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The Amazing Peso Appreciation - John Mangun

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Following recent events in Manila, which on all indictations were seemingly bad for the peso-dollar, is it not strange to see the peso performing better than usual?

Most people with barely a rudimentary knowledge of economics maybe misled by certain economic claims of the government officials and unfounded analyses on TV, me included.

While it may not be an official policy of the government to create disinformation, shouldn't citizens have right to accurate information?

Unfortunately, diplomats or not have ways to circumvent that by saying half-truths - which while not really true at all, are not exactly false either. I'm posting here an excellently written piece by John Mangun explaining the seemingly amazing gain in value that the Philippines peso has been showing in the past weeks. Superbly written, and yes, most amazing of all, it's purely economics, strictly no politics:

Date: March 13, 2006
Author: John Mangun
BUSINESS MIRROR
From his Column " Outside The Box"

"The Amazing Peso Appreciation"


The Philippine Peso is a very `minor' currency in that there is virtually no trading in the international currency markets. All trading, that is the buying and selling of the Peso that determines the exchange rate, is done right here through the local Philippine dealing system. The free market should price the Peso at a level that would create equilibrium between demand for dollars and desire for Pesos.

A further aspect of a currency exchange rate is that, if the market is relatively free as through the Philippine dealing system, short-term fluctuations mean little in the broad scheme of things. Even what might be considered a trend over several months as we have witnessed, is no indicator of either long-term investor sentiment or of economic growth and stability.

Regarding the thought that investor sentiment is found in the Peso rate, that idea is simply not true. The administration can look to a rising Peso as an indicator of support either personally or of its handling of recent events, however, that idea is false.

While it is true that currency rates can reflect short terms delight or despair over a government and its policies, that does not hold true in the short run. For example, many years ago when George Bush 1, fell sick at a Japanese state dinner, the dollar immediately dropped. When he was found to be healthy, the dollar rose in price and the speculators made a lot of profit. Nothing of economic significance had changed in those few hours. It was only as if some speculators were betting Bush was going to die; others betting he was going to live and the US Dollar market was a place to gamble.

The reason the world currency market can be a type of casino is that a large amount of the trading in major currencies is speculative in that the traders have no desire to take physical possession of or use the foreign money that they purchase.

The same is not true for the Philippines. The amount of speculative purchases in this country is almost non-existent. You do not use the Peso to "bet" on or against the Administration. This is because, essentially, the Bangko Sentral can control all
transactions. In addition, in the international markets, traders can buy and sell directly to each other, whereas here, all transactions are coursed through the banking system. Finally, the market is so small, the BSP so large in comparison, and trading controlled locally, that if, say a George Soros wanted to crush the value of the Peso as he did in Malaysia a decade ago, the BSP could intervene not only through buying Pesos, but by stopping Peso trading, and Soros' trading intentions would be thwarted.

The rise in the value of the Peso in the last quarter of 2005 was caused by legitimate demand for Pesos as increased remittances through the banking system created a true demand for Pesos and free market trading reflected that demand in a higher valued Peso.

However to believe the recent Peso appreciation reflects real Peso demand or,
as the administration tells us, foreign investor confidence is to assume two wildly improbable scenarios.

The first is that a group of foreign investors, in New York or Tokyo, viewed the recent events and concluded that they should immediately buy US$50 million worth of Pesos and open a call center because they are so happy the President is still in power and are pleased with the way that the Administration handled the situation. Sorry, real business life does not work that way.

The other false scenario would be that these same investors, although not wanting to
build a call center, decided to buy US$50 million worth of Pesos as a "sign of support" for the Arroyo administration. I have been involved the foreign currency markets for almost thirty years as a professional trader and currency analyst and I guarantee you both scenarios, as are the administration's pronouncements, pure foreign exchange fantasy.

Understand clearly that I am not making any implication that the BSP is manipulating the value of the Peso. The BSP is not under any circumstances, even trying to control the Peso rate to make it go higher to supposedly make the Arroyo Administration look good. They know better. If the BSP were doing that, then people like Soros could and would come into the market to take advantage of the situation. Currency traders are like large sharks that attack at the first smell of blood. And there is no juicer fresh meat for traders than a central bank, especially a central bank with only US$20 billion in foreign currency reserves, which is trying to control currency prices. Remember Soros took on and beat the Bank of England and Malaysia's Bank Negara. Our central bank would merely be an easily digested finger food if the BSP gave currency traders the signal that they wanted to battle.

What the BSP has done is to use its monopolistic power to force Peso buyers to accept
fewer Pesos for their dollars. Exporters that have received an overseas payment of
US$100,000 are forced to buy Pesos at 51 not 54. They have no other choice. It is not that there is any greater demand for Pesos, which would normally account for an increase in the value of the currency. It is simply that the BSP has temporarily `fixed' or set the price to their desired level.

Isn't this manipulation you might ask? No, because a `stronger' Peso creates demand from the importer side of the economy. Imagine how much the oil companies favor a stronger Peso as it reduces their oil import costs. As they see the Peso rising, they are encouraged to `help' the BSP push the Peso value higher.

Allow me to illustrate this idea by a silly example. You give your driver a P10,000 a month salary increase, but he must pay for the all the gasoline. Give your maid P20,000 but she buys the family's food. Now you can tell everybody how rich you are because you can afford to pay your household employees so much.

The same is true for the Philippine economy. Importers will lose a little; exporters may gain a little. The big winner of a higher Peso is the government is it reduces their obscene debt burden. The idea is that everybody wins, or failing that, maybe at least nobody loses. . . . much. . . . sort of.

---

What's eating Jardine Davies? Hmmm... Get's me to thinking huh! What do you think batinktink? If the last paragraph were true, how much of truth is there in hyper-wage theory as a solution to mystery of the Philippine Economy?

Labels: , , ,

posted by Jdavies @ 3/13/2006,

3 Comments:

At 3/18/2006 04:43:00 AM, Blogger Ederic said...

Uy, may updates na. Econ? Teka lang, magko-concentrate muna ako, tol. :p 

Posted by ederic

 
At 3/18/2006 11:40:00 PM, Anonymous Anonymous said...

thank you for your kind comments. i appreciate it
regards
john mangun 

Posted by john mangun

 
At 3/21/2006 07:24:00 PM, Blogger Jdavies said...

hehehe well meron na naman. Just took a long time before i did post one. John's article is so irrestitable not to post! 

Posted by jdavies

 

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The Author

J.Davies

Jdavies lives in Quezon City, Philippines and has been blogging since 2002. A brand manager in a leading technology company and a freelance new media/web strategy consultant, he has refocused his blogging from personal, political & sociological observations, to marketing-related efforts and Internet trends that are relevant to his career and branding advocacies.


About This Blog

This blog is a depot of thoughts and observations on marketing trends which remain personally relevant to the Author as far as his marketing career is concerned. Having evolved from the personal blog of Jdavies, much of the earlier work contained herein are laced with personal speculation, political views, and similar advocacies. These posts are being kept for posterity's sake and for no other reason. No effort is being made to claim that the author will not contradict himself from his previous positions or that such advocacies are absolute.

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