Simply dubm: BSP’s P34B Loss in Foreign Exchange Operations

By

Perfecto R. Yasay, Jr.

Former SEC Chairman

It is quite unsettling for our people to be told that on the first 6 months of the year the Bangko Sentral ng Pilipinas lost about PhP 34 billion while trying to control the sharp rise of the Peso against the sagging U.S. Dollar.

This loss occurs when the BSP intercedes defending and producing an artificial demand for the U.S. Dollar to prop-up its value by desperately buying them to arrest the unstable fluctuations – or sudden volatility swings of the peso. Simply put, the BSP buys the dollar for virtually more pesos than the prevailing Peso-Dollar rate that is dictated by market forces. Why buy dollars at a simulated price of say, PhP 44.22 when its actual value as determined by market demands should be lower?

Through this manipulative scheme the BSP gets into foreign exchange trading deliberately intent in losing, not fully realizing that the sharp and sudden surges it seeks to prevent do not usually result from an honest to goodness sturdy peso but mainly from our currency’s inherent weaknesses.

For small transactions the difference may appear insignificant. But when purchases are made in enormous volumes for futile purposes, losses can regularly and astronomical happen like the PhP 34 billion loss for the first half of 2010, the net losses in 2009 and 2008 of PhP 13.16 billion and PhP 8.93 billion, respectively, or the net loss incurred in 2007 at a staggering amount of PhP 87 billion.

These hefty amounts could have well been utilized to develop and brace-up our various business sectors include exports or even reduce our external debt; be used as a capital base for a national provident fund to benefit our overseas workers who have been heroically responsible in preventing the nation’s  economic collapse; or for such other worthwhile projects in the area of investments that will generate more jobs, provide education and, skills development for the youth, housing and medical care that will benefit the entire nation - let alone truly stabilize and strengthen the peso.

Should the BSP be allowed to continue with this practice that smacks of being like a messy case of fraudulent overpricing the way devastating kickbacks are made by unscrupulous public officials when they simulate a much higher and fictitious value for public work or BOT contracts grossly prejudicial to Government’s interest? Isn’t this the kind of price manipulation that upsets the economy and cheats our people?

Exporters correctly claim that a sustained appreciation of the peso, standing alone, would make Philippine products more expensive in dollar terms and could eventually dampen their competitiveness.

Our monetary experts have disputed this view, arguing that all other currencies of emerging Asian markets have been strengthening and on that basis the competitiveness of exported goods from the Philippines have remained stable. However they have miserably overlooked that our stiff competitors in the Region, for the most part, have well-balanced and expanded their trading relations with other countries that are not limited to a few trading partners, or at least, are on their way towards a wholesome trade equilibrium much unlike the Philippine export market that is largely lopsided.

And yet the BSP continues with their buying frenzy to temper the steep rise of the currency in the belief that doing otherwise could make the peso grow stronger and its volatility higher that would be disruptive to businesses.

But experiences have taught that what has been disastrous to business are artificial conditions that create illusions of order, false enthusiasm and durability in the economy only to realize later that a catastrophic bubble has been created that will wreak havoc to the nation.

Of course, the might of the peso - given that the over-all economy has become robust, vibrant and stable - must be kept in proper balance in order to preserve our competitiveness and advantage. But if that “Goldilocks” illusion of being just right is all that there is, then instead of acting to protect ailing industries by our interventionist policies, we will be weakening other business groups like importers and short-changing our heroic OFWs and eventually lead the economy to shambles..

Our Monetary officials cannot embark on solutions to problems that will inevitably result in other pressing difficulties.

As I have previously written, the real strength and stability of any currency is dependent on the dynamism of internal economic realities – not contrived conditions, which include steady investment flows, sound banking and financial system, sustainable growth, adequate infrastructure, dedicated and competent officials, equitable income distribution that will generate opportunities for savings and wealth creation and asset growth for the people.