What should we do with a $14.4B BoP surplus?

The banner story in today’s business sections of the three major dailies announces the largest Balance of Payments surplus for the Philippines standing at $14.4 billion. Here is what the Inquirer reported

The sustained increase in remittances, higher export earnings and a surge in foreign capital inflows lifted the surplus in the country’s balance of payments (BOP) to an all-time high of $14.4 billion in 2010.

The Bangko Sentral ng Pilipinas on Wednesday said the BOP surplus cemented claims that 2010 was a banner year for the Philippines especially in terms of inflows of dollars and other foreign currencies.

The surplus, the highest ever recorded, was more than double the $6.42 billion registered in 2009.

For December alone, the surplus stood at $1.23 billion, up slightly from $1.22 billion in the same month of the previous year.

The BOP is a record of the commercial and financial transactions of the country with the rest of the world. A surplus, which indicates that the inflows are more than the outflows, adds to the Philippines’ total reserves of foreign currencies or the gross international reserves (GIR), which reflects the country’s ability to pay for imports and services and settle maturing debts to foreign creditors.

The central bank earlier reported that the country’s GIR registered a historic high of $62.1 billion as of the end of 2010 (emphasis added).

To put the last statement in its proper context, our current gross international reserves are enough to pay for a full year’s worth of imports! To show just how far we have come, there was a time in the mid-80s when the country struggled to even pay for a few months’ worth of imports. The forecast in 2011 is for our reserves to climb up to $70B. Because of this some have predicted that the peso could appreciate this year to 40 to a dollar. This would pose serious challenges to our export sector as well as to the workers overseas whose remittances are partly driving up our reserves.

Previously, I had commented in this space about the need for our Bangko Sentral (BSP) to start looking at new policy tools for dealing with this imminent threat. Other countries in Latin America have also been faced with rising currencies and have attempted to deal with them using both traditional and unorthodox means as the Economist has reported this week.

Having quickly shaken off the world recession, many countries in Latin America are prospering again. The region’s economies grew by an average of 6% last year, according to a preliminary estimate from the United Nations Economic Commission for Latin America and the Caribbean. This strong performance, linked in large part to the global commodity boom, has attracted big inflows of foreign cash. With that has come a familiar problem: the region’s currencies have soared in value against the dollar, making life uncomfortable for Latin American manufacturers. They find themselves priced out of export markets or struggling to compete with cheap imports. Worried governments are launching a battery of measures to try to restrain the value of their currencies.

Yet the BSP at the end of last year stated that it was quite happy with the current policy settings saying that the real effective exchange rate of the country (economistic gobbledygook for the prices of our goods that are traded abroad) have risen moderately compared to other countries in the ASEAN region. That may be cold comfort though for the families of overseas contract workers who see their expected earnings in pesos still dwindling nonetheless.

At any rate, the Philippines as always might have to play policy catch-up with its Latin American brethren (as it has with the conditional cash transfers program). Perhaps (and this is where I become a bit speculative) we ought to lend some of our reserves to Ireland or some other struggling European economy (Spain or Greece perhaps?). Expatriation of foreign reserves is not a bad thing. The country can still earn a decent return from its investments while relieving the peso from upward pressure.

Why not? If we remain timid, we might miss the boat once again. As the currency wars rage on, our response needs to be well thought through.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • KG

    “They simply created the pesos out of thin air in exchange for these dollars. Those pesos then are added to the total money supply in the economy domestically. Today the BSP with the tremendous amount of peso creation in the past few years has had to expand the use of their special deposit accounts to park all these pesos. Today Php 1.22 trillion are parked in this account alone.”JAG

    JAG you sure sound like HVRDS.

    “Last week we focused on the incontrovertible fact that the Philippines is fully equipped to achieve success in its national economic recovery aspirations, particularly in the availability of domestic capital, as the idle P1.22-trillion Special Deposit Account managed by the Bangko Sentral ng Pilipinas shows. Hiro Vaswani, forensic finance process consultant and research chief of KME (Kilusan para sa Makabansang Ekonomiya), pointed this out — something that we shared in our last column. ”
    http://www.tribuneonline.org/commentary/20110124com5.html

  • I never said we didn’t earn anything from US notes. I said we earn next to nothing especially when you factor in the depreciation of the dollar.

