[Vantage Point] Strong dollar hits emerging markets

Former agriculture secretary Manny Piñol has come under fire from netizens over his views on the Philippine peso’s downward trajectory against the US dollar. According to him, “P57 at $1 is not entirely bad. It is good for our OFWs (Filipino Overseas Workers) and local food producers. This crisis could open opportunities. On Tuesday, September 6, the peso crashed to a new all-time low of P57 for the dollar as the greenback strengthened following sustained interest rate hikes decreed by the US Federal Reserve.The dollar, which has been rising sharply for about a year, competes now with the value of the euro for the first time in two decades.

Although Piñol’s statement seems insensitive at a time when many Filipinos could barely make ends meet, his statement overall contains some truth. This is the nature of the free market system. There will be no winners if there are no losers. This happens every trading day in the Philippine stock market. There are winners and there are losers. What makes it bad is if the losers outnumber those who get the chips.

In a capitalist system, money goes where money grows. With all the global turmoil, mainstream and institutional investors will seek refuge in whatever tradable instruments they can get their hands on.

While the US economy is still finding its balance, a combination of events has made the US currency a top choice for investors. The dollar has soared mainly because the Federal Reserve keeps raising interest rates faster than other major countries. Investing in the US dollar now is like putting your money in an impenetrable safe. As the outlook for the global economy darkens, nervous investors are gobbling up dollars, especially US Treasuries, catapulting the US currency to new highs. The rising dollar has nothing to do with the health of the US economy. It’s about how worried investors are about a global economic meltdown.

Here’s what I think Piñol is right about:

Since the start of the year, all major asset classes around the world, with one exception – the US dollar – have fallen:

One of the world’s largest currency hedge funds, P/E Investments of Singapore, has generated an exceptional return of 18% since the start of the year, riding reliable statistical models in the markets.

In the short to medium term (

Macroeconomic factors can also create unique opportunities for certain industries and types of businesses. A weak currency will make the country a destination of choice for foreign tourists. Besides benefiting the tourism industry, foreign currency will also flow into other industries and the economy in general. A devalued peso also benefits OFW families. If you are an investor and take a longer-term view (>5 years), you can view market and currency weaknesses as opportunities rather than risks.

But here’s why Piñol’s argument falls short:

Experts fear emerging markets, including the Philippines, could see capital flight, inflation or even defaults as the dollar’s two-decade dominance drains the taps. A strong dollar severely impacts emerging economies. A low interest rate in the United States allows investors to flock to emerging markets (countries in transition to become developed economies). But when US rates start to rise and the US dollar strengthens, foreign money starts flowing out of those countries.

Recall that past crises in emerging markets were partly caused by the strength of the dollar. The continued rise of the dollar is forcing economic managers in developing countries to tighten monetary policy to prevent their own currencies from collapsing. Failure to do so would increase inflation and make it more expensive to service dollar-denominated debt.

Piñol argues that OFW families could purchase more goods and services from an expanded dollar value in terms of pesos. But a stronger dollar still means higher imported inflation, especially with 30-40% increases in food and oil prices (Source: World Bank). High commodity prices in the market are virtually wiping out any theoretical gains these OFW families will derive from higher exchange rates. Filipinos are the hardest hit by high commodity prices and a further rise in oil and food prices is claiming even more victims. Experts also fear that shortages of almost all staples, such as sugar, rice, salt, pork and chicken, among others, will further strain the purses of Filipinos.

Government records show that the largest categories in our consumer price index are: food and non-alcoholic beverages (39% of total weight); housing, water, electricity, gas and other fuels (22%); and transport (8%). The index also includes health (3%), education (3%), clothing and footwear (3%), communication (2%) and leisure and culture (2%). Alcoholic beverages, tobacco, furniture, household equipment, catering and other goods and services account for the remaining 15%.

Will exporters benefit from a devalued peso? Yes, because they now get P56.80 (exchange rate at the time of writing) for every dollar they earn, compared to P55 for a dollar just a few months ago. Conversely, importers now pay more pesos for the dollar cost of imported goods. As we import more than we export, the whole country loses out.

IN THE GRAPHS: Weak peso, high prices, shortages test Marcos' economic agenda

According to World Bank records, the country’s trade deficit widened sharply to $5.93 billion in July 2022 from $3.50 billion in the same month a year earlier, mainly due to an increase in imports. Amid robust domestic demand as the COVID-19 situation further improved and commodity prices rose, inbound shipments jumped 21.5% year-on-year to $12.14 billion, even as exports fell 4.2% to $6.21 billion. In the first seven months of the year, the trade deficit rose to $35.74 billion from $21.46 billion in the same period of 2021. All of this shows that the strength of the dollar translates by higher import bills, which accelerate inflation.

Do you remember how the combination of a higher cost of debt, economic mismanagement and political unrest pushed Sri Lanka into full-scale crisis? Experts warn that this scenario can happen to any emerging market.

A strong dollar also means that we have to pay more pesos to meet our obligations abroad. The country faces a debt of 12,890 billion pesos at the end of July 2022. Of this total, 31.5% represents external debts and 68.5% domestic borrowings. On July 31, our peso-dollar exchange rate was only 55.3463 pula for 1 dollar. You do the math.

Many poor countries are unable to borrow in their own currency in the amount or in the terms they want because lenders are allergic to the risk of being repaid in the unstable currencies of these borrowers. Thus, poor countries more often scoop up funds in dollars, guaranteeing to repay their obligations in dollars, regardless of the prevailing exchange rate. Thus, as the value of the dollar increases against other currencies, settling their debts becomes more costly in terms of the national currency. In public debt jargon, this is called the “original sin”.

Finance Secretary Benjamin Diokno, however, is confident that the Philippines will be able to pay all its debts on time. The debt-to-GDP ratio, he said, will decrease to 61.8% by the end of the year, dropping gradually over the years until it drops below 60% by 2025. It is expected to decline further to 52.5% by the end of the Marcos Jr. administration in 2028.

Will the dollar continue to climb in the short term? Chess grandmaster Kenneth Saul Rogoff, an American economist, Thomas D. Cabot professor of public policy and professor of economics at Harvard University, proposed this scenario quoted by Vox mediaUS news and opinion site: The dollar could fall if the war in Ukraine were to “miraculously” end, easing pressure on European economies and strengthening their currencies.

He said the dollar could also fall if the US goes into recession and the Fed needs to cut interest rates to stimulate the economy. Rogoff thinks an economic slowdown in the United States could make investing in American assets and companies less attractive, leading to a devaluation of the dollar.

With this “highly uncertain environment,” Rogoff pointed out, “the exchange rate is likely going to be difficult to predict.” It certainly looks like a bumpy ride for the Philippine peso. – Rappler.com

Val A. Villanueva is a seasoned business journalist. He was a former business editor for the Philippine Star and the Gokongwei-owned Manila Times. For comments, suggestions, email him at [email protected].

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