Speculating on currency speculators

When the peso plumbs uncharted territories, the movement of the exchange rate during these sensitive periods becomes especially vulnerable to the threat of currency speculation, both legitimate and illegitimate, real and imagined.

With the threat of war becoming ominous in the fourth quarter of 2002, the peso started acting up as importers initiated the building up of their inventories.

Thus, when the peso crossed the P52 level in August 2002, slid further to P53 in October, hit P54 last February, and closed at a new record low last March 12 of P55.099, banks’ foreign exchange transactions once again came under the intense scrutiny of the Bangko Sentral ng Pilipinas (BSP).

The peso, however, has seen lower levels. In fact, the lowest it ever traded in a day was at P55.25 on Jan. 17, 2001, or a day after senators refused to open the second envelope related to the Jose Velarde account.

The BSP’s eagle-eyed examination of banks’ behavior is also not new, the most recent being in the third quarter of 2001 when rampant currency speculation was blamed solely for the peso’s weakness. As a result, the central bank, in an unprecedented move as a regulator, then named and penalized nine foreign and local banks in August 2001.

This time at least, the overriding factor on the recent peso-dollar movements is largely attributed to the uncertain impact on the local economy of the US-led war on Iraq. Currency speculations remains but one of the extraneous pressures.

Tolerable speculations

Hedging, as a defensive approach, is one of the logical options for importers since a peso drop in the exchange rate could spell millions in losses for them.

To some firms like the oil companies which are dependent on imported crude or finished products, and whose business decision to hike pump prices are often held hostage by public and political opinion, hedging is also an option but not necessarily availed of by everyone.

Done with the right timing, oil companies through hedging can protect or enhance margins. Otherwise, it could mean additional costs that may not immediately be passed on to the consumers.

Exporters and overseas Filipino workers also try to maximize gains on dollar earnings by waiting for the opportune moment to convert their foreign currency to pesos. By speculating on the value of the peso and exchanging to pesos at the right time, exporters gain windfall profits. And doing so is generally accepted as prudent decision-making.

For our dollar earners abroad, currency speculation is but a practical option. Individual gain (or loss) is small, but when consolidated to cover the millions of OFWs, any concerted effort – although difficult to undertake – may create additional pressure on the foreign exchange system.

In the case of these types of "speculation," the most the government can do is to urge individuals and importers/exporters not to exercise their hedging prerogatives during sensitive periods.

Speculation by banks is unacceptable and not tolerable

In the recent BSP investigation over suspicions of currency speculation by banks, six banks were initially asked to explain discrepancies in their ledger against their officially declared dollar positions, while two other banks were directed to submit more records.

Eventually, all eight banks were slapped monetary and administrative penalties. But unlike in 2001 when the BSP specifically finger-pointed banks in a name-and-shame campaign, the central bank this time was more sober.

Rumors have it that that the central bank’s hesitance comes from talks that some of the banks that were penalized are suffering from financial problems, and publishing their names may trigger some undue withdrawals that could lead to even bigger problems.

Whatever the BSP’s reasons for not openly blurting out names, corridor gossip takes away the mystery quite accurately. For example, three of those rumored in the list of recent offenders are repeat offenders, having been publicly cited for violations of foreign exchange regulations in 2001.

Too lenient on clear violators

When an oil company advances its dollar purchases to buy crude oil as part of an inventory build-up required by the energy department, the central bank agrees that this hedging is acceptable and is not considered as a damaging currency speculation.

When it comes to banks, though, the fine line between hedging and speculation is more defined. Rules are spelled out clearly, including sanctions against splitting over-the-counter foreign exchange sales below the limit allowed for non-documented transactions, insufficient documentation and foreign exchange sales for unregistered import purchases.

The BSP also regularly updates its regulations. In 2001, it tightened foreign exchange regulations by requiring banks to fully document all dollar transactions exceeding $5,000 from an earlier threshold of $10,000. Last month, the central bank brought down the ceiling for accumulating in-bank dollars to $5 million.

So, all eight banks that were recently found guilty of various foreign exchange rules and regulations transgressions – amounting to a combined $350 million – could not do anything except cough up the specified fines.

Some believe, however, that they got away lightly. The public was not made aware of those in the banking system who contributed to the weakening of the pesos, and made money at that.

Peso swings other way

Since the recent crackdown, the peso started its recovery. Last week, the Philippine currency went up to a high of P53.10. Now, more people are betting that the peso would recover to P52 or at least stay in the P53-level.

This is why last week, exporters and OFWs who missed converting at P55 scrambled to change their dollars in fear that the peso would strengthen further, resulting to paring down any potential gain.

Most traders however feel that the peso’s rebound is artificially induced and is a temporary aberration largely influenced by the weakness of the dollar following the seemingly protracted war in the Middle East.

I am tempted to give my own prognosis. But that, readers, could be construed as speculation. By the way, did anyone accuse Lucio Tan of currency speculation when he said the peso would reach P120 to a dollar by 2009?

Tunnels of mining opportunities on TV

"Isyung Kalakalan at Iba Pa" on IBC-13 News (5 p.m. and 10:30 p.m., Monday to Friday) completes today the presentation of issues surrounding the mining sector. Starting Monday, a sunshine industry, the seaweeds industry, takes center stage. Although fully supported now by international food organizations, Philippine natural grade carrageenan faces new problems. Watch it.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. If you wish to view the previous columns or telecasts of "Isyung Kalakalan at Iba Pa," you may visit my website at http://bizlinks.linkedge.biz.