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