Measured by value, it is the largest business in the world and the biggest in the Philippines. But it is almost impossible to find anyone outside of the industry that has the slightest understanding of how the business works.
On a big trading day the Philippine Stock Exchange trades P10 billion worth of shares. On an average day, the local foreign currency exchange market trades P25 billion, all buying and selling the Philippine peso using US dollars.
Although I have also said it many times, it is totally inaccurate to say that “it is not that the peso is strong; it is that the dollar is weak.” There is no such thing as “weak” or “strong.” Maybe a better way to look at it is “heavier” or “lighter,” like on one of those old balance scales.
You put an object on one side and another on the other side. The heavier one pulls the scale down, in this case, that’s because more people want to own pesos rather than dollars.
Money is flowing into the Philippines—mostly US dollars—that are converted to pesos to be used domestically rather than pesos being converted into dollars to be used abroad.
You can see money being stored all around in the economy and it is being stored in pesos. Hence, the local currency is “heavier” than the dollar. People are buying less-expensive local sardines rather than Chinese “Spam” and saving the difference. The amount of personal savings in banks is up 13 percent year-on-year by P600 million.
Net inward capital flow was P850 million or 17 percent higher in March 2020 over March 2019. Even as remittances have fallen, the lowest monthly amount for 2020 is still above $2 billion. Let’s hope it stays close to that level.
People read this headline—“US Dollar Suffers Its Worst Month in a Decade”—and think there is a problem. In fact, that is the only thing that is keeping many countries from debt disaster. Japan’s huge debt is 90 percent domestic. They do not need dollars to pay their debt.
But Greece and Turkey both owe about $450 billion, payable mostly in US dollars. Indonesia owes $390 billion and Thailand has $165 billion in dollar debt. The Philippines’s debt is $84 billion. Both Thailand and the Philippines have enough foreign exchange reserves to cover their total debt if ever needed. But Indonesia’s foreign debt is three times its reserves, with Turkey’s debt at nearly 10 times its reserves and Greece with debt at an astounding 50 times its reserves.
A “strong” dollar means it costs more in local currency to service the debt and we found out in 1997 that can quickly kill an economy. Ask Thailand and South Korea.
Before March, there was a large global dollar shortage as countries scrambled for dollars to pay their bills. In March alone, emerging economies lost around $1.5 billion in foreign exchange reserves per day. Since March, the US Federal Reserve has pumped $2.5 trillion into the global system to weaken the dollar to keep nations like Greece and Turkey from defaulting. The Fed’s balance was increased by a 60 percent.
Be glad the Philippines is not desperate for a “strong” peso. But it does help reduce the cost of our debt servicing as well as imports.
E-mail me at firstname.lastname@example.org. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.