    Also the notion that the Philippines is a net importer of capital is factually incorrect. How else could our net foreign reserves as reported by the BSP pile up to begin with to roughly equal a full year’s worth of imports?

    I am aware of fractional reserve banking having earned a masters degree in economics from the UP School of Economics. AIM certified me to be a corporate director of banking and financial institutions because that was the role I performed at the time (I personally do not believe in brandishing qualifications, but you force me to do so).

    These days however any freshman in college studying Economics 101 will be familiar with the concept of fractional reserve banking. Frankly there is nothing particularly sophisticated about it as a rudimentary knowledge of algebra is all that is required to learn it. Again you keep bringing it up but as I mentioned it has no relevance to the proposals and to the discussion at hand.

    Finally I never claimed that investing through a sovereign wealth fund did not have its risks. Of course there are risks to any policy instrument. The question is whether the risks of staying the course outweigh the risks of changing course. My thesis is that the BSP is perhaps not assessing the risks properly.

    I was also using Ireland merely as an example. In reality, there are a myriad of other possibilities, but the first step would be to set up the fund along with the necessary prudential governance systems to manage it.

  • J_ag

    Ahem, another so called economist proposing stuff he so obviously does not know or understand anything about.

    Firstly on effective exchange rate. When we export abroad we do not sell our goods for pesos. We sell it for dollars, yen, euros or swiss francs predominantly. Don’t just quote stuff.

    Secondly under the BSP law most of our forex reserves are to be in dollars. They are mostly all lent out to the U.S. government. They do not sit in a giant vault in the BSP. They are also mostly in the form of ledger entries in some U.S. bank which is part of the U.S. Federal Reserve System which backstops our fractional reserve banking system. Do you know what that means?

    Now the BSP with a capital paid up of only Php 10 billion pesos and with forex reserves equivalent to over $70 billion one question comes to mind. How did the BSP buy the reserves?

    They simply created the pesos out of thin air in exchange for these dollars. Those pesos then are added to the total money supply in the economy domestically. Today the BSP with the tremendous amount of peso creation in the past few years has had to expand the use of their special deposit accounts to park all these pesos. Today Php 1.22 trillion are parked in this account alone.

    Do you know the effect of releasing this cash onto the banking system and lending it out. The multiplier effect in credit creation would multiply the money supply by almost five times normally.

    That would mean an additional Php 4-5 trillion in money creation. Who would need foreign investors?

    The Philippine economy is only an Php 8 trillion economy.

    Where did you learn your economics? From the movies or comics?

    • Well, I try to avoid the technicalities, but since you have used some of your knowledge to ‘poison the well’ so to speak, then allow me to engage in a response.

      Firstly, regardless of whether we are talking of physical or electronic currency, the core problem remains. There are more dollars flowing in (or being debited to our accounts) than are flowing out. So the question becomes “should we keep current monetary policy settings in place?”

      Secondly, the current policy settings as you point out as mandated by law is to park excess currency with the US Federal Reserve in the form of short term treasury notes (in effect lend it to the US). At present those notes earn close to zero interest because of the Fed’s accommodative stimulus in response to the US recession (and in retaliation to China’s own currency manipulation).

      So in effect the money is earning next to nothing and is also losing value as a result of the dollar’s slide (some say that will correct itself in the next two years, but then what to do in the interim).

      Thirdly, other countries such as China, Singapore, Australia and many more have used sovereign wealth funds to expatriate their dollars overseas. Again whether we talk of physical or metaphysical dollars is beside the point. These funds lend to other countries and for foreign projects in need of them. That is what I was proposing in this and previous articles.

      I was not proposing we lend it internally since the banking system is already awash with cash. I was proposing we lent it overseas. I know how the banking system works by the way having been certified by AIM as a corporate director in financial institutions. I also previously worked in the system and wrote a graduate terminal paper on it at the UP School of Economics.

      This article is about looking at what our peers in the region are already doing in response to the currency wars of Chimerica (China v US). Sovereign wealth funds are just one option. Other more exotic and stringent options are available although I’m not sure if we want to go there just yet. But they are worth investigating at this point.

