SOUTH-EAST Asian currencies have been under attack from speculators in recent months. Sony Melencio explains. ON JULY 11, the halls of currency trading in the Philippines reverberated with a mild shock brought about by unusually intense selling of the peso and buying of US dollars.
The next day, newspapers reported this as the de facto devaluation of the peso, or its depreciation against the dollar, which soared from the official rate of P26 to the dollar to P32.
The government then announced official devaluation: it ordered the Central Bank (BSP) to allow the "flotation" of the peso. It removed the previous system of "defending" the peso through state intervention on financial markets.
This capped a series of shock waves which had sent Asian financial markets spinning since the April devaluation of the Thai baht. This had had a knock-on effect on other south east Asian currencies, including the Indonesian ruppiah, the Philippine peso, and even the Singapore dollar.
In May, as an aftermath of the Thai devaluation, selling of Philippine pesos to buy dollars became more intense, and threatened to deplete the dollar reserves of the Central Bank. To protect the peso, the banks increased their overnight lending rates by nearly 100 per cent. By increasing the interest paid to currency traders holding pesos, the Central Bank hoped to encourage them to hold rather than sell pesos.
For a while this seemed to work. From May 22 to June 19, the exchange rate stabilised, and the overnight lending rate was gradually reduced to 12.75 per cent. The collapse of the peso was avoided because the Central Bank had enough dollar reserves to absorb the "peso glut".
President Fidel Ramos boasted of a "robust" Philippine currency and promised that he would never allow a currency devaluation, as the Thai government had. He would recant a few weeks later.
Between June 27 and July 2, the market was again besieged by "peso dumping". The overnight lending rates shot up to 24 per cent. Peso-dollar trading became more feverish. The volume of currency exchange leapt from $100-150 million/day to $400-600 million/day and overnight lending rates to 30-32 per cent in the days preceding the July 11 devaluation.
Many local capitalists, including those from the country's top 100 firms, demanded the interest rate be cut to manageable levels. They said expansion was being jeopardised by soaring interest rates which made it unprofitable to borrow.
The banking sector said devaluation would bring stability. Exporters argued it would cheapen their products and make them competitive internationally. Investors in the domestic market argued that their products would profit, because devaluation would push up the prices of imports.
This was a nightmare for President Ramos. Devaluation was like an axe falling towards the heads of the consumers. Ramos' posturing about the country's "economic growth" would fizzle out and might jeopardise his party's chances for the 1998 elections.
The government finally buckled to pressures from capitalist circles. Whatever the economic effect for consumers, Ramos knew that he had to secure the support of his main financial backers.
A few days before July 11, the government liberalised the terms on which six major financial institutions could bid for U.S. bonds and other financial instruments. On July 11, the financial speculators outbid themselves in frenzied trading. Billions of pesos were dumped into the market to acquire these new dollars. Windfall profits were made.
Speculators who had acquired dollars before July 11, at an exchange rate of P26.40, were able to sell them on July 12 for P30-P32. Ten percent profit, overnight!
The six 'universal banks' are known around the globe. They are Citibank, JP Morgan, Solomon Brothers, Merrill Lynch, ING Barrings, and Morgan Stanley. They are awash with paper money, and trade in tril lions of dollars and other currencies all over the world. These are just six of the giant financial corporations preying on the South East Asian market.
Short term
Together with 14 other international banks and financial institutions in the Philippines, the six "universal banks" do a huge amount of short-term lending to banks and industrial companies. Rather than being used for industrial expansion, these "portfolio in-. vestment" funds circulate mostly in the financial market, and are used predominantly for speculation.
This is the kind of capital that has primarily boosted so-called "economic growth" in the Philippines. Without this inflow of speculative cash - and the millions of dollars that are sent home every year by more than five million overseas Filipino workers - Asia's "sick man" could never have appeared to recover in recent years.
The economic strategy of the present Phil. ippine government strongly revolves around procurement of the precious dollar - even if it means attracting the financial vultures to prey on the Philippine economy.
Portfolio investments represent trillions of dollars that cannot find a use in the advanced capitalist countries.
Their owners are on a constant look-out for profitable investments that bring in fast profits.
Portfolio investments represent trillions of dollars that cannot find a use in the advanced capitalist countries. Their owners are on a constant look-out for profitable investments that bring in fast profits.
