Bottomless

We have not found the bottom yet. When currencies begin sharply depreciating, it is a challenge predicting where they will end up.

The Philippine peso was last exchanged at $1:P62.40. Analysts forecast it will operate within the P62 to P63 band until the end of the year. This offers us little solace.

Our peso is among the worst performing currencies in the world. This has less to do with external factors than with internal ones. Currencies do not prosper when their home economies are deluged with bad news.

It used to be that conventional economists assured us that depreciation is good. It encourages domestic industries and pushes exports. It limits the propensity to import. It grows the purchasing power of remittances from our migrant workforce.

I have heard no economist repeat that mantra lately. Since we import 99 percent of our oil and half of our natural gas, the prevailing exchange rate hardly influences buying decisions. Imported energy is a fixed expense.

We do not have much by way of exports. There could not be more than a handful of enterprises that will benefit from a collapsing peso.

Increasingly, we have imported more of the food we consume – including staples we used to produce for ourselves. The falling peso will not curb food importation. It will only force up the peso prices of what we eat.

In a word, the full inflationary weight of the peso’s depreciation will fall on every Filipino. Families of migrant workers might get more pesos for their dollars. But that will be quickly cancelled by elevated inflation.

Those who earn their incomes in pesos are defenseless against the onslaught of higher prices for everything. The contraction of their purchasing power is hastened by the local currency’s decline.

The President’s son tried to convince us that the peso is weak because the dollar is strong. That is not quite true. The dollar is itself scrambling. Other economies are dumping US Treasury bonds, forcing yields higher. The decline of petrodollars reduces the attractiveness of holding reserves in dollars. Higher bond yields push up interest rates, making mortgages more expensive.

People are expecting the US economy to crash at some point. Investments in US technology companies created a bubble threatening to burst. With disastrous consequences for the entire global economy.

The peso is simply weak. Portfolio funds have fled even as our stocks are at bargain basement levels. Foreign direct investments have reduced to a trickle, discouraged by corruption scandals, slippery policies and poor economic leadership. Local enterprises are moving capital abroad where returns are better and the outlook brighter.

A depreciating peso does not attract international investments. No one wants to convert hard currency into a fluffy one, losing on the exchange rate risks alone.

Add to this all the other risk premiums they have to consider: corruption, political volatility and natural calamities. We are the most disaster-prone country in the world. That simply compounds all our many other failures.

There is little on the economic radar screen that will mitigate the peso’s fall. Our GDP is hardly growing. Our political leadership labors under negative net approval ratings. Our agriculture has not been a redeeming factor – and lately it has faltered even more in the face of natural calamities.

A few months ago, I forecast in this space that the peso will break past the $1:P60 level. Pro-administration trolls attacked that forecast, claiming the peso will never fall past that level. This is a measure of the wishful thinking animating pro-administration partisans. They are clutching at straws.

Every factor at play conspires against the peso. Our outstanding sovereign debt will soon breach P20 trillion. A third of our national budget goes to servicing this debt. There is hardly anything left to pump-prime our sagging domestic economy.

Our debt-to-GDP ratio is now at about 66 percent. The conventional threshold for fiscal prudence has been breached. Yet we continue to borrow more. At least a third of the proposed 2027 national budget will be financed through additional borrowing.

National indebtedness is a disease. Beyond a certain point, it is not possible to outgrow the debt. The debt begins to consume us and impair our ability to fund economic expansion. It converts to additional taxes that will eradicate what is left of the middle class. It will cut away our ability to fund future growth by building the infra for it. Our ability to aggregate capital is crippled.

We do not have to wait until our economy implodes in a full-blown debt crisis. The large debt overhang impoverishes the people just by being there. It steals our future in plain sight.

But the political elite will not tame indebtedness. Borrowing is the only way to buy legitimacy through endless dole-outs. Our irresponsible elite is addicted to it. Without the subsidy programs, the political order crashes.

As the debt piles up, the interest we pay for borrowed money rises as well. Government takes pride in the fact that most of the debt is owed domestically. The bad news there is that government has crowded out others who might use local capital more efficiently – at least by not losing it to corruption.

The sinking peso is a barometer of how our economy is failing. Currency intervention will not break that fall. Attempting to do so will be calamitous.