Currency risks

FEARS OF “currency wars”—when governments deliberately depreciate their currencies to help boost demand for their exports—are intensifying. The recent move of Vietnam to devalue the dong after China allowed the yuan to weaken early this month has fueled the global anxiety.

Countries that rely heavily on exports, be they emerging markets (e.g., Vietnam, Thailand, Indonesia, Malaysia) or developed (e.g., Japan, South Korea) are very watchful of their currencies to keep them competitive against those of other export-dependent countries. Japan and South Korea, for instance, have been at odds after Tokyo moved to weaken the yen. Seoul complained that the yen’s weakness against the dollar was making it harder for Korea’s exporters to compete. Last year, South Korea retaliated, and after 12 months the won fell in value against the dollar by about 15 percent.

The Philippines used to rely on export earnings from commodities such as metals, sugar and coconut oil to fuel a big part of its economy. Today, although its economy has become less dependent on commodity exports as a major driver of economic growth, still the Bangko Sentral ng Pilipinas (BSP) ensures that the value of the peso remains inexpensive relative to the currencies of the other countries in the region, with exports that compete with Philippine products.

With the Philippines no longer too dependent on exports to fuel its economy, it would be impractical for the country to join the currency wars and force the peso to lose value against the dollar. As BSP Deputy Governor Diwa C. Guinigundo has warned, directly devaluing the currency or reducing interest rates to induce the currency’s weakening would not make much sense and there could be unintended and unwarranted consequences.

True, a weaker currency can help exporters. However, it also makes imported goods more expensive for the local population. Also, the cost of servicing foreign debt rises with a weaker currency. Philippine exporters might lose part of their competitiveness in other countries where currencies have weakened substantially.

Note, however, that those countries devaluing their currencies have economies that rely heavily on exports. In contrast, the Philippine economy stands on domestic pillars, namely, consumption fueled by billions of dollars in remittances and BPO (business process outsourcing) earnings, private investments in manufacturing and property, and increased government spending.

This is not to say that the Philippines will be totally spared the effects of a currency wars outbreak elsewhere. With all bets now on US interest rates increasing next month, “hot money” (foreign funds invested in short-term instruments such as stocks and bonds) is leaving emerging markets, and the Philippines has not been spared. This will add pressure to the peso as the demand for dollars increases. Once the peso weakens, government and private corporations, which have borrowed offshore in dollars, will need more pesos to service those obligations.

The Philippines may take comfort in the fact that currency wars would make a more severe impact in export-dependent countries. Oil-exporting Indonesia and Malaysia, for example, will suffer from the combined effects of a weaker currency (after “hot money” leaves) and collapsing crude prices (down by more than half since last year).

International experts have long ago frowned on currency wars, branding them “desperate measures” that destroy domestic consumption and incomes, private sector investment and the country’s overall credibility. Currency wars also trigger capital flight that, in turn, adds pressure on the currency, causing it to weaken some more.

Experts also cite the risk of governments and corporations borrowing abroad to take advantage of lower interest rates outside the country. Sharp depreciations in the value of their currencies will only make servicing the debts more expensive, thus negating the cheap nature of the borrowed funds. The fact is, many emerging market-countries and their banks and corporations have been borrowing in dollars to get access to lower interest rates.

For the complaining Philippine exporters, they should listen to Guinigundo. Competitiveness for exporters, he points out, comes easy with devaluation. However, the more durable and sustainable sources of external competitiveness go beyond that. They include lower cost of electricity, lower cost of doing business, better quality goods and quick turnaround time.