What’s up with the peso slump?

Recently, the local currency has been hitting historic lows, threatening to drop to an unprecedented 60 per dollar.

The weakening of the currency is in parallel to the stream of revelations of corruption, which is reaching unseen heights.

An economist said the slide in the peso’s value was a confluence of several factors that pointed to fewer dollars coming in.

The most crucial source of dollars is foreign investment, since domestic capital remains small.

Former Bangko Sentral ng Pilipinas (BSP) deputy governor Diwa Guinigundo warned that when investors see bad governance and about 30 to 40 percent of the national budget going into the pockets of a few politicians and contractors, capital shrinks.                                                                                                                    

When investments are withheld or repatriated, the peso suffers. The contraction in investments due to the flood control scandal is extra detrimental to the economy, since the Philippines lags behind the rest of Southeast Asia in infrastructure.

Investors figure that, since the disgraceful situation will force the government to slow down on projects, the infrastructure deficit will worsen.

The slow grind of justice makes the problem worse. People have been accused of wrongdoing, of receiving bribes, yet months have passed and no one has been charged or jailed.

As a result, major international financial institutions like the International Monetary Fund, World Bank, Asian Development Bank, and the ASEAN+3 Macroeconomic Research Office (AMRO) have downgraded their growth forecasts.

Their projections are below the government’s target of 5.5 to 6.5 percent growth this year. The outlook is that growth will fall below even the lower end of that range.

Contrary to the official statements, the President’s foreign travels are not generating the investments the country needs.

“When you look at the numbers, most of what came out of those trips were pledges and commitments, meaning that during meetings and agreements, they say, ‘Yes, Mr. President, we will go to the Philippines and invest,’ and so on. But those were just pledges or commitments,” Guinigundo pointed out.

The difference between pledges and investments is that not all pledges are fulfilled.

“That’s why there should be close monitoring of the cost of those trips versus the investments that came in,” he said.

Capital enters the economy through portfolio investments in the stock market or fixed-income securities like bonds and corporate papers. The other way is through direct equity investment, which involves long-term infusions such as the setting up of factories and local offices.

“If you add all of that up, the total is smaller compared to previous years,” the former central bank official underlined.

Overseas Filipino workers’ (OFW) remittances and business process outsourcing (BPO) revenues, both sources of dollar inflows, continue to grow, but the increases are no longer as spectacular as before.

Cash transfers totaled $34.5 billion last year. Still, when you compute the current account — the total of merchandise trade, services, remittances, and BPO revenues — it’s negative by $18.3 billion.

Thus, more dollars are still going out than coming in, affecting the peso.

Another more fundamental factor is the projection that the BSP might cut interest rates in December. Since the BSP has been very successful in controlling inflation, it now has some room to lower its policy rate, which serves as the basis for interest rates in the country.

Since inflation has eased, the BSP has started to loosen its stance but political and economic uncertainties stemming from the corruption, plunder, and bad governance imbroglio might prompt the BSP to become more cautious.

The recent declaration that rates may still be cut could have signaled to some investors that they should take their money elsewhere, adding to the market tension and pressure on the currency.

Since the corruption mess is nowhere near resolution, the nation will see the peso breaking more historic lows.