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Weakened PHP and Why Economic Cha-Cha Regarding FDI Restrictions is URGENT

Dubai OFW

The recent peso devaluation had happened in 12 years. Should it be a call for panic? It was a few days ago and I feel I didn't want to blog about it immediately. As said, I'm no financial adviser or the like--I'm just another guy who's writing on the Internet to help spread the knowledge of others. The current USD-PHP exchange rate is PHP 54.265 which makes me think about inflation. I feel like it might be time to evaluate car-buying policies in order to reduce traffic and how no garage-no car policy should be implemented. I checked Singapore's gas prices and they're even more expensive. I think it would be more ideal to take public transportation in Singapore than to own a car. That's why I believe people need to learn to ride public transportation. Some entrepreneurs ride the jeepney or bus (when needed) without being ashamed about it. 

Powerful economies with currencies weaker than the PHP

Before panicking--I think it would be good to take a look at some of the ASEAN countries. Two of my favorite countries to mention (in terms of depreciated currency) are Japan and South Korea. Let's think of these two figures which you can Google for yourself:
  • 1 Japanese Yen (JPY) is equivalent to PHP 0.41. 
  • 1 South Korean Won (SKW) is equivalent to PHP PHP 0.043. 
Basically, these two currencies are heavily devalued. To get SKW 10,000 a day is equivalent to PHP 425.80 a day. It may sound generous but it isn't in a first-world standard. Both the JPY and the SKW are weaker than the PHP. Yet, the Japanese economy and the South Korean economy are stronger. These are tiger economies for a long time. Meanwhile, the Philippines is still a rising tiger. I prefer to call it a cub that needs to be nurtured and cared for before it can truly be vicious. Some would say that the late former Philippine President Benigno Simeon C. Aquino (whose death anniversary was the other day) gave some foundations. Certain sectors were liberated from the negative list. However, there was not much of that economic charter change. Meanwhile, outgoing Philippine Vice President Maria Leonor Gerona-Robredo supporter (and economist) Andrew James Masigan believes in the need for economic charter change. I wrote a similar post some time ago which can be read here. I may have not voted for Mrs. Robredo while I simply like Masigan's smart analytics with economic issues. 

What allowed Japan and South Korea to emerge even if the JPY and SKW are weaker than the PHP? It would be having a freer economy. The difference between North Korea and South Korea is like night and day during the night. Think about a satellite view during the evening where North Korea is so dark (except for a few places) in contrast to South Korea. Communist China even shines so brightly during the evening. North Korea's aim to become a self-industrialized country has undergone three monarchs--the late Kim Il Sung, the late Kim Jong Il, and its current monarch, Kim Jong Un. Yet, not even the monarchy of its current "emperor" had made it exceed South Korea. South Korea isn't just rich because it's a democracy (but being a democracy is certainly an edge over free-market dictatorships)and has a highly-disciplined population. It's also because South Korea has high economic freedom to help contribute to its population. 

A more interesting is that Communist Vietnam's dong (VND) is pretty much even lower than JPY and SKW. The current value I Googled up today is PHP 0.0024. Yet, Vietnam shows signs of being a powerful economy thanks to free markets. I remembered reading From Third World to First and how the Communist economic thinker, Do Muoi, established policies that made Vietnam an economic powerhouse in spite of it being under a Communist form of government. Like China, Vietnam refused to follow North Korea and followed Singapore. It's an irony that the Venezuelan Bolivar is equivalent to PHP 9.98 peso but the whole country is a wreck. Meanwhile, the comrades of Vietnam are all probably enjoying their groceries filled with the best of local and imported. 

We can't attribute Singapore to being better than the Philippines because the Singaporean dollar (SGD) is more powerful than the PHP. Singapore pursued to discipline its population but it wouldn't work if it wasn't for the late Lee Kuan Yew's economic policies. The current leader, Lee Hsien Loong, still pursues economic freedom. The SGD can be stronger than the PHP for all we care. However, it'd be a big slap to Singapore if it operated based on protectionist policies. 

Why do countries pursue a devaluation policy at times?

The Investopedia team explains these reasons why depreciation is sometimes the key to success:

1. To Boost Exports 

On a world market, goods from one country must compete with those from all other countries. Car makers in America must compete with car makers in Europe and Japan. If the value of the euro decreases against the dollar, the price of the cars sold by European manufacturers in America, in dollars, will be effectively less expensive than they were before. On the other hand, a more valuable currency make exports relatively more expensive for purchase in foreign markets.

