Erle Frayne D. Argonza
Good day to you, fellow global citizens!
The newspapers this morning released a gladdening news about a macro-economic fundamental in my beloved Philippines: foreign exchange or FOREX reserves breached the U.S. $62 Billion mark. The news item means that my country has all the foreign currencies to purchase a year-long worth of imports and still end up with a surplus of money.
That is inarguably good news, a veritable proof of how strong the Philippine economy is. My country surely belongs to the ‘Asian economy’ and is part of the region that is intractably the growth driver of the global economy today. PH’s forex grew by almost 50% from $44 Billion in 2009 to $62 Billion in 2010, and that is a very newsworthy development.
Practically all of the major macro-economic indicators in the country ended up with good results as of end of December 2010, thus ensuring prognosis of healthy fundamentals in the foreseeable future. GDP growth rate is good (c. 7%), balance of payments is at surpluses worth billions of U.S. dollars, exports & imports have rebounded since the lamentable contraction in 2009 (affected by the North’s recessionary winds), wages have been going up, inflation rate has been a manageable 2.8%-4.2%, debts are manageable (no fiscal crisis in the short run), domestic market had expanded by double digit, and liquidity has been sustained at manageable level.
So far so good! I have no better wish than to see the rising forex levels sustained so that PH can breach forex reserves of $100 Billion as early as 2012. At that level, we can safely say that foreign currency (dollar, pound sterling, yen, euro) will be an over-the-counter commodity, thus ending decades of forex crisis that was a factor behind PH’s low capability to secure foreign loans for its big ticket development projects.
The days of the forex crisis—whence forex levels wasn’t even enough to pay for 1 month of imports—is way behind us now in the ‘pearl of the orient seas’. Our forex reserves, added to the other macro-economic fundamentals, have rendered our country as more than stable economically and financially, thus meriting an upgrade in its assessment by investment evaluators (e.g. Moody’s).
The only thing to watch out, in a cautionary manner, is the contribution of portfolio investments to the forex level of late. As the northern economies burn, ‘smart money’ has been departing from their niches and finding new havens in Asia. And so a substantial sum of billions of dollars of that ‘smart money’ found its way into the Philippine financial and capital markets.
Our financial markets here are very highly liberalized, so the danger that volatilities can bring to our very own forex reserves is there. Extreme volatilities elsewhere in the globe can lead to investors’ gross divestment of their portfolios, thus leading to a domino effect of economic crash.
I have no problem admitting that short-term investments do make an economy healthy enough, provided that the regulatory mechanisms—available as tool to address volatilities’ adverse effects—are strengthened or reinforced at this moment. We can never have a repeat again of the Asian financial meltdown in 1997, a meltdown that began with currency attacks and then led to domino effects of crashing blows on banking, realty, manufactures, infrastructures, and the other sectors as well. No sir! We can and should never have a repeat again of that Dark Year of ’97!
Short of installing capital control measures, such as what Mahathir Mohammad did for Malaysia, PH’s central bank and monetary board should evaluate quickly the impact of possible volatilities through simulation models at hand. Maybe more tighter regulatory interventions should be installed as options in case of the contingencies arising, measures other than manipulating the liquidities through interest rates or shoring up fiscal capabilities through extended treasuries sales.
Among the options to be taken is the imposition of a Tobin Tax on all cross-border financial transactions. I have been echoing this option since the late 1990s yet, and I will again echo it this time. Just by imposing 0.35% tax on all such transactions, the country can accumulate buffer stocks of monies for the rainy economic days, at the same time that it can contribute immensely to international organizations such as the UN (as per prescription by the late economist James Tobin).
Meantime, for the Filipinos and Asians, cheers over the buoyant forex reserves in Manila! Mabuhay!
[Philippines, 08 January 2011]
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