The Scent of War
The Philippine Star
02/21/2003

War brings all shapes and sorts of speculators. And victims too. For the Philippine economy, the most vulnerable to this unwarranted attention is the peso, as can be gleaned from recent developments.

Even before the gongs of war were sounded by the United States last Tuesday sans a United Nations resolution, the peso had been taking an ugly beating weeks ago as speculators tried to anticipate how misshapen the local economy would be by the time the first shots are fired.

A week before US President George Bush gave Iraqi President Saddam Hussein 48 hours to leave Baghdad, the peso plunged to an all-time closing low of P55.099 to a dollar, beating the previous end-of-trading record of P54.79 during the last few days of the Estrada administration.

(The Estrada government still holds the record for the lowest intra-day rate of P55.75; this happened when the local currency plummeted a day after senators voted not to open the second envelope of the Jose Velarde account.)

Currency traders are unanimously betting the peso would breach the P60 level within the year. Forward contracts sold overseas are definitely worth already more than P60, according to bankers.

Lucio Tan's prediction last year that the peso would drop to a heart-rending P120 to a greenback in seven years is now not as farfetched as at the time he said it.

Speculating on the economy's vulnerabilities

While the government is hot on the tails of currency speculators who are supposedly criminally liable, there is not much that can be done in the case of businesses with real dollar requirements. It would be naïve to expect businessmen to refrain from hedging on the value of their future importations.

The oil industry, for example, buys more than $300 million worth of crude and finished petroleum products monthly. Because the country is almost totally reliant on imported fuels (even the celebrated Malampaya natural gas is not much comfort), protecting future oil purchases causes relatively huge hiccups in the currency landscape.

It does not also help that 15 percent of the country's annual offshore workers' remittances come from the Middle East where more than 1.3 million Filipinos are employed. Nor that a big portion of the country's economy is buoyed by exports to the US, the only country that has remained the Philippines' biggest buyer of locally manufactured goods.

A drop in exports would shrink the country's current account surplus, which incidentally already reflects the bad state of the country's trade. As a side note, this indicator was overstated in the last three years following the failure of the government to appropriately capture data on electronic imports in the special economic zones.

The current account surplus, together with the balance-of-payment position, is indicative of the country's ability to settle its importation and debts.

The deficit and debt burden

The Economist, a British weekly magazine, identified the Philippines as the biggest loser-and hardest hit in Asia-once US-led forces attack Iraq. Filipino economist Walden Bello agrees.

The Philippines' vulnerability lies in its humongous foreign debt. Official government data showed that as of end-2002, the government's debt stock stood at PhP2.815 trillion while the country's total foreign debts-both private and public-hit about USD54 billion.

For a country mired in debts-and needing to borrow half of its overseas financing requirements-the adverse impact of the US-led war on the cost of borrowings would be staggering.

At this point, the national government still has to borrow $1 billion to complete a $2.4 billion foreign financing program this year. The private sector, on the other hand, would need $2 billion to pay off debts and finance capital projects.

As financing from foreign markets becomes difficult, all these groups will turn to the local market for financing. That would be disastrous on domestic interest rates.

Higher interest rates make it more difficult for borrowers to tap loans. This would definitely have a chilling effect on the economy. The government, as the biggest borrower in the country, would have a harder time financing its P202 billion deficit.

Lowest foreign reserves

Although the banking system has $12 billion in dollar deposits, and overseas workers remit $7 billion annually, the strength of the primary dollar reserves (also called gross international reserves) is important to the psychology of the financial market because it indicates how much ammunition the central bank has in influencing the exchange rate movement.

At USD16 billion, the Philippines has one of the lowest foreign reserves in Asia. Thailand for instance has about $40 billion, while Japan has about $200 billion.

Looking beyond destructions of war

As we Filipinos take stock of our weapons, we cringe at how little we actually possess to cope with the evils of a war not of our own doing. But, being pragmatic and accepting reality, I can foresee one bright spot.

Some may not feel comfortable and may see this as taking advantage of the misfortunes of others. However, once the black cloud of war has settled and the military might of the US and its coalition of "willing" allies prove their supremacy over Iraq, opportunities abound for those eager to work overseas.

There would be a big demand for workers to man construction projects, nurses and doctors to extend medical assistance to living casualties and even teachers to teach the Iraqis the western way of doing things.

If I heard Bush right, money would be flowing to "build a new Iraq that is prosperous." So something good may still turn out for developing countries like ours that had to support this "unholy war."

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