Thursday, October 11, 2007

In praise of the cheap peso

The peso is getting more and more expensive relative to the dollar. Since about this day in 2005 to the present, the peso's value in dollar terms has risen by about 27% (from P56 to P46.23 per $).

This is to a big extent due to the overall weakness of the dollar, causing it to become cheaper against all currencies. Aside from this though is specific high demand for Philippine pesos from dollar-denominated funds, basically from foreign remittances and portfolio investment. The timing though is beyond explanation - for all we know this is the result of forces set into motion months or even years back.

The era of the cheap peso arrived after the Asian crisis, as hot money blew cold on emerging markets, and the Central Bank shifted more credibly away from exchange rate targeting to inflation targeting. Filipinos have since gone global, working overseas in droves, seeking foreign customers (both inside and outside the country) to earn suddenly valuable foreign currency.

So is the dearer peso a market-driven correction? Partly. I don't believe in a return to a P56 per dollar regime. But the current trend is disturbing, to say the least. At least one prominent economist is taking up the cudgels for a cheap peso, and a major businesss daily (Business Mirror) is backing him up.

Bringing back the cheap peso makes eminent sense. (Coming from Professor Fabella, we can expect no less.) No, capital controls and exchange rate caps are nowhere near the table. The target is policy choices that may be artificially propping up the peso. Government should now shift towards dollar-denominated options (borrowing, investment, debt pre-payments), in line with the cheaper dollar. (But no bilateral deals in the dark, please.)

But if I may be too malice-minded, perhaps our policymakers are relucant to return to the cheap peso. Their rhetoric of a strong peso being the sign of good macrofundamentals is particularly off-putting. Let's hope they keep an open mind about the concerns of our dollar-earners.

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