(STAR) President Arroyo has issued a directive to make it easier for overseas Filipino workers (OFWs) to cope with effects of the strengthening peso in relation to the prevailing exchange rate against the US dollar.

Mrs. Arroyo signed Administrative Order No. 215 ordering the Department of Labor and Employment (DOLE) and the Overseas Workers Welfare Administration (OWWA) to correct the exchange rate of the membership fee imposed on OFWs.

Prior to the order, OFWs complained that the OWWA was using a P51 to $1 exchange rate for the $25 membership fee being collected from departing overseas workers.

The peso is now trading at below P42, so OWWA changed the rate to P42 after the President’s order.

Mrs. Arroyo also ordered DOLE to set up a global help line for OFWs.

The DOLE was also directed to work on reviewing and strengthening laws, policies and programs against illegal recruiters, unscrupulous employers and other parties violating OFW rights and employment conditions.

On concerns over the rising peso, Mrs. Arroyo directed the Cabinet representative in the Monetary Board of the Bangko Sentral ng Pilipinas to consider cutting, if not stopping, foreign borrowings in 2008.

The huge dollar inflows from OFW remittances and investments contributed to the strength of the peso, so it was suggested that foreign borrowings should be suspended at least temporarily.

Mrs. Arroyo also ordered the Department of Finance to prepay part of the country’s foreign obligations in order to reduce the overall external debt and consequently stem the peso’s rise.

In response to the complaints of OFWs about the high remittance fees being charged, Mrs. Arroyo called on the Landbank of the Philippines to facilitate its cheaper remittance service for the OFWs.

The President has constantly paid tribute to the OFWs for their contribution to the economy with their billions in dollar remittances. – Marvin Sy

Yearender: BSP does good job in managing inflation By Des Ferriols Thursday, December 27, 2007

(STAR) It was obvious from the start of the year that 2007 would not bring the usual doom and gloom that had been ever-present since the start of the decade.

The Bangko Sentral ng Pilipinas (BSP) was actually looking forward to a happy shift in the fiscal balance which meant that government borrowing would be significantly lower than usual and the credit market would have more space for private borrowing.

In January, the peso was already strong, breaking the 50:$1 level for the first time in two years. The currency was being supported by steady inflows from overseas Filipinos, portfolio and direct investments, export earnings and even income from investments abroad.

Moreover, inflation rate was dropping steadily because the strong peso was shielding domestic prices from increases in the world prices of oil and oil products.

On the whole, it looked like a good year for the BSP’s primary job of managing inflation which did not look to be under threat except for the consequence of strong dollar inflows.

Monetary policy amid rising liquidity

Even that early, the BSP had noticed that the steady inflow of foreign exchange into the economy was fueling an acceleration in domestic liquidity growth since the dollars coming in were being converted into pesos.

The more pesos there was in the system, the higher the probability that prices would go up because people had more money to spend and this would fuel a rise in domestic demand. The outcome, if not managed properly, was a rise in inflation.

In the beginning, however, the BSP said the economy could absorb the current rate of domestic liquidity growth although monetary officials said a prolonged growth rate of 20 to 30 percent would be inflationary.

The BSP said that although the shifting dynamics of the economy now enabled it to absorb higher liquidity growth, monetary officials would start to worry about inflation pressures if the growth rate accelerated even more and over a long period.

Domestic liquidity growth had jumped from 23 percent in January to 24.6 percent in March, significantly above the 14 percent average growth rate that the BSP had projected for the entire year.

By April, the growth in the domestic money supply had surged to 26.3 percent and the BSP was under fire for its decision in late 2006 to introduce a scheme that tiered the rates on bank placements with the BSP.

When the BSP introduced the tiered scheme, analysts said it had the effect of easing monetary policy by at least 200 basis points and released funds that would otherwise be parked by banks with the BSP.

This meant that the dramatic rise in liquidity should not have surprised the BSP, especially since its decision came at a time when foreign exchange inflows were gathering the kind of momentum not seen since before the Asian crisis in 1997.

To head off the possible runaway inflation that would have resulted from the rapid growth in money supply, the BSP finally decided to take action in May. Instead of lifting the tiering scheme, however, what the BSP did confounded the market: the Monetary Board decided to keep all its policy settings unchanged and opened its special deposit accounts to trust entities for the first time.

BSP Governor Amando M.Tetangco Jr. announced that the overnight borrowing rate would stay at 7.5 percent and the overnight lending rate at 9.75 percent. The tiering scheme on bank placements with the BSP was also retained. To address the radical rise in money supply, the MB said trust entities would be allowed access to the SDA and this alone was expected to draw the significant bulk of liquidity from the system. The BSP also decided it would allow trust department of banks to deposit with the BSP and allow banks to count their SDA deposits as alternative compliance with the liquidity floor requirements for government deposits.

This way, Tetangco said banks could use their SDA placements when calculating their liquidity floor compliance for government deposits. Normally, banks buy government securities to comply with this requirement.

Tetangco has always insisted that the BSP did not see excess liquidity but the MB needed to take action because projections showed imminent inflation surge over a one-year horizon due to strong foreign exchange inflows.

