Philippines should allow peso devaluation, UNCTAD exec says

Business World

BY JESSICA ANNE D. HERMOSA, Senior Reporter

THE PHILIPPINES should devalue its currency for the sake of better export sales and economic stability, an economist at a UN agency said.

This will deter a surge of hot money inflows as developed countries attempt to rebalance their economies, UN Conference on Trade and Development (UNCTAD) economist Detlef Kotte told BusinessWorld in a forum earlier this month.

The prescription comes amid a strengthening peso which traded at an average of P43.49 to the dollar in November versus roughly P47 a year earlier.

Pressures for further appreciation remain as dollar remittances from overseas Filipino workers (OFWs) were robust even before the Christmas season.

This has prompted the Philippine Exporters Confederation to slash its sales growth forecast to just 10% annually for the next three years from 25%.

"The best solution is to eliminate factors that motivate speculative capital flows [such as] perceptions of a weak currency and perceptions that the central bank is unwilling to defend it," Mr. Kotte said.

"The Philippines should devalue. If investors know they will not gain, it will prevent speculation," he added.

Such a tack would require the central bank to use its reserves to buy foreign currency from the market. Gross international reserves were at a record $61.3 billion as of November due to higher export receipts, OFW remittances and increased foreign direct investments.

"If others can, you can keep your currency from being overvalued," Mr. Kotte said.

This is a departure from recent calls by the Group of 20 (G20) and the Asia-Pacific Economic Cooperation (APEC) that countries avoid competitive devaluations.

Sought for comment, Bangko Sentral ng Pilipinas (BSP) governor Amando M. Tetangco, Jr. said the policy direction was to remain with a floating exchange rate as a fixed regime would mean the central bank wouldn’t be able to tweak interest rates to stimulate the economy.

"Our policy has been to keep the exchange rate essentially market-determined with scope for official action only to contain excessive volatilities. This policy has served us well under the inflation targeting framework of monetary policy and there is no reason at this time for us to veer away from this," Mr. Tetangco said in a text message yesterday.

Tempered inflation has so far continued to provide BSP with room to lower policy rates should it need to pump-prime the economy or match rate decreases enacted abroad. Year-to-date headline inflation stood at 3.8% last month, within the 3.5-5.5% target of the government for 2010.

Mr. Tetangco also noted that the peso remained competitive.

"The peso has basically moved together with the currencies in the region. The peso has maintained its competitiveness against its major trading partners in real exchange rate terms," he said.