US sneezes the Philippines catches a cold. The US caught the cold instead of just sneezing. The peso benefited from it.
As the economic fundamentals in America continue to improve particularly in job creation, the dollar is starting to regain strength. The rest of the weaker currencies began to weaken.
As a former US treasury secretary told his European counterpart, “our money, your problem” or words to that effect.
There are strengths and weaknesses that result from the weakening peso brought about by the strong dollar. The weakness may have a tendency to develop internal economic strength to avoid expensive imports.
Just as important, the Filipino exporters get more pesos from the strong dollar. However, this is left practically meaningless by the fact that more dollars have to be used to import components for manufactured exports.
The bigger benefit accrues to the dependents of overseas workers. For the same amount of dollar remittances, the dependents get more pesos. The result is a push in demand. The not too funny part is the economy has to spend more dollars to fill demand for goods, mostly consumer precisely because we have not created enough internal strength.
One cancels out the other. That is the reason I guess a strong dollar that makes the peso weak may awaken the minds of regulators and the private sector to try developing internal strength.
If this effort succeeds, we would hardly care which way the dollar goes although as the world’s major trade currency, a strong dollar will continue to bring about strengths and weaknesses to emerging markets.
I hold the opinion the strong dollar is not a threat to the Philippine economy not only because of the benefits and the punishments mentioned above. I thought the biggest ever amount of gross international reserves pre-empts currency speculation, the most serious threat to dollar supply no matter how big, in a market economy.
I thought monetary authorities headed by BSP Governor Amando Tetangco saw all these. Before they could come upon us the Monetary Board adopted macro-prudential measures. Slowly, the Monetary Board siphoned off excess liquidity which, if not checked, could have resulted in “hoarding” of dollars in anticipation of the inevitability of the peso tending to get weaker when the US currency becomes stronger, as it is now stronger.
This is not exactly speculation. It is inspired or may have been made necessary by the fact that the financial system is so stable and strong such that it is now extremely difficult to find an investment instrument with lesser risk that assures returns of close to 10 percent a year.
As repeatedly asserted here it was precisely the want for better yields that saw plenty of money going into shares of stock in the Philippine Stock Exchange. This is bolstered by quarterly reports of rising profits of listed companies who share their fortunes with the stockholders in the form of reasonably regular cash dividends. Under spending does not figure in any of these desirable economic situations. Growth has to be sustained by spending more borrowed money since the budget is never enough to fill the General Appropriations Act. The path to higher level of economic development cannot be blocked by the refusal of government to spend more.
Economic Secretary Balisacan and Public Works and Highways Secretary Rogelio Singson should have thought of over-spending much earlier.
The President should have ordered key agencies to come up with more vital projects, such as infrastructure and at the same time told Budget Secretary Florencio Abad to cough out the money borrowed by the National Treasurer.
Finance Secretary Cesar Purisima should have borrowed more from the public considering low interest rates and the search for sovereign liabilities by private investors who gobble up state borrowings.
It is strange the Aquino government does not spend enough for the economy at a time when the cost of money is so cheap it can lay its hands on oodles upon oodles and pay less.
The NEDA suddenly woke up to the necessity of spending more. Almost late! But better late than never! The strength or weakness of the peso has nothing to do with over-spending for the economy. It will pay for itself in time.
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email:amadomacasaet@yahoo.com
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