The peso and the Big Mac

With the Philippine peso hitting a 12-year low against the US dollar, it is possible at any time that we may see groups of people performing special dances to appease the foreign-exchange gods. Likewise, others are sticking pins in dolls fashioned to look like their favorite economic villain.

However, the issue of the foreign-exchange rate is more complicated. In theory, the value of a nation’s currency should move along the money flow. That is, if the Philippines is buying more dollars than it is selling, then the peso should depreciate. Certainly, the current peso depreciation is partly due to our negative trade balance.

Yet, this is the age of globalization and speculation, and we are operating in an environment of “fake”—artificially controlled outside of demand—interest rates. The Philippines is lumped in the broad brogue of “emerging markets [EM].”

The four largest EMs are Brazil, Russia, India and China. Other EMs include Bangladesh, Argentina, Turkey and Nigeria. When big money invests in either the stocks or currencies of the EMs, performance is measure by the moves of an index that tracks all the EMs. The Morgan Stanley Emerging Markets Index takes in 24 countries. Therefore, if that index is in a downtrend, fund managers adjust their portfolio, virtually selling across all those 24 nations.


When the Argentine peso falls 30 percent this year and the Turkish lira drops 15 percent in the past month, there will also be Philippine peso selling. Big money is trying to stay with the trend.

While the economy and, more important, the average Filipinos are being negatively impacted by a weak peso, short-term intervention by the central bank is not a good long-term solution.

We must ask if the current low peso-exchange rate is justified and by what measure. The Big Mac index, published by The Economist, is an informal way of measuring the purchasing power parity between two currencies and provides a test to which market exchange rates result in almost the same goods costing the same in different countries.

Therefore, based on the exchange rate, is a Big Mac “expensive” or “cheap”? If the hamburger is cheap, then that means the local currency is undervalued, and the exchange rate should be higher. If it is expensive, then the currency is overvalued.

Using the Big Mac index for 2009, the Philippine peso was undervalued (cheap) in relation to the US dollar by 38 percent. The dollar-exchange rate then was 45.92. For 2017 the peso was undervalued by 50 percent with a 50.70 exchange rate to the dollar.

Vietnam, Turkey, India, Indonesia, Mexico and South Africa also started 2018 with their respective currencies undervalued by around 50 percent. With the exception of Vietnam, whose currency is not fully convertible, all the other currencies have depreciated more against the dollar.

If all these EM currencies are even cheaper by the Big Mac index and lower against the dollar than six months ago, what is the conclusion?

The greatest concern for most of the EMs—the Philippines an exception and excluded—is their dollar-denominated debt, particularly in light of an appreciating dollar. Both Turkey and Argentina are in serious trouble with regard to paying their debt, and this becomes more serious with their falling currencies. Unfortunately, the Philippines is painted with the same brush.

The declining peso is a problem. But it is not because of serious local economic problems. Further, there is little that we can do about it. Argentina just raised interest rates to an economy-killing 40 percent, but its currency still went down. In our case, maybe the best solution is to change the name of our currency. Maybe we could call it the “Philippine Rizal.”


Image Credits: Jimbo Albano

Turning Points 2018
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