In other words, exporters become more competitive in a global market. Exports are encouraged while imports are discouraged. There should be some caution, however, for two reasons. First, as the demand for a country's exported goods increases worldwide, the price will begin to rise, normalizing the initial effect of the devaluation. The second is that as other countries see this effect at work, they will be incentivized to devalue their own currencies in kind in a so-called "race to the bottom." This can lead to tit for tat currency wars and lead to unchecked inflation.

2. To Shrink Trade Deficits 

Exports will increase and imports will decrease due to exports becoming cheaper and imports more expensive. This favors an improved balance of payments as exports increase and imports decrease, shrinking trade deficits. Persistent deficits are not uncommon today, with the United States and many other nations running persistent imbalances year after year. Economic theory, however, states that ongoing deficits are unsustainable in the long run and can lead to dangerous levels of debt which can cripple an economy. Devaluing the home currency can help correct balance of payments and reduce these deficits.

There is a potential downside to this rationale, however. Devaluation also increases the debt burden of foreign-denominated loans when priced in the home currency. This is a big problem for a developing country like India or Argentina which hold lots of dollar- and euro-denominated debt. These foreign debts become more difficult to service, reducing confidence among the people in their domestic currency.

3. To Reduce Sovereign Debt Burdens 

A government may be incentivized to encourage a weak currency policy if it has a lot of government-issued sovereign debt to service on a regular basis. If debt payments are fixed, a weaker currency makes these payments effectively less expensive over time.

Take for example a government who has to pay $1 million each month in interest payments on its outstanding debts. But if that same $1 million of notional payments becomes less valuable, it will be easier to cover that interest. In our example, if the domestic currency is devalued to half of its initial value, the $1 million debt payment will only be worth $500,000 now. 

Again, this tactic should be used with caution. As most countries around the globe have some debt outstanding in one form or another, a race to the bottom currency war could be initiated. This tactic will also fail if the country in question holds a large number of foreign bonds since it will make those interest payments relatively more costly. 
In order to achieve all three--it would be worth nothing that why we're getting well-manufactured products from Japan, South Korea, and Vietnam (all three with weaker currencies) is their free-market policy. Japan has become a leader in electronics for some time. Now, South Korea is taking that lead. Vietnam may soon take that lead as it was also manufacturing Samsung phones. The Philippines needs to export, right? There are already some Filipino products of world-class quality like Marikina shoes and Jollibee. I'm proud to be a long-time supporter of Tony Tancaktiong's worldwide success with Jollibee. The competition with McDonald's allowed Jollibee to innovate and eventually hit the world market. South Korea has Samsung. Vietnam has been a smartphone manufacturing hub for foreign investments. I wonder if Vietnam can soon have its own smartphone to penetrate the world market? If so, that'd be the next revolutionary commie phone. Vietnam's exports also consist of imported brands such as Samsung, OPPO, VIVO, Apple, and Xiaomi. Vietnam benefited from it since any foreign company that fails to follow the glorious Communist state's rules can be considered for stiff penalties.

The Philippines should follow the same principle. Of course, we should set up environmental rules since factories can be a major source of pollution. Environmentally-friendly companies are welcome to invest and manufacture. Such regulations may result in importing certain stuff to produce locally. If it wasn't for imported services like Grab or Foodpanda--we'd probably never see Filipino establishments survive during the pandemic. It would be interesting if the Philippines becomes a manufacturing hub. It wouldn't matter if the exports are of Filipino brand or foreign brand. What matters more is that these exports are contributing to the Filipino economy. These foreign companies will still need to pay taxes, pay workers, pay suppliers, and everything related to their operations. Any profits that FDIs have is always net income after taxes. In short, the Philippines will benefit from their income because any income above a certain income earned on Philippine soil will be automatically taxable on Philippine soil. 

Instead of obsessing with ayudas (read the post here)--we need to obsess with fixing the economy. Any seasoned or competent Filipino investor doesn't cry in the midst of competition. Instead, any good Filipino investor will say, "Come on, bring it!" Just think that Tony Tancaktiong faced off against McDonald's. Xiaomi has faced competition on Chinese soil against foreign technology companies. This economic cha-cha will certainly change the tide of the Philippine economic environment. 

References

Websites

"Miracle on the Han River Part II, or Regression to the Mean? South Korea’s Economy in Transition" by Yoon-shik Park (December 2014)

"Philippine peso further weakens to P54.265 to $1" by ABS-CBN News (June 21, 2022)


"Vietnam’s Smartphone Shipments Grew 12% in 2021, and IDC Expects 25% Growth in 2022 Driven by Migration from 2G Feature Phones to 4G/5G Smartphones"  
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