Arroyo's strong warning to protect peso

Arroyo's strong warning to protect peso

MANILA: President Gloria Macapagal-Arroyo has announced that the Philippine government would not rule out the imposition of currency controls to defend the peso from speculative attacks. She issued the statement at the end of her visit to Malaysia, a country that successfully defended its currency, the ringgit, through temporary capital controls at the height of speculative attacks on Asian currencies, including the peso, by predatory portfolio fund managers.

There was more than symbolism in this message that the government is prepared to use more unconventional monetary weapons to stop the slide of the peso exchange rate. The announcement came hard on the heels of an unprecedented Bangko Sentral ng Pilipinas decision imposing fines on nine big banks, three of which were foreign, found speculating against the peso from June to July, when the exchange rate fell to as low as 54 pesos to the US dollar. This came parallel to the Bangko Sentral's decision to implement its earlier plan to raise banks' reserve requirement to shield the peso from speculative attacks as well as to halt inflation.

Whether or not the President's announcement was coordinated with the Bangko Sentral (reports say they acted independently of each other), the government has sent out a double-barreled message that it would use its weight more forcefully to defend the peso and not allow speculators to make the currency a hapless victim.

The market got the message that the government meant business this time. The currency market was stunned, if not scared, at the demonstration of political will to intervene in currency transactions. The peso over the past two days strengthened one percentage point against the dollar.

Whether or not capital controls will work in the Philippines to provide a respite to currency depreciation, allowing the economy to catch its breath in the climb to economic growth, is arguable. Neither is there an assurance that what worked in Malaysia, which dug in to defend its currency in defiance of the orthodox monetary policies in place in the region during the 1997 financial crisis, will produce the same results in the Philippines.

Prime Minister Mahathir Mohamad's monetary heresy was a temporary measure and has since been relaxed, but only after it put Malaysia's economic footing on firmer ground for staging a recovery.

The warning issued by President Macapagal is that if the life of the economy is threatened, thereby also fuelling political instability, the government is prepared to use all possible weapons and monetary instruments to curb the appetites of free- wheeling market forces preying on weak currencies and sluggish economies.

The Mahathir experiment, which has strong nationalist overtones, has proved that even small states are not entirely helpless against the onslaught of market forces. While this might be an era when the fad calls for integration into a globalized trading system, it has also been shown that globalization, including that of currencies strapped to the US dollar or other strong currencies, has plenty of shortcomings. It has also demonstrated that there are still instruments left in the hands of the economies of the developing world to chart relatively autonomous economic and monetary policies not generally favored by the World Bank, the International Monetary Fund or the Asian Development Bank.

Even in the World Bank, a number of senior officials have studied the Malaysian model and have found out that, in the context of certain circumstances, it has something to recommend to combat the currency crisis. If this is what President Macapagal Arroyo learned in Malaysia, that quick lesson is more than enough to justify her first state visit.

To be sure, the visit has produced other results, few of which involve the usual claims of bringing in the goodies, like new investment promises, etc. The signing of the ceasefire agreement with the Moro Islamic Liberation Front is a good enough starting point for laying the groundwork for further peace talks.

There was also strong symbolism in returning to Manila via Mindanao, the region that received a heavy accent from the visit in terms of reviving the moribund project of rebuilding the East Asia Growth Area with Malaysia, Indonesia and Brunei. The accent is on the southern frontier, and its development is tied to having peace in Mindanao.

-- Philippine Daily Inquirer/Asia News Network