Solving the "strong peso" puzzle

The borrowing mix is important. We should keep reminding the government that we have lots of dollars. Why are we still borrowing from the outside, like the NBN? Just borrow dollars domestically and then prepay our debt. Then you will see the exchange rate will begin to rise to the benefit of OFWs. —Dr. Raul Fabella, professor, UP School of Economics

IT looks bizarre but it seems we are the only country in the world where the gross domestic product (GDP) is registering good numbers while some factories are shedding off thousands of jobs. In the latest labor-force survey, it appears the industry sector lost more than a hundred thousand jobs, the experts say.

That figure, of course, is probably inaccurate since the labor-force survey doesn’t really count jobs created and lost, but simply registers the difference between the number of employed persons per industry at present and in last year’s labor-force survey.

So what analysts do is simply get the difference between the present and previous employment figures to get the supposed number of jobs lost or created—a meaningless statistic, actually, when one is tracking the employment impact of GDP figures.

Nevertheless, the difference of about a hundred thousand jobs in the current survey suggests that we are not getting strong in job creation.

Yesterday our banner story dwelt on the condition of exporters downscaling their operations after being hit by the impact of the steadily appreciating peso. We are not talking about some “corporate downsizing” here to achieve efficiency. What we are witnessing is probably the hollowing out of the Philippine economy caused by the very reason we have those great GDP numbers in the first place: dollar remittances.

Exporters downscaling their business could only mean they are sending off workers into the streets. When businesses are getting less pesos for their dollars earned from selling goods and services abroad, there are only two options: either close shop, or minimize losses by scaling down operations, hoping that things will improve someday.

And yet, it’s not likely that things will get worse for exporters as well as for OFWs, unless the government does something. For long, government officials have been saying that the appreciation of the peso has been “market-driven” and therefore nothing can be done about it.

This is a lame excuse for inaction. The industries—those companies producing tangible products and providing jobs to those who are not “skilled enough” to work in outsourcing—are losing competitiveness. If the government doesn’t do anything, the economy will continue to hollow out as factory managers and business owners are likely to sell or close their factories and concentrate on buying and selling products produced by the Chinese, Vietnamese and the Thais.

In fact, this has been a continuing trend so far, as manifested by the continuing decline in the value of production index in the monthly integrated survey of selected industries. And it’s hurting us in terms of thousands of jobs lost.

And it’s going to polarize the economy even further. More than 60 percent of the country’s exports are accounted for by electronics. But these big exporters are not hurt by the strong peso because their raw materials and intermediate inputs are delivered on consignment basis.

Besides, these companies enjoy a battery of fiscal incentives like income-tax holidays, duty-free importation of machines, and duty-free importation of raw and intermediate inputs. Most of these firms operate in special economic zones; hence, they enjoy the added benefits of subsidized energy rates.

Those who are hurting are the small exporters who don’t have these perks. But since they are mostly labor-intensive operations, the closure of these small firms are likely to render so many poor people jobless, thus accentuating inequality.

But could the government really do anything about the peso-dollar parity given that the peso value of dollars is influenced by the local supply and demand as well as certain global dynamics? We say yes.

Certainly, the Bangko Sentral ng Pilipinas (BSP) has all the powers, like raising the country’s international reserve from, say, four months’ worth of imports to about a year as what our neighbors did. That would surely raise demand for dollars that will check the continuing overvaluation of the peso. The central bank is supposedly independent and Malacañang, therefore, is not supposed to influence the institution.

Still, that’s no excuse because Malacañang has other instruments in its tool kit. Take it from University of the Philippines economist Raul Fabella, who favors an “aggressive” foreign exchange-rate policy to ensure the competitiveness of the country’s export-oriented industries.

There are several ways the government could change the dollar-supply and -demand picture, he said lately, and one of them is for the government to stop borrowing dollars from abroad. For important projects, the government, instead, should source dollars from within the Philippine borders by borrowing greenbacks from the BSP. That’s shooting two birds with one stone: not only could it help exporters, it will also curb corruption à la the controversial national broadband network deal and the cyber education project now being investigated in the Senate. (Written as editorial for BusinessMirror, 11 Oct 2007)