Limit to transparency
Published Nov 10, 2022 00:02 am
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Updated Nov 10, 2022 00:02 am
OF SUBSTANCE AND SPIRIT
Diwa C. Guinigundo
It was necessary for the President to have met his economic managers last Oct. 18 and discussed inflation, exchange rate and interest rates. Our people should be reassured that today’s critical situation has the attention of those in the highest places. Unfortunately, the sound bites that resonated from the Palace were not exactly inspiring. We have to underscore this because it is the nation’s utmost interest that is at stake in that meeting, and that is our best wish. There is such a thing as limit to transparency.
First, the President’s creative team should have advised against disclosing that “the policy directions for the rest of the year and the first quarter of next year were discussed.” Nothing has been unveiled yet, so we don’t want to think that we are on a short lease, following a playbook by the quarter. Without doubt, setting policy direction four months into his six-year term implies that we have just started to mull about our future.
We are therefore led to gloss over the succeeding clarification by NEDA Secretary Arsi Balisacan. Through the Medium-Term Fiscal Program and Philippine Development Plan (PDP) framed by the 8-point socio economic agenda, some critical policy and legislative priorities would be set forth to guide the government in addressing immediate economic and social issues. But even then, the PDP will be completed only by the end of the year.
Between the time the plan is completed and actually implemented, we need to secure its broad ownership by the rest of government and civil society. This is possible only if the citizenry is aware of what the government intends to do. A campaign platform or a track record would have been most useful.
It was both for the come-backing Luiz Inácio Lula da Silva of Brazil who won the Brazilian presidency last Oct. 30. With two terms as president (2003-2011) under his belt, Lula championed comprehensive social policy and he actually disclosed it during the elections and delivered on it during his incumbency. Brazil’s impressive growth during his previous term benefitted most of the population. Poverty dropped by some 40 percent. Majority of the Brazilian population had acquired at least an elementary education. Cameron Abadi of Foreign Policy last Nov. 4 cited that electrification became accessible to the vast majority of Brazilians. Sea change in Brazil is worth a thousand plans, a graphic proof that inclusive growth is possible.
The concrete plan was his government’s investment in schools, electrification, other infrastructure and yes, to ensure quick survival, cash transfer to the poor, or Bolsa Familia. This social instrument ensures poor families are assisted to access the most basic form of education and health facility. Welfare distribution is done right at the mass level, something that is aligned with Lula’s politics. He risked his life in the 1960s and the 1970s, opposing a military dictatorship. Lula has a serious commitment to democratic ideals.
Second, the President also declared that “we will continue to use interest rates to mitigate the effects.” It is most reassuring for the people to hear no less than their head of state telling them what instrument to use to mitigate this inflationary scourge. But at the same time, that could trigger more comments. Why speak on interest rate when allowing the BSP to handle both the conduct and communication of monetary policy could better promote its independence and effectiveness? A hands-off policy will also protect him from any backlash in case the outcome turns out differently.
And finally, the third sound bite may be considered inordinately costly: “We may have to defend the peso in the coming months…” That is giving tons of information to market speculators, that is opening an opportunity for them to make tons of money. Central banks would normally reaffirm that their exchange rate regime is one of independent float, or flexible. But their treasury departments should remain free to address extreme volatilities on both sides of the daily trading. That is part of FX market activities. Speculators have no incentive to game the monetary authorities.
While the weakening of the domestic currency adds more pressure to inflation, it would be smart not to reveal the exchange rate path, or to BSP Governor Philip Medalla, to draw the line in the sand. One wins in poker when he remains stoic, repressing the urge to flaunt his unbeatable cards, or telegraphing how much he is prepared to bet beyond those chips. But laying all these on the table means half of the battle is lost.
Leaving aside poker, it should have dawned on us that the peso is losing ground against the US dollar because of some fundamental reason. Our balance of payments (BOP) is not doing very well. For the first nine months of 2022, the deficit stood at $7.8 billion versus year-ago level of only $665 million. In the last few years, we sustained surpluses with a high of $16 billion in 2020 reflecting the weak business activities during the pandemic, huge drop in imports and weak demand for US dollar. It should not surprise us that the peso was unusually strong at ₱49.624 to a dollar in 2020.
The US Fed’s spiraling interest rates aggravated this situation and motivated capital flight away from emerging markets including the Philippines. Our high domestic inflation, fiscal deficit, and public debt, could only work against the peso. The demand for US dollar intensified even more.
Are we prepared to waste our precious FX reserves?
Announcing the need to defend the peso, the amount of US dollar to spend and defend it at ₱60 level would make us appear hopelessly clueless. This is not good in inspiring confidence in the forthcoming PDP in December 2022.
