Cur­rency woes im­pact Philip­pines econ­omy

The China Post - - COMMENTARY -

Main­land China shocked global fi­nan­cial mar­kets last week when it al­lowed its cur­rency, the yuan, to fall in value against the U.S. dol­lar for three straight days, fu­el­ing fears that the world’s sec­ond-big­gest econ­omy was slow­ing down more than what ex­perts had ex­pected. Stock mar­kets in Asia and Europe suf­fered wide­spread losses and many cur­ren­cies in the re­gion weak­ened.

On Fri­day the bench­mark Philip­pine Stock Ex­change in­dex (PSEi) closed at 7,408.44, down 126 points, or 1.67 per­cent for the week. The peso closed at 46.215 to the U.S. dol­lar from 45.755 at the start of the week.

The same was true for stock mar­kets and cur­ren­cies of coun­tries in Asia and even Europe.

The move of the Peo­ple’s Bank of China to de­value the yuan fol­lowed a se­ries of un­fa­vor­able eco­nomic data: an 8-per­cent slump in ex­ports, a slow­down in in­vest­ment growth, a lower-thanex­pected 6-per­cent growth in fac­tory out­put and the 6.6-per­cent drop in car sales for July.

Af­ter the main­land Chi­nese cen­tral bank’s ac­tions last week, the yuan fell to its low­est against the U.S. dol­lar in four years.

The sur­prise move on Tues­day was the big­gest one-day fall in the yuan since the 33-per­cent one­time de­val­u­a­tion in 1994.

The next day, it fell to 6.43 against the dol­lar, its weak­est since Au­gust 2011.

Another 1.1-per­cent de­pre­ci­a­tion was al­lowed on Thurs­day, un­til the main­land Chi­nese cen­tral bank halted the slide on Fri­day.

A cheaper yuan will help main­land Chi­nese ex­porters by mak­ing China-made prod­ucts less ex­pen­sive in for­eign mar­kets.

Fi­nan­cial an­a­lysts agreed that China’s move was de­signed to boost ex­ports, which had been slow­ing as the yuan got over­val­ued.

Since it was pegged to the dol­lar, which has been ris­ing re­cently in an­tic­i­pa­tion of the U.S. Fed­eral Re­serve Board’s in­crease in in­ter­est rates by Septem­ber, the yuan also rose in value in step with the dol­lar’s rise, mak­ing main­land Chi­nese goods more ex­pen­sive com­pared to re­gional ri­vals, par­tic­u­larly South Korea and Ja­pan.

At the same time, China is un­der pres­sure from the In­ter­na­tional Mon­e­tary Fund (IMF), which has backed China’s move to let its cur­rency float.

China has been urg­ing the mul­ti­lat­eral lend­ing agency to in­clude the yuan in the IMF’s bas­ket of re­serve cur­ren­cies, known as Spe­cial Draw­ing Rights.

The yuan’s in­clu­sion would be a big step in its in­ter­na­tional ac­cep­tance.

Some an­a­lysts have de­scribed the de­pre­ci­a­tion of the yuan as a win-win move for China: It was mak­ing it ap­pear that it was al­low­ing mar­ket forces to de­ter­mine the ex­change value of its cur­rency as pushed by the IMF and, at the same time, was also help­ing main­land Chi­nese ex­porters get more com­pet­i­tive.

On home grounds, no mat­ter what the Philip­pines’ eco­nomic man­agers say to al­lay public fears, the peso will have to weaken along with the other cur­ren­cies in the re­gion in or­der for lo­cal ex­ports to re­main com­pet­i­tive.

If the Bangko Sen­tral ng Pilip­inas will de­fend the peso while al­low­ing the cur­ren­cies of Thai­land, Viet­nam, In­done­sia or Malaysia to fall in value against the U.S. dol­lar, Philip­pine-made prod­ucts will be­come more ex­pen­sive in dol­lar terms com­pared to com­peti­tors in ASEAN.

Mon­e­tary author­i­ties have no choice but to al­low the peso to de­pre­ci­ate to­gether with the yuan.

The peso has joined its peers in the re­gion: The Malaysian ring­git has weak­ened to a 17-year low.

In­done­sia’s ru­piah also fell to its low­est since July 1998. The Sin­ga­pore dol­lar and the New Tai­wan dol­lar like­wise touched five-year lows, and the South Korean won slid near a four-year trough.

One thing go­ing for the Philip­pines is the fact that oil prices have re­mained be­low US$50 a bar­rel, down from more than US$100 a bar­rel last year.

Any im­pact of the cur­rency de­pre­ci­a­tion on pump prices of ga­so­line and other petroleum prod­ucts and trans­porta­tion fares is ex­pected to be very min­i­mal as weak oil prices will off­set the weaker peso’s ef­fect.

Mov­ing for­ward, what will be wor­ri­some is if main­land China’s de­val­u­a­tion of the yuan starts a cur­rency war that many econ­o­mists be­lieve could desta­bi­lize the global econ­omy.

This will hap­pen if the United States and Ja­pan re­tal­i­ate and push the value of the dol­lar and yen lower.

In fact, some an­a­lysts cite a lin­ger­ing worry that main­land China’s move may prod other cen­tral banks to al­low their cur­ren­cies to also weaken in or­der to re­main com­pet­i­tive.

The Philip­pines can only hope that they will not, and can only hold on to the main­land Chi­nese cen­tral bank’s as­sur­ance to global fi­nan­cial mar­kets that it is not em­bark­ing on a steady de­pre­ci­a­tion of the yuan. This is an ed­i­to­rial pub­lished by the Philip­pine Daily In­quirer on Sun­day, Aug. 16.

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