Filipino Taxpayers, Be Ready for a Possible Reserves Grab at the BSP 119.0

Since we cautioned about the depreciating US$ just three weeks ago in our September 18 post, the Philippine peso has strengthened by 3.0% to PhP46.656 (closing rate, 10.8.09).

As in October, 2007, this is a danger signal as some sectors like exporters, BPOs and OFWs will start to clamor for support from the rapid rise of the peso. Remember, that this support, even if well deserved, can only come at a cost to all Filipino taxpayers.

In 2007, without consulting the Filipino taxpayers, the President through the Monetary Board ordered the Bangko Sentral (BSP) to slow down the rise of the peso value and support the Export, BPO and OFW sectors.

In twelve months, that decision cost our BSP PhP102.9 billion of its capital reserves earned since 1992 ( See my Post 62 for a financial analysis based on BSP audited statements.) (over and above dividends paid to extinguish the Marcos behest loans housed in the bad bank, the old CBP).

So twice within twenty years, all Philippine taxpayers as stakeholders of the BSP have been shorn of hard-earned capital for transfer payments to powerful and favored sectors with nary a say about it.

In other situations, a CEO’s loss of PhP102.9 billion in one year would have cost him his job.

The administration cannot claim that the rise in the peso value comes from good economic management. The Finance department just reported a budget deficit of P210 billion this fiscal year from lower revenue collections (a perennial issue even in good times except during President Ramos term) and spending for the stimulus. Typhoon Ondoy (Ketsana) can only make the situation worse. These actions would normal drive the peso down.

The rise in the peso despite these can only be because the U.S. economy is performing more badly and has too much accumulated imbalances to keep the US$ value.

With the bottom of the crisis being felt, the BSP has not seen fit to change guidance rates as of October 1, 2009. A lowering of rates, to weaken the peso can result into inflationary bubbles given the stimulus package already being implemented.

President Obama, despite being the most powerful politician in the world, understands the key role – both economic and political – of the U.S. Central Bank, the Federal Reserve. He nominated Ben Bernanke for a second term as Chairman of the Fed.

Ben Bernanke, in his speech thanking President Obama for nominating him for second term, also thanked him “for his unwavering support for a strong and independent Federal Reserve.”

The key words here are “strong” and “independent”. Both men realize that, as I paraphrase from my Post 61 on May 24:

an independent central bank is the linear descendant of the gold standard; in fact, its very innovative replacement fit for our time … By being [strong and] independent and working to keep the currency value stable, the central bank is expected to keep the politicians’ tendency to overspend from tanking the economy. The independent central bank, like the gold standard, is expected to provide an anchor to its currency’s value. A stable currency favors savers, innovators and the long-term investors that is generally good for the society in the long run.

Indeed, a strong and independent central bank is the modern equivalent of the gold standard. It works the same way to make politicians fiscally responsible or risk the vicious cycle of boom-and-bust.

Unfortunately, our BSP is neither strong nor independent.

That raid on its capital reserves in 2007 weakened its ability to fight for the peso. The government’s failure to comply with R.A. 7653 to top up the BSP’s initial recapitalization by$40 billion by 1995 is an added complication. (Since May 24, I have learned that one cannot sue the Philippine government without its consent – to avoid frivolous suits tying up its operations. That makes sense; the government, as political entity, can apparently be pressed to act only by political action.)

On independence, the President’s actual control of the BSP through the Monetary Board on its governance, the Commission on Audit on submission of its reports, and the compensation scheme of BSP officers on its operation, makes the President solely responsible for the BSP’s performance.

The Reserve Bank of New Zealand has a written contract with the the elected NZ government mainly based on inflation targets. Other than this statement of monetary goal, it is independent in its operations.

The Federal Reserve Chairman is required to report verbally before the two house of Congress on a regular basis. Beyond that, he makes public statements to inform.

Just today, Chairman Bernanke reported about the state of the U.S. Fed Balance Sheet and outlined components of the Fed’s exit strategy as the crisis unwinds to avoid massive inflation.

(Note: Chairman Bernanke presented the Fed’s Balance Sheet as of 9/30/09. That is real transparency! I was told that the corresponding order was to hold the BSP’s balance sheet until audited by the COA. The last report in the CB website is as of 6/30/08. Note banks do balance every day. Regardless, it is hard to understand that they are unable to release an audited Balance Sheet for 15 months from the last one issued.)

I hope that President Arroyo will inform us, this time around, of the costs and benefits of transfer payments of Filipino taxpayers’ money to sectors asking for such bailouts.

P.S. I write about the value of the Peso as an advocacy to help innovators, savers and Filipino taxpayers, in general, keep the value of the peso in the face of our politicians; historical fiscal irresponsibility. An unstable or weakening peso disadvantages innovators and savers and places a penalty (or raises a premium on the hurdle rate) on innovations.