What entices them to "invest" in the Philippines (and Southeast Asian markets in general) are the higher interest rates in the region. In normal times, Philippine Interbank (base) interest rates average 12-15 per cent compared to 5-7 per cent in advanced capitalist countries This means US dollars earn more if they are invested in local currencies and financial instruments (through the purchase of Philippine treasury bills and shares in Philippine companies) rather than in low-interest US bonds, the main alternative. Foreign financial investors are assured a higher return than they can get at home.
In order to attract financial investment, a Carrying the can: the economic havoc caused by speculators will hit the poorest workers and peasants Third World economy has to assure investors a "risk-free" deal through a stable exchange rate. This guarantee that the "principle" they sink into the economy can easily be converted into dollars, which they can transfer out of the country whenever they want. If it is in the interest of financial managers that the exchange rate in the Philippines remains stable, why did they resort to conspiracy to bring down the value of the peso?
To understand, we must look at the operation of the financial markets. This "industry" is inherently speculative. Competition is rife because of the presence of surplus moneycapital in big institutions where everyone tries to corner the surplus capital in the shortest possible deals.
One of the major operations on these markets is speculation on exchange rates. Just like any commercial capitalist, financial speculators try to make profits by buying a currency cheap in order to sell it dear. In the case of the Philippines, they started to buy dollars when the rate was P26 to the dollar. They then dumped more pesos in the trading market to raise the dollar value.
The finance managers do this in a conspiratorial way through agreements among themselves to fix a "trading spread" (usually a manageable 1-1.5% movement of the exchange rate). But on occasions the trading gets out of hand because of stiff competition, or when bigger financial institutions start to attack the trading market by heating up the competition in the trading floor, and the system gets out of hand.
To solve this crisis, the Philippine government's response was to whip up another crisis. It officially devalued the peso, purportedly to stop the speculation and to recoup the dwindling foreign currency reserves.
Unfortunately, this "textbook solution" is only applicable to stronger economies: fully industrialised countries or those which have a strong export-orientation. The Philippines remains dependent on imports, and lacks export products which are competitive in the international marketplace.
And in any case currency stabilisation after depreciation usually lasts for only six months. The post-devaluation "economic boom" impelled by the export industry usually occurs a year after depreciation.
If the Philippine exchange rate does not stabilise in the next few months, and if foreign currency reserves continue to be depleted, some economists will consider this as evidence that the financial vultures are preparing to ship out their money back to their base country, or to some other more profitable ventures outside the Philippines.
In any case, before the Philippine economy recovers, there will be a crisis for the low-income groups. Inflation is likely to rise from 4.6 per cent to at least 6.1 per cent by the end of the year. Prices of basic commodities like food, electricity and transport have already increased.
Although the price of crude oil has fallen 30 per cent in the international market, where trade is in US dollars, vultures in the Philippine petrol industry are demanding a further increase in fuel prices from 50 to 75 centavos per litre. And because the government recently deregulated the trade in oil products, there seems no way of stopping them.
Losers
It is not only the poor who are the losers in the peso devaluation. Capitalist importers, and most Philippine businesses, stand to lose. While the devaluation will be profitable for some exporters, those corporations which have incurred dollar debts in their operations and exporters who use imported components will lose out.
The main winners from devaluation, apart from the international financial firms, are the transnational corporations (TNCs) which trade mainly between their own subsidiaries in different countries.
•The government will also see its revenue increase, as price increases mean an increase in sales tax. But this will be wiped out by the higher cost of repayment of foreign loans. This explains why President Ramos is again begging the International Monetary Fund to extend its "exit program" in the Philippines.
The Philippine economy is held hostage by a number of international financial institutions. International finance capital is roaming around the globe in search of the quick buck. It attacks weaker currencies of smaller countries to reap huge profits.
It first shook the economy of Mexico, then Thailand, Malaysia, Philippines, and now Indonesia. This is one facet of "globalisation" that quite clearly stifles economic growth. And the Southeast Asian countries have been hit particularly hard.
The "economic miracle" in a number of Southeast Asian countries is starting to burst. It was always a bubble. The economic collapse experienced by Thailand in particular has proved once more the destructive role of finance-capital. According to Marx, this "pure money-capital" plays a role as the "slaughterer" of industrial capital.
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