Mr. Sta. Ana is the coordinator of Action for Economic Reforms. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, January 30, 2006 edition, page S1/5.
The peso’s recent appreciation, which the Arroyo administration would like to interpret as a positive economic indicator, once again brings to the fore the problems that Philippine exporters face. The peso appreciation from a high of PhP56.00 to US$1.00 to nearly PhP52 to US$1.00 has inflicted heavy losses to Philippine exports, especially products like electronics that are already going through a slump.
Philippine exports already suffer low profit margins. In 2005, exporters based their prices on an exchange rate of PhP55.00 or PhP56.00 to US$1.00—a realistic assumption drawn from government’s own forecast. Hence, the movement of the exchange rate to below PhP53.00 to US$1.00, has caused severe anxieties among exporters. In the words of economist Benjamin Diokno, the peso appreciation is the nail in the coffin, especially for electronics exports.
It is not just a question of thinning profits for exporters. The sudden appreciation of the peso is a manifestation of unpredictability and volatility, making it hard for exporters to firm up their business plan and their pricing. Plans get upset when the exchange rate swings and when policy direction changes.
To be sure, the whole real economy, and not just the export sector, is adversely affected by the currency appreciation. Import-substitution goods—already being clobbered by smuggled or low-tariff imports—are further handicapped by the cheapened prices of imports arising from the peso appreciation. Consequently, investments and employment are damped.
The strong appreciation of the peso is mainly due to the heavy remittances from Filipino overseas workers. The inflow of fickle portfolio investments and the weakening of the US dollar vis-à-vis global currencies have likewise contributed to the peso’s strength.
Nevertheless, the peso appreciation could have still been avoided, or at least mitigated. The Bangko Sentral ng Pilipinas (BSP) has an array of instruments that could have tempered the strengthening of the peso. For example, it could have been aggressive in buying dollars and using the dollars to pay off foreign loans. But perhaps because the BSP is overly concerned with inflation—and its principal mandate is to ensure price stability—the incentive structure encourages the BSP to allow the peso strengthening.
In the past, too, the exchange rate penalized exporters. Monetary authorities had a bias for a strong local currency. For instance, during the term of Gabriel Singson as governor of the BSP, the outcome of monetary policy—specifically, a high-interest rate regime—was the overvaluation of the peso, equivalent to about a third of its nominal value. This meant an unsustainable current account deficit, which in turn led to the 1997 financial crisis.
The massive outflow of capital in 1997 suddenly devalued the peso. Overnight, the exchange rate was corrected. In fact, the peso would further weaken, making it undervalued. This should have been favorable to the exporters. Despite the advantage of an export-friendly exchange rate, the exporters have not gained much ground; in some periods, they have even faltered.
Evidently, a “correct” exchange rate is insufficient to make Philippine exports competitive.
Take the case of the food exports. The food industry has great export potential, which can yield tremendous benefits to poor farmers and small producers. Yet, the food exporters are hobbled.
Food exporters, especially the small and medium entrepreneurs, lack access to credit. The Export and Industry Bank (or Exportbank), which in the first place should give special attention to small and medium exporters, has become part of the problem. The interest rate that Exportbank imposes on agricultural exporters is high; a risk premium is tucked in. The loan that it approves for agricultural exporters is only equivalent to about 50 percent of the appraised value of the collateralized land though the BSP ceiling is 60 percent. Even exporters who have subscribed shares in the Exportbank but who lack connection cannot obtain loans against the value of their shares.
Exportbank’s role should be that of an institution that helps exporters, especially the struggling ones, address their financing needs. In reality, the Exportbank operates just like any other commercial bank.
The Exportbank was established during the Fidel Ramos administration in light of the difficulties faced by exporters then. (Some say that creating the bank was a way for Ramos to co-opt the big exporters.) It is thus an irony that the small and medium exporters have not benefited very much from the Exportbank.
Worse, the Exportbank has incurred substantial losses because of mismanagement and imprudent decisions (such as the merger with the now defunct Urban Bank and Urbancorp Investments and thus acquisition of their non-performing assets). The Philippine Deposit Insurance Corporation (PDIC) has provided assistance amounting to PhP12 billion to salvage Exportbank.
Food exporters face other problems—exorbitant prices of raw materials, soaring energy prices, high cost of inter-island shipping because of the port monopoly, incomplete industry or product information that concerned government agencies should provide, lack of product promotion abroad, etc.
These are perennial problems and the solutions have already been identified. Yet, as in the case of the exchange-rate policy, policy makers and the leaders both in the public and private sectors have not learned the lessons.