The Brazilian real was the best performing currency in the world, strengthening by 13.7 percent against the dollar in 2005. The second was the Kenyan shilling which gained 8.7 percent against the greenback. The Chilean peso and the Egyptian pound finished 3rd and 4th place by appreciating by 8.5 percent and 7.2 percent, respectively.
While the dollar weakened against the Philippine peso last year (including the currencies mentioned above), it was a different story for the rest. Generally, the dollar was strong last year. It gained 14.5 percent against the euro and 12.8 percent against the yen.
Meanwhile, Asian currencies – led by the Philippine peso – performed relatively well against the dollar, depreciating by only 0.9 percent on average.
But much has changed in Latin America in the last couple of years… and much can be learned from the region’s recent economic success. Many countries have reduced their public debt by implementing significant fiscal reforms. Current accounts are in surplus, cutting down the dependence on external capital inflows and resulting in higher reserve positions. Governments have taken advantage of the benign financial conditions to pre-finance external debt service obligations and strengthen the maturity profiles of their debt. And despite, high oil prices, inflation has remained relatively stable.
Strengthened macroeconomic policies and economic fundamentals have expanded the government’s access to domestic currency bond markets. Several countries – notably Brazil, Chile, Mexico, Columbia, and Peru – have increased their reliance on domestic issuance, reducing their vulnerability to exchange rate risk and increasing liquidity in local currency markets. Brazil and Columbia have taken it a step further by issuing external bonds denominated in local currencies. The increased investor confidence in these countries has resulted in exchange rate appreciations. It’s no wonder that four of the top 10 currencies (in terms of end-2005 year-on-year appreciation) come from Latin America, including the Brazilian real which is the best performing currency last year.
Brazil’s currency, the real, is now so strong (up as much as 22 percent against the US dollar last month) that its central bank had to weaken it by purchasing US dollars and selling so-called currency swap contracts. According to news reports, the central bank bought $3.5 billion in the foreign exchange markets for the month of December alone – and as much as $21 billion for the whole of 2005 – in order to weaken the real.
With reserves now reaching $54 billion, Brazil is now in a position make an early repayment of its entire obligations to the International Monetary Fund (IMF) amounting to $15.46 billion drawn in 2002. Under the original schedule, the final repayment of outstanding loans would have taken place in 2007.
Going forward, it is vital to build on the foundations for higher sustained growth to insure against external risks of high oil prices and sudden shifts in global capital market conditions. On this regard, we look upon the lessons learned in the recent economic success in Latin America, and in particular, Brazil.
Just as Brazil did, we should take advantage of our strengths and work on our weaknesses. Our policymakers should continue to focus on:
1) Strengthening fiscal positions and lower public debt. It is crucial that the Philippines continue to push through with fiscal reforms. The implementation of the second phase of EVAT or raising the VAT rate to 12 percent by Feb. 1 is imperative in order to reduce the deficit to GDP ratio to 1.8 percent by end-2006. Fast-tracking the privatization of big-ticket government assets (Transco, Calaca, PNOC-EDC, etc.) will be a big help in reducing public debt.
2) Improving external positions. If Brazil has its commodity exports (steel, iron ore, cellulose, beef, sugar, soybeans, etc.) as its source of dollars, the Philippines has the advantage in OFW remittances.
Other sources of hard currency which the Philippines can capitalize on are the tourism and mining industries. The opening of the NAIA 3 this year would certainly provide a boost to tourism. Meanwhile, the slated initial public offerings (IPOs) of several mining companies is a step towards revitalizing the industry.
3) Developing alternative sources of energy in the face of high oil prices. The Philippines also has a chance to turn a weakness (of being a net oil importer) into strength by developing alternative sources of energy (geothermal, wind, bio-fuels, etc.) similar to what was done in Brazil, the world’s leading producer of ethanol-based fuels.
Recently, Ford Motors announced a $20-million investment to build a flexible fuel engine plant in the Philippines for the use of bio-ethanol to complement the government program to develop bio-diesel in the petroleum industry. This would not only generate foreign exchange savings, but also provide new markets for our agricultural products and expand the livelihood of our farmers.
Therefore, if we play our cards right, 2006 will be a banner year for the Philippine economy, another remarkable year for the Philippine peso, and the right time to get that elusive credit rating upgrade. Who knows… the Bangko Sentral may now face the problem of defending the US dollar against a strong peso this year, just as Brazil’s central bank did with the Brazilian real in 2005.
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