“We’re looking here at the same policy horizon of 15 months to two years,” Tetangco said. “So that is an indication that the effects of what we have done would take time and needed to be done this early before the potential risks become real problems.”

The results were immediate. In May, liquidity growth went down to 21.1 percent. By July, the growth rate had slowed down to 18.7 percent and a month later, the rate dropped to 14.9 percent and finally to11.4 percent in September.

“The BSP has been criticized for that but it has actually done a tremendous job fine-tuning that path,” said HSBC Asia-Pacific economist Frederic Neumann earlier.

“It was a bit unorthodox but so far it has been effective and it was actually quite a smart tactic.”

By then, however, the BSP had other problems. The peso had appreciated dramatically to levels not seen in seven years and the rumblings of imminent trouble in the US credit market had developed into a full-blown crisis.

Monetary policy then started to take a different turn as the US Federal Reserve Board began cutting down its key policy rates in an attempt to ward off economic recession that was expected to result from the crisis in the credit market.

This left the BSP with no choice but to adjust its own key policy rates which it did three times in a row, ultimately cutting the overnight borrowing rate to 5.5 percent and its overnight lending rate to 7.5 percent.

However, the BSP did not close the SDA tap and continued to mop-up liquidity from the system despite the dramatic slowdown in money supply growth. The rate cuts, however, made it cheaper for the BSP to do so.


The increase in the prices of oil and oil products in the world market should have fanned a rise in the inflation rate. However, the brunt of the impact of rising oil prices was largely blunted by the sheer strength of the peso against the dollar.

In the beginning of the year, the peso was at 48 to the dollar and this had allowed treasury officials to clean up the National Government’s debt portfolio by retiring the more expensive foreign obligations or swapping them with cheaper money.

The private sector too, took advantage of the strength of the peso and prepaid as much of their foreign obligations as they could while the peso was strong against the dollar.

The latest data from the BSP indicated that the public and the private sector had paid a combined total of $1.7billion worth of foreign obligations in the first seven months of the year, including loans that were owed the International Monetary Fund (IMF).

For the first time in four decades, the country was free of any obligation from the IMF where it was considered a prolonged user of funds with 23 IMF-supported programs since 1962.

“The prepayment served as a watershed event in the country’s relationship with the IMF,” Tetangco said.

The strength of the peso, however, made casualties out of the very people who have been funding the economy since the early 1970s when the country started deploying workers abroad.

The appreciation of the peso has seriously eroded the income of overseas Filipinos, particularly those whose salaries are dollar-denominated. Exporters were louder, however, arguing that they were losing competitiveness because the peso was so strong.

The BSP, for its part, admitted that the strong foreign exchange inflows were beginning to cause stress on the Philippine economy that would require immediate intervention.

Preliminary studies by the BSP indicated that the economy was beginning to show early symptoms of the so-called Dutch Disease which could result in the sharp contraction of the economy if not addressed properly.

According to Cyd Amador, BSP managing director for monetary policy, there were was evidence suggesting that remittances, in particular, could be setting off a cycle of ultimately negative side-effects of strong forex inflows.

The so-called Dutch Disease broadly refers to the harmful effects of large inflows of foreign currency, beginning with loss of competitiveness that could ultimately trigger a decline in the manufacturing sector.

According to Amador, the BSP had already looked at whether the same phenomenon was beginning to show as a result of strong forex inflows from investments and remittances but she said the first analysis showed no sign of the disease.

However, Amador said the most recent modeling she conducted had shown initial indications of a real appreciation of the peso against a basket of currencies that include the country’s main competitors in the world export market.

“The peso has been appreciating steadily together with currencies in these countries,” Amador said. “But in 2007, we began to see a modest increase in the real exchange rate, indicating some relative reduction in external price competitiveness.”

Despite mounting political pressure especially from industry, however, Tetangco has resisted the urge to aggressively interfere in the foreign exchange market to peg the exchange rate at a level that would be less damaging to both exporters and Ofs.

“At the end of the day, it will be a matter of subsidizing the difference between the market-determined exchange rate and whatever rate you want it to be,” Tetangco explained. “The National Government has budget issues that have not been completely resolved, the BSP does not have that kind of funds and it’s not even allowed by its mandate to peg the peso.”

Tetangco said that the most the BSP could do was to help OFWs and their families to learn how to hedge against the movements and volatilities in the foreign exchange rate. Ultimately, he said overseas workers would have to learn how to invest their earnings instead of using them up for consumption.

Exporters, on the other hand, would have to go back to the fundamental business of increasing productivity and efficiency in order to compete with the rest of the world instead of depending on the shield of the foreign exchange rate.

Tetangco said the success of this strategy, depended on whether the National Government would be able to deliver its promise of increasing spending on infrastructure to provide the competitive edge that Philippine industries have lost out to other countries with better infrastructure support.

Tetangco said he was optimistic of the country’s macroeconomic prospects. “I think we will see the fruits of the reform agenda which we have put in place,” he said. “We expect the economy to grow against a continued favorable inflation environment, the external position to remain strong, and the banking sector to improve in its profitability and stability,” Tetangco continued.

Chief News Editor: Sol Jose Vanzi

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