‘Dutch disease’ warning aired

THE CENTRAL BANK must put more teeth in its foreign exchange policy, economists yesterday urged, before an overvalued peso causes the collapse of local industry.

“We already have the so-called ‘Dutch disease’ — dollars are coming in, pushing up the peso, harming manufacturers and exporters in the country,” University of the Philippines economist Solita Collas-Monsod claimed in a Management Association of the Philippines forum.

“The benefits are so clear. An undervalued peso makes exports cheaper and encourages import-competing firms,” she added.

Ms. Monsod pointed out that historically, high-growth countries kept their currencies weak, giving them a trade advantage. In the Philippines, however, local manufacturers “with one arm tied behind their back” are finding it difficult to compete since a strong peso makes their exports more expensive.

Ateneo de Manila University economist Luis F. Dumlao backed the assessment, noting that “the peso has appreciated by some 25% in the last eight years, from P56 in 2004 to P41 last year, while the yen, dollar, euro and pound have fallen.”

He warned that this had created trade deficits for the Philippines, especially against major trading partners such as Japan and the rest of Southeast Asia.

The biggest factor behind the appreciation of the local currency, Ms. Monsod and Mr. Dumlao claimed, is the steady stream of remittances sent by overseas Filipinos, not capital inflows.

Remittances totalled $21.391 billion last year, dwarfing the $3.885-billion net inflow of foreign portfolio investments.

“We should not allow the remittances to push up the peso. This is the ‘Dutch disease’ also experienced by the likes of Indonesia, Pakistan and the Netherlands,” Mr. Dumlao said.

The Bangko Sentral ng Pilipinas (BSP) concentrates its foreign exchange interventions on capital flows, though, viewing these as more destabilizing.

Capital flows — also called “hot money” given the ease by which these can enter and leave markets — comprise only 1.6% of gross domestic product (GDP) but score 121.2 on a volatility index, central bank director Francisco G. Dakila, Jr. said at the same forum. Remittances, meanwhile, account for 9.2% of GDP but score just 10.2.

IMF Resident Representative Shanaka Jayanath Peiris said the BSP buys 65 cents for every dollar of hot money and only 30 cents for every remittance dollar.

“This is consistent with the BSP’s statement that they will only intervene with the exchange rate to smoothen its movements, not when it is below or above trend,” Mr. Peiris told the forum.

The economists, though, said a more aggressive response was needed.

“If the BSP sees that its dollar purchases only pushes up the dollar marginally, then it should buy more,” Ms. Monsod said.

Mr. Dumlao also suggested that the central bank counteract the impact of remittances by printing more money despite the inflationary risk.

Mr. Dakila, though, said the BSP was doing what it could given its means.

“The appreciation of the peso will be much worse if we haven’t intervened. The fact that we try to temper volatility already shows that we have a bias for a weaker peso,” he said. — D. C. J. Jiao
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