why am i not getting wet?

on wednesday the 13th (my lucky number. what can i say, i am a witch.), i attended the economic forum sponsored by the economic journalists association of the philippines or ejap. a star studded affair attended by the central bank deputy governor diwa guinigundo, the finance head cesar purisima, the world bank's country manager bert hofman, as well as bankers from bdo, citibank and standard chartered bank.
aside from lending glamour to the event and supporting my friends who are officers of ejap -- the country's only organization of business journalists covering, what else, business and economic beats -- i was intrigued by the forum's topic: awash in cash: making liquidity work for the economy.

i luv the topic. a bit technical but could be understood if you are patient enough to listen. then do some readings afterwards. i did.
the question on most reporters' mind (including myself) was: where is that extra cash? how come we remain dry? (no pun intended, you naughty naughty gurls and boys).
maybe there was not much to go around? don't you think?
as world bank's hofman told the audience, china dwarfed every asian country as far as liquidity is concerned. the soon to become world's largest economy simply siphoned off most of the capital -- investments and debt -- flowing into the region that there is not much left to others.
at $3.2 trillion, china's so called gross international reserves or foreign exchange reserves simply dwarfed the philippines' $69 billion. oh well, and we have the nerve to challenge beijing over the disputed spratlys?
sorry, i am all for national sovereignty and all that, but we have to be realistic. instead of provoking the giant, we should look for more diplomatic means to settle the row. not all the time can david topple goliath, you know.

anyway, going back to the forum, the central bank's guinigundo argued that because the country was flooded with liquidity coming from remittances from citizens working overseas, proceeds from international bond issues of corporates and the government, as well as portfolio investments (money from foreign investors used to buy listed shares of local firms), there may be more tightening of monetary policy ahead to thwart inflationary pressures.
meaning, the central bank may raise its benchmark interest rates anew (that may lead to more expensive domestic borrowings) or raise the reserve requirement imposed on bank deposits.
cheaper loans usually encourage more borrowings, resulting in more money in the hands of consumers and businessmen and may push up spending and investments.


so far this year, monetary authorities have raised the central bank's key rates by 50 basis points and the so-called reserve requirement on bank deposits (or the amount of cash raised from depositors that banks must keep with the central bank) by 100 bps or one percentage point.
these tightening measures were aimed at curbing inflationary pressures. you see, as more money circulated in the financial system (usually in the hands of companies and individuals), there is more demand for goods and services, causing consumer prices to pick up at a much faster pace than anticipated. now, every government and central bank in the world don't want that because it could spell political trouble.
last month, inflation accelerated to its fastest pace in 26 months even after the central bank's two rate increases in march and may and the rise in the banks' reserve ratios in june.
while the usually hawkish guinigundo did not categorically said that more tightening measures can be expected in the coming months, his answers to questions from reporters during an ambush interview hinted to that scenario.

so that means that my chances of getting wet will become less and less likely.
on the other hand, rising rates may lure more portfolio funds or "hot money" into the country, as investors look for higher yields for their cash.
as europe's debt crisis worsen and as debt raters warned about a credit rating downgrade in the united states of obama, foreign investors were betting on asia's relatively safer but higher yielding debt papers. the philippines, by the way, remained one of the most attractive debt markets in asia, given its improving credit worthiness and higher yields.
the surge in this flighty capital (these funds could easily flow out of the country at the slightest hint of instability, wrecking havoc on the currency, balance of payments and the economy in general) poses some problems to regulators.
first these funds cause the peso to appreciate against the u.s. dollar, a headache to exporters because that would mean that their goods would be more expensive when sold overseas (that is, if other currencies remained steady vis-a-vis the greenback).
second, they could further aggravate the liquidity situation.


this was the case when i first covered the central bank in the 90s, when veteran central banker gabriel singson was the governor. exporters, particularly those from cebu, were up in arms because of the strong peso, buoyed by the surge in foreign funds that flowed into the country's stock and debt markets.
this was the time of the ipo boom, when the government under president ramos was privatizing state owned firms and encouraging local companies to list in the stock market by selling shares for the first time to the public to fund expansion, pay debt and finance other needs.


"this is a nice problem to have," singson chuckled when told that cebu exporters including seaweed king benson dakay staged a rally in the city carrying coffins labelled philippine exports.
well, we survived that one.
and the crisis that followed.
after thailand (which, like the philippines, also enjoyed a strong currency due to heavy inflows of foreign portfolio investments) suffered a reversal in investor sentiment, bangkok was forced to devalue the baht, pressuring the philippine peso and other asian currencies to weaken. that resulted in a competitive devaluation (or the beggar thy neighbor policy).
as expected, the philippine central bank followed thailand's lead and the peso was devalued.
ironically, exporters also complained because that raised the cost of imported raw materials such as oil.
the reversal in capital flows resulted in the asian currency crisis in the late 90s (97-98).


so are we going to see a repeat of the forex crisis?
most economists and analysts believed otherwise. first, most asian central banks and governments have learned their lessons, so safety nets have been put in place, banks have been strengthened, and monetary authorities were now quicker to respond at the earliest signs of trouble.
my only concern about this whole liquidity thing is that aside from us journos, majority of the filipinos are not benefiting from this.
despite sws' claims that the number of filipinos suffering from hunger declined, it could not be denied that majority of filipinos remained poor. that the so-called trickle down effect from the sustained economic expansion in the last few years was never felt, never seen, never happened.

by the way, who is enjoying all that money?
look at forbes's list of the richest in the philippines.
while at it, look around you. what do you see?
yes, more shopping malls. that means the country will rely more on consumer spending to fuel growth. that means, more reliance on remittances.
a not so encouraging sign because as a developing country, we need more factories to ensure a more vibrant economy. like what south korea and china have done and are doing.

lastly, at the end of the forum, nobody gave a concrete answer on how can the country make liquidity work for the economy.
or maybe i missed that one because i stepped out when a high ranking government official delivered his valedictory address, some say lecture, on responsible journalism.


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