      • J_ag

        Who said we do not earn interest on U.S. treasury assets. Do not confuse the interbank rate which is at zero from the different tenors of U.S. treasury debt and debts issued by GSE’s. (Fannie Mae & Freddie Mac)10 year and 30 years treasuries pay off 3-4%.

        GSE means Government Sponsored Enterprises.

        Also do you know what fractional reserve banking is?

        Countries that are net capital exporters can afford to have sovereign wealth funds. The Philippines is a net importer of finance capital.

        Please go to the website of the U.S. treasury and check on the list of countries that lend money to the U.S. treasury and the amount they lend.

        Foreign central banks go through authorized security dealers (US banks) who are authorized to bid in auctions of U.S. treasuries.

        All central banks park their reserves in the triple A sovereign issued bond markets. These reserves are managed for them by asset managers of the large US banks.

        Just because you have been schooled in fiance does not make you an expert monetary economics. Business financial accounting is completely different from economic accounting.

        If we invest dollars into Ireland we will have two fold risks. Exchange risk and the risk of being killed in the price of bonds we buy. Interest debt on Irish sovereigns have skyrocketed due to the risk of default. Prices of Irish bonds have collapsed. Do you know anything about bond markets? Bond prices change everyday.

        The bond markets are waiting for the EU community to guarantee Irelands public debt by issuing EU bonds guaranteed by the entire EC. Unlike the US the EU is not an integrated fiscal union. The EU is not a Federal super state like the U.S.

        One of the more serious debates ongoing at the highest circles of the U.S. government is on the proper definition of money. The Federal Reserve itself has stopped publishing data for M3 money supply.

        School yourself first on Central Banking and monetary authorities. They do not teach that at AIM.

  • Anonymous

    Lending money to Ireland is an idea, but why not lend the money to ShoeMart so that ShoeMart has more capital to build another mall or a couple of high-rise residential projects in China? Why not lend the money to the World Bank so that the World Bank has more money to lend Pilipinas for the funding of an additional million indigent families for CCT? Why not lend the money to a German company like FRAPORT so that they can undertake airport-building projects in Africa?

    Or Pilipinas can buy thousands of hectares of Thailand agricultural land so Thai farmers can grow the rice that Pilipinas imports every year?

    OR: Pilipinas can lend at 9/10 rates to Pilipinas rural banks so that the rural banks can lend at 7/10 rates to compete against 5/6.

  • Anonymous

    Lending money to Ireland is an idea, but why not lend the money to ShoeMart so that ShoeMart has more capital to build another mall or a couple of high-rise residential projects in China? Why not lend the money to the World Bank so that the World Bank has more money to lend Pilipinas for the funding of an additional million indigent families for CCT? Why not lend the money to a German company like FRAPORT so that they can undertake airport-building projects in Africa?

    Or Pilipinas can buy thousands of hectares of Thailand agricultural land so Thai farmers can grow the rice that Pilipinas imports every year?

    OR: Pilipinas can lend at 9/10 rates to Pilipinas rural banks so that the rural banks can lend at 7/10 rates to compete against 5/6.

    • Anonymous

      Before some folks get carried away with the suggestion — Pilipinas to lend at 9/10 to rural banks or Pilipinas to buy land in Thailand — be reminded that much of that $14,4Billion Balance of Payments surplus for the Philippines can not be touched (at least for now) by Noynoy Administration. An example — OFW remittances. Since Pilipinas has not yet put a 40%-tax on OFW-remittances (not yet), then Pilipinas is unable to buy agricultural land in Thailand. Too bad. Malacanang has issues with Filipino Haciendas and Filipino farmers with regards food self-sufficiency for Pilipinas. It will be nice, though, if Malacanang directs more money for irrigating more agricultural land and to provide more training to farmers. Also low-cost loans. (***I know that farmers (and sari-sari store owners) are still saddled with loans at 48% or higher interest rates.)