By then, we would only have 11 semesters to make up.
Diwa C. Guinigundo
It was necessary for the President to have met his economic managers last Oct. 18 and discussed inflation, exchange rate and interest rates. Our people should be reassured that today’s critical situation has the attention of those in the highest places. Unfortunately, the sound bites that resonated from the Palace were not exactly inspiring. We have to underscore this because it is the nation’s utmost interest that is at stake in that meeting, and that is our best wish. There is such a thing as limit to transparency.
First, the President’s creative team should have advised against disclosing that “the policy directions for the rest of the year and the first quarter of next year were discussed.” Nothing has been unveiled yet, so we don’t want to think that we are on a short lease, following a playbook by the quarter. Without doubt, setting policy direction four months into his six-year term implies that we have just started to mull about our future.
We are therefore led to gloss over the succeeding clarification by NEDA Secretary Arsi Balisacan. Through the Medium-Term Fiscal Program and Philippine Development Plan (PDP) framed by the 8-point socio economic agenda, some critical policy and legislative priorities would be set forth to guide the government in addressing immediate economic and social issues. But even then, the PDP will be completed only by the end of the year.
Between the time the plan is completed and actually implemented, we need to secure its broad ownership by the rest of government and civil society. This is possible only if the citizenry is aware of what the government intends to do. A campaign platform or a track record would have been most useful.
It was both for the come-backing Luiz Inácio Lula da Silva of Brazil who won the Brazilian presidency last Oct. 30. With two terms as president (2003-2011) under his belt, Lula championed comprehensive social policy and he actually disclosed it during the elections and delivered on it during his incumbency. Brazil’s impressive growth during his previous term benefitted most of the population. Poverty dropped by some 40 percent. Majority of the Brazilian population had acquired at least an elementary education. Cameron Abadi of Foreign Policy last Nov. 4 cited that electrification became accessible to the vast majority of Brazilians. Sea change in Brazil is worth a thousand plans, a graphic proof that inclusive growth is possible.
The concrete plan was his government’s investment in schools, electrification, other infrastructure and yes, to ensure quick survival, cash transfer to the poor, or Bolsa Familia. This social instrument ensures poor families are assisted to access the most basic form of education and health facility. Welfare distribution is done right at the mass level, something that is aligned with Lula’s politics. He risked his life in the 1960s and the 1970s, opposing a military dictatorship. Lula has a serious commitment to democratic ideals.
Second, the President also declared that “we will continue to use interest rates to mitigate the effects.” It is most reassuring for the people to hear no less than their head of state telling them what instrument to use to mitigate this inflationary scourge. But at the same time, that could trigger more comments. Why speak on interest rate when allowing the BSP to handle both the conduct and communication of monetary policy could better promote its independence and effectiveness? A hands-off policy will also protect him from any backlash in case the outcome turns out differently.
And finally, the third sound bite may be considered inordinately costly: “We may have to defend the peso in the coming months…” That is giving tons of information to market speculators, that is opening an opportunity for them to make tons of money. Central banks would normally reaffirm that their exchange rate regime is one of independent float, or flexible. But their treasury departments should remain free to address extreme volatilities on both sides of the daily trading. That is part of FX market activities. Speculators have no incentive to game the monetary authorities.
While the weakening of the domestic currency adds more pressure to inflation, it would be smart not to reveal the exchange rate path, or to BSP Governor Philip Medalla, to draw the line in the sand. One wins in poker when he remains stoic, repressing the urge to flaunt his unbeatable cards, or telegraphing how much he is prepared to bet beyond those chips. But laying all these on the table means half of the battle is lost.
Leaving aside poker, it should have dawned on us that the peso is losing ground against the US dollar because of some fundamental reason. Our balance of payments (BOP) is not doing very well. For the first nine months of 2022, the deficit stood at $7.8 billion versus year-ago level of only $665 million. In the last few years, we sustained surpluses with a high of $16 billion in 2020 reflecting the weak business activities during the pandemic, huge drop in imports and weak demand for US dollar. It should not surprise us that the peso was unusually strong at ₱49.624 to a dollar in 2020.
The US Fed’s spiraling interest rates aggravated this situation and motivated capital flight away from emerging markets including the Philippines. Our high domestic inflation, fiscal deficit, and public debt, could only work against the peso. The demand for US dollar intensified even more.
Are we prepared to waste our precious FX reserves?
Announcing the need to defend the peso, the amount of US dollar to spend and defend it at ₱60 level would make us appear hopelessly clueless. This is not good in inspiring confidence in the forthcoming PDP in December 2022.
By then, we would only have 11 semesters to make up.