The problem with a strong peso…

The first problem with a strong peso is that it should not be called as such. Economists refer to currencies as either appreciating (increasing in value against another currency) or depreciating (decreasing in value). Calling the peso weak or strong puts positive or negative connotations into it.

An appreciating peso can be good or bad depending on your situation. If you earn US dollars like exporters, OFWs and call-center firms, then an appreciating peso is bad for you. You get to buy less in peso for the same amount of dollars you earn. But if you spend in dollars like importers, then a depreciating peso is bad for you.

From a nation’s point of view, an appreciating currency can be good or bad depending on whether it is a net importer or net exporter. For several decades, the Philippines has been a net importer thus we generally prefer an appreciating peso.

This also led to a strong belief that earning foreign currencies is good, thus pushing our countrymen to more than 190 countries and territories around the world. However, as more and more Filipinos work abroad (and send more and more dollars into the Philippines), the balance between import and export is shifting. Additional dollars come in due to the increased earnings of BPO firms and call center companies (warning: as the peso appreciates call center agents might be in for a crunch).

Right now our biggest import is oil, while OFWs are our biggest export. The overall economy is generally benefiting from the appreciating peso. Inflation is at its lowest levels in history. And oil prices in the Philippines would have risen much faster if the peso is not appreciating as much.

But the issue must be seen from an international perspective, the peso is not just appreciating… the US dollar is depreciating against all major currencies. One problem is that major oil-producing countries receive US dollars for payment. As the dollar depreciates, oil suppliers jack up their prices because they are now receiving less for every barrel of oil they produce. As oil prices go up, the economy of the US is affected more because it is more oil-dependent compared to Europe, Japan and other developed economies. As the US economy weakens, US dollar depreciates further, and a global economic slowdown might be triggered.

OFW families are also badly affected by the depreciating dollar. Since their dollar can buy less, OFWs have to send more dollars, leading to further appreciation of the peso. They even launched a campaign to withhold remittances with the aim of curbing the peso appreciation. It might be a losing battle; their remittances are being used for food, education, household maintenance and medicines. They cannot withhold for a very long time.

What should the government do?

1. Train OFW families to be dual earners. They should not rely on the remittances alone. More remittances should be channeled to savings and investments and less on immediate consumption and luxury.

2. Help exporters find other markets than the US. The EU, Japan (we need the JPEPA), Canada, and the rest of Asia is waiting for our products if only we can get our acts together.

3. Diversify and move away from the US dollar. When we buy oil, we pay in US dollars. When we take loans from China, we borrow and pay in US dollars. Since we get currencies other than the US dollar from our OFWs (Saudi Riyal and Dubai Dirham), we can probably use this to pay for our oil imports.

4. Resist the temptation of intervening too much. The main goal of the Bangko Sentral ng Pilipinas (BSP) is to maintain price stability. Then, why is it intervening with the foreign exchange? You can only achieve two out of three: price stability, free flow of capital and foreign exchange stability. Recent actions by the BSP suggest that they want all three… the results can be disastrous.

5. The appreciating peso is not really the biggest concern, a bigger concern is rising oil prices. We probably need an economist in NEDA and a competent person in the Department of Energy to deal with the problems of rising oil prices.

(thanks to rey barcelon for inspiring me to write this blog)

Risks, Rewards and Ratings Systems

Admittedly, Matthew (my employer) and I often have intellectual debates regarding the many aspects of the Global Property Guide. One of the most recent discussions was regarding the Investment Rating System. Each country is given a "star rating" based on the desirability of a country for a buy-to-let investment.

There were several issues involved. One of the most difficult issues to resolve is the primary basis of the rating system itself.

Matthew asks for a rating system primarily based on yields. According to him:   

 

We are interested in focusing attention on high yielding places. If people want safe, no-risk, conservative investments with moderate to low yields, they will stay in their own countries.

At a glance, I can see that though not all 5-star countries are high yielding and not all low-star countries are low yielding, there are obvious reasons for it, where countries are exceptions to the "high-yielding = more desirable" rule.

I have several problems with this type of rating system. There are several risks and rewards in an investment. For me, an investment rating should show the balance between risks and rewards. In this case, the rewards are the rental yields. The risks are multiple. This includes political and economic risks and ownership risks.

An investment rating must show the balance between risks and rewards. A rating system based mainly on yields is a ranking based on yields and not an investment rating. 

Matthew argues that if investors wanted low risks with moderate rewards they would not leave their own country. What if you live in a low rental yields country? Then you must go out and look for investments the can give you the return that you want. But should you invest immediately based on the rewards? No. You must check what are the risks attached to that high returns.

High returns attract the attention of investors. For instance, if rental yields in a particular city are high, then a lot of investors will come in. The increase in rental supply brought by the increase in investments will eventually push down rents. This will lead to lower rental yields. However, this increase in investment can only happen if the market is perfectly competitive.

In reality, markets are not perfectly competitive. In several countries, there are restrictions on the entry of foreign investors. While there maybe loopholes and shortcuts to go through the limitations this is extremely risky from the point of view of investors.

Political and economic risks are also significant hindrances for investors. Investors generally avoid countries that are on a brink of a civil war or economic collapse. In undemocratic regime changes, foreign investments are frequently the first victims of expropriation.

The results of a yields-based rating system are equally disturbing. Included in the best cities for buy-to-let investments is Thailand (currently ruled by a military junta which clamping down on foreign investments), China (currently flip-flopping on whether they actually want foreign investments in property or not) and the Philippines (whose president is constantly in political trouble).      

For me, a country worthy to be considered among the bests is the one without any restrictions on ownership of buy-to-let properties. Rents are high because of high demand and not because of lack of supply due to barriers to entry. A country with a constant supply of renters because it continually attracts people due to economic and political stability.

(to be concluded... or not...)