$1:P61.485

The peso is on a path of depreciation. Based on Thursday’s trade, we need P61.485 for a US dollar.

The declining exchange value of the peso opens the door to the dreaded “second round effects” arising from an elevated oil price regime and disrupted global supply chains. We cannot accurately predict the extent of these “second round effects” – except to say they will be unpleasant.

Our economic managers pin the blame on a remarkably strong dollar. But the Philippine peso appears more vulnerable to depreciation than the other regional currencies. Something else must be driving the retreat.

The Palace spokesperson seemed to be assuring the public that the BSP will do something to slow the slide. This is, technically, not the job of our monetary authorities. Their job is to manage inflation – which is tough enough at this point. The Monetary Board’s only tool to manage inflation is the benchmark interest rate.

In principle, movements in the currency exchange rate is entirely the business of the market. In theory, our central bankers do not interfere with the exchange rate. The peso “floats” as the market moves.

In reality, the BSP does interfere – subtly and never admittedly. In most cases, the outcome of such interference in the exchange rate was calamitous. The 1997 Asian Financial Crisis happened because the market sensed many Asian currencies were overvalued and bet against them. The Thai baht was first to break in the face of such betting. But the peso ended up suffering the worst.

Before the Asian financial crisis broke out, our BSP governor at the time loved to boast about how the exchange rate managed to remain flat. That was brazen admission our central bank was playing around with the exchange rate. When the rates realigned, our businesses were hit hard. Those carrying unsustainable debt simply went under.

There will always be political pressure on our monetary authorities to try and manage the exchange rate. That rate, after all, is a major factor determining how our inflation runs.

At this time, the consensus in the market is that it will be too costly to try and defend the peso’s exchange rate beyond adjusting benchmark interest rates upward. Our Monetary Board did raise interest rates last month and the expectation is that these rates will go up again. Higher interest rates generally help strengthen the peso’s exchange rate – but at serious costs to the domestic economy.

As we see, the interest rate increase last month did little to arrest the peso’s depreciation. The larger forces governing the global economy easily overpower our own policy moves.

In theory, a more prohibitive interest rate regime dampens economic activity and therefore takes oxygen out of whatever is driving higher inflation. But domestic policy has weaker effect in the real world if prices are driven by escalating cost factors. The most important cost factor today is higher oil prices.

The BSP raised interest rates. In the same week, it also raised its inflation forecast (up to 6.5 percent) for the coming period. Over the past few days, Dubai crude went to over $120 per barrel – the highest in four years. The inflation battle is lopsided.

The constriction of commercial shipping at the Strait of Hormuz affects not only oil prices. It has created shortages in LNG, helium and other petrochemical by-products. It turns out, even the global supply of pharmaceuticals is adversely affected. All the broken supply chains will convert to inflation-inducing price increases into the foreseeable future.

The amount of oil withdrawn from the global market since the US-Israeli attack on Iran is unprecedented. It is about four times the volume of oil withdrawn from the market in all the previous oil crises since the ’70s.

The magnitude of dislocation is immense. It will take many years to repair. The “second round effects” will simply transition us to the “third round effects.”

Our rice supply is especially vulnerable. The crop is dependent on urea fertilizer inputs. With urea shortages, the forecast is for the next harvests to suffer.

Anticipating reduced harvests, the time to stockpile rice is now. But there are political complications to this. Our rice farmers oppose importation – except when shortage is imminent. Importing rice to stockpile today makes economic sense. But it is politically suicidal.

Before the war against Iran began, I wrote a column anticipating the peso to slide to $1:P60. That anticipation was based entirely on trends visible at that time. This particular column was attacked by pro-administration trolls who are chronically unable to digest bad news.

Not only has the peso slid past the crucial threshold, it now stands significantly weaker. Our propensity to incur debt and our failure to export anything at scale will further weaken our currency. The potential loss of OFW remittances from the Middle East will cause our balance of payments deficit to widen.

In a word, the peso will likely continue depreciating. This will magnify the costs imposed by the global oil and gas situation. It will magnify food inflation since we now import a large amount of food and farm inputs.

Forecasting inflation at 6.5 percent might seem terrifying. I am betting, however, that considering all the other factors, our inflation rate will exceed forecast. The peso will exchange even lower than we see today.

The worst has yet to come.