    • Anonymous

      Before some folks get carried away with the suggestion — Pilipinas to lend at 9/10 to rural banks or Pilipinas to buy land in Thailand — be reminded that much of that $14,4Billion Balance of Payments surplus for the Philippines can not be touched (at least for now) by Noynoy Administration. An example — OFW remittances. Since Pilipinas has not yet put a 40%-tax on OFW-remittances (not yet), then Pilipinas is unable to buy agricultural land in Thailand. Too bad. Malacanang has issues with Filipino Haciendas and Filipino farmers with regards food self-sufficiency for Pilipinas. It will be nice, though, if Malacanang directs more money for irrigating more agricultural land and to provide more training to farmers. Also low-cost loans. (***I know that farmers (and sari-sari store owners) are still saddled with loans at 48% or higher interest rates.)

      • Anonymous

        But while Pilipinas can NOT buy rice fields in Thailand to support Pilipinas food sufficiency, China can. And Malacanang of Noynoy administration has “sold” hundreds of thousands of hectares Pilipinas agricultural land to China (for China food-sufficiency).

      • Anonymous

        But while Pilipinas can NOT buy rice fields in Thailand to support Pilipinas food sufficiency, China can. And Malacanang of Noynoy administration has “sold” hundreds of thousands of hectares Pilipinas agricultural land to China (for China food-sufficiency).

      • Anonymous

        What Pilipinas can do is borrow 8%APR-money (with Govt-Republic-Pilipinas providing guarantee) and then lend the money at 11%APR to rural banks with directives that the 11%APR-money should be loans to sari-sari stores, farmers (and other small enterprises).

        If the rural banks charge 36%-APR for these loans (much much lower than monthly 5/6), then that would be progress. But PresiNoynoy knew this already from his sales days and from his Ateneo-Loyola Heights economics classes.

        The challenge — how to handle “hot” money. Need some experts for that!

      • Anonymous

        What Pilipinas can do is borrow 8%APR-money (with Govt-Republic-Pilipinas providing guarantee) and then lend the money at 11%APR to rural banks with directives that the 11%APR-money should be loans to sari-sari stores, farmers (and other small enterprises).

        If the rural banks charge 36%-APR for these loans (much much lower than monthly 5/6), then that would be progress. But PresiNoynoy knew this already from his sales days and from his Ateneo-Loyola Heights economics classes.

        The challenge — how to handle “hot” money. Need some experts for that!

  • Anonymous

    Lending money to Ireland is an idea, but why not lend the money to ShoeMart so that ShoeMart has more capital to build another mall or a couple of high-rise residential projects in China? Why not lend the money to the World Bank so that the World Bank has more money to lend Pilipinas for the funding of an additional million indigent families for CCT? Why not lend the money to a German company like FRAPORT so that they can undertake airport-building projects in Africa?

    Or Pilipinas can buy thousands of hectares of Thailand agricultural land so Thai farmers can grow the rice that Pilipinas imports every year?

    • Anonymous

      Before some folks get carried away with the suggestion — Pilipinas to lend at 9/10 to rural banks or Pilipinas to buy land in Thailand — be reminded that much of that $14,4Billion Balance of Payments surplus for the Philippines is out-of-touch (at least for now) to Noynoy Administration. For example, much of the $14.4Bllion surplus is from OFW remittances. Since Pilipinas has not yet put a 40%-tax on OFW-remittances (not yet), then Pilipinas is unable to buy agricultural land in Thailand. Too bad. Malacanang has to use depend on Filipino Haciendas and Filipino farmers with regards food self-sufficiency for Pilipinas.

      • Anonymous

        But while Pilipinas can NOT buy rice fields in Thailand to support Pilipinas food sufficiency, China can. And Malacanang of Noynoy administration has “sold” hundreds of thousands of hectares Pilipinas agricultural land to China (for China food-sufficiency).

      • Anonymous

        What Pilipinas can do is borrow 8%APR-money (with Govt-Republic-Pilipinas providing guarantee) and then lend the money at 11%APR to rural banks with directives that the 11%APR-money should be loans to sari-sari stores, farmers (and other small enterprises).

        If the rural banks charge 36%-APR for these loans (much much lower than monthly 5/6), then everyone will be happy, wasn’t this taught at Ateneo-Loyola Heights economics classes?