The peso this week rose to a two and a half year high of 42 Pesos to the US dollar. This was on the back of stellar growth figures over the past two quarters and revised estimates for the coming year. The flow into the country of so-called “hot money” from international investment houses and hedge funds has buoyed the local stock market to all time highs.
The Bangko Sentral reports that international reserves of foreign currency in the country over the past 18 months have grown rapidly at an annualized rate of 25% from $33B to over $44B. It forecasts that reserves will reach $58B next year. Meanwhile the financial system continues to be awash with cash as bank deposits with the central bank have breached the Php900B or $2B mark.
A lot has been written about the adverse effects of the rising power of the peso versus the US dollar on the families of overseas Filipino workers dependent on their remittances and on local exporters whose goods and services become more expensive relative to producers from other countries. Not much has been written about how to utlize the flow of income and wealth from overseas into our country.
Contrary to popular belief, the Philippines is no longer a net borrower of capital (the government’s record in that regard not being very helpful). The nation since 2005 has actually been a net accumulator of capital. Given that our international reserves keep rising and with it the value of our currency, it is high time we do something about it.
Rather than parking reserves overseas in fixed income securities and the like, the Philippine government should create a sovereign wealth fund to actively invest in projects based here and abroad in order to promote rapid development. Simon Johnson describes the rationale for establishing a sovereign wealth fund as follows
When a country, by running a current account surplus, accumulates more reserves than it feels it needs for immediate purposes, it can create a sovereign fund to manage those “extra” resources.
The Philippines would be an anomaly since it does not run current account surpluses (the difference between exports and imports of goods and services). It does however run balance of payments surpluses (the difference between the inflow and outflow of capital from trading and investments) due to the remittances of its overseas workers (consider them an export of services). The size of this is expected to hit $20B next year according to the BSP.
While traditionally, oil and gas exporting countries saw the need for establishing these funds, in order to deal with the “resource curse” of rapidly rising currencies reducing the competitiveness of their other exporting industries, there is nothing that would prevent the country from doing the same.
Singapore and China, both net importers of mineral resources are some of the new players in the region with some $300B and $800B in funds respectively. Australia had about $60B in its Future Fund when it was established. The Philippine monetary authorities need to do more than just engage in minor interventions in the spot market to temper the effects of foreign remittances. For the sake of the broad section of the population that relies on the strength of the dollar, some other forms of policy intervention are needed.
I leave it to you, dear reader, to assess the worthiness of this idea.