Weathering a ‘sneeze’
“When the United States sneezes, the rest of the world catches a cold.” This adage used to be bandied about by economists when describing how any weakness in the world’s largest economy can instantly send ripples through financial systems of countries half a world away.
Recent events prove, however, that this old saying is no longer the exclusive domain of one superpower.
Less than 24 hours after China devalued its currency to help prop up its apparently weakening economy, stock markets around the world—including the Philippines’ own—dropped precipitously. The rationale for this is, any weakness in the world’s second largest economy would mean weaker sales for many companies around the world, especially those which directly or indirectly sell raw materials, intermediate goods or finished products to the country that has been dubbed “the factory of the world.”
Indeed, if this so-called factory of the world is slowing down, the rest of the world economy will probably likewise slow down. So conventional economic wisdom goes.
The question we should be asking right now—and trying to answer with solutions—is how China’s economic convulsion will affect individual Filipinos and the Philippine economy, as a whole.
Distrust anyone who says that recent wild swings in financial markets portend another major financial upheaval in the manner of the 1997 East Asian financial crisis.
The country’s dollar reserves stand at near all-time high levels, equivalent to almost a year of the country’s import needs. By any measure, that is a very comfortable buffer in the unlikely event of investors suddenly deciding to pull out their dollars, or locals suddenly deciding to hide their wealth overseas.
And unlike 1997, today’s debt stands at very manageable levels, with both the public and private sectors taking to heart the lessons of the previous crisis by cutting down on dollar-denominated loans and extending the maturities of the remaining ones far into the future.
At the same time, distrust anyone who says that all’s well and that the Philippine economy will survive this Chinese crisis unscathed.
There is another, less visible—less headline-grabbing—indicator just as, if not more, important for Filipinos, and that is the peso-dollar exchange rate.
China’s calibrated devaluation of its own currency, the renminbi, sparked a virtual currency war among economies around the region. The thinking among policymakers in different countries is that, if goods sold by an economic competitor like China suddenly become cheaper because of a government-mandated devaluation, we’d better cut our own prices, too, so that our goods remain competitive in the world market. Hence, a currency war ensues.
Or has ensued. So far the Malaysian ringgit has fallen by over 17 percent against the dollar, the Indonesian rupiah by over 11 percent, the Thai baht by over 8 percent, the Singaporean dollar by over 6 percent, and—so far, still one of the most resilient currencies in the region—the Philippine peso declining only by over 4 percent.
A weaker peso is a double-edged sword.
On one hand, it translates to short-term gains for millions of beneficiaries of billions of dollars of remittances sent by millions of expatriate Filipinos each month. Other dollar-earning industries like the booming business process outsourcing industry also stand to gain, and help deliver a short-term consumption boost to the local economy.
On the other hand, a weaker peso makes it more expensive to buy dollar-denominated needed goods and services from overseas, whether one is an individual who needs to travel overseas or a large corporation which needs to buy imported raw materials.
In the face of all these moving parts, and a din of conflicting voices—some advising a rush toward the investment exit doors and some counseling calm—what is the average man to do?
Personal finance experts have some rules of thumb that are applicable to individuals and even large corporations: Keep a savings or cash buffer (equivalent to at least four months’ worth of spending needs, if possible); set aside a portion of one’s earnings for investments even during bad times (perhaps, especially during bad times when asset prices are depressed); and use debt wisely.
In sum, as with most situations where there are many unknown variables, it is best to be prepared. But not paranoid.
