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The Cost of the Peso
Appreciation
Raul V Fabella
UP School of Economics and NAST
The New World Monetary Order
• From “Inflation First” to “Employment First”
• Unlimited QEs: So much money growth and
no inflation! Keynes lives!
• Abenomics and the end of deflation
The New Philippine Economy
• From “Beggar to the World”
• To “Lender to the World”; BOP surplus and
GIR
• We can/should pick and choose
• We badly need job creating investments: DFI
or domestic private and government
• We don’t need portfolio investment!
Investment Grade
• Additional resource flow
• DFI: the missing link in 2012 and before
• Portfolio investment (PI) rules the roost: does
not care about power cost, good roads,
employment creation
• PI warms the heart (PSIC record levels;
bubbles) and clogs the arteries (economic
thrombosis)
• PI perpetuates Development Progeria
Cost of the Peso Appreciation: Method
 Measure of real peso appreciation: RER
 Base year: 2010; Growth potential: 6%
 Rodrik (2008 )and Berg and Mieng (2010): every
10% overvaluation leads to 0.02% reduction in
GDP growth
 Baseline scenario: keep PHL 41/$ to 2017
 GDP lost from appreciation (from PHL 41/$ in
2012 to PHL 33/$ by 2017)
 GDP gain from return to PHL 45/$
The Cost of the Peso Appreciation
• Table and Figure in Paper
What to do
BSP/Monetary
1.Macro-prudential measures: continue
2.Reduce SDA rate to 1%
3.Raise the inflation target from 3-5% to 4-6%
4.Purchase gov’t guaranteed certificates of
indebtedness for infrastructure finance
5.Print pesos to soak up forex inflow: not
inflationary!
What to do
 Finance/Fiscal:
1. Borrow dollar even future $ requirement in
domestic market
2. Issue certificates of indebtedness ( Infra bond) that
BSP can buy
3. Raise the GCO to 5%-7% of GDP from 2-3%
4. Finance greenfield power generation units to
ensure stable and cost- competitive power supply
beyond 2016
5. Clear, predictable and simple regulatory rules for
foreign and domestic investment in traded goods
What to do
Public
1.Abandon the false mantra: “A strong peso
means a strong economy.”
2.Join coalitions for a weak and job creating
peso policy
Maraming Salamat
“Le’ important c’est invisible pour les
yeux”
Le Petit Prince (St Exupery)

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The cost of the peso appreciation

  • 1. The Cost of the Peso Appreciation Raul V Fabella UP School of Economics and NAST
  • 2. The New World Monetary Order • From “Inflation First” to “Employment First” • Unlimited QEs: So much money growth and no inflation! Keynes lives! • Abenomics and the end of deflation
  • 3. The New Philippine Economy • From “Beggar to the World” • To “Lender to the World”; BOP surplus and GIR • We can/should pick and choose • We badly need job creating investments: DFI or domestic private and government • We don’t need portfolio investment!
  • 4. Investment Grade • Additional resource flow • DFI: the missing link in 2012 and before • Portfolio investment (PI) rules the roost: does not care about power cost, good roads, employment creation • PI warms the heart (PSIC record levels; bubbles) and clogs the arteries (economic thrombosis) • PI perpetuates Development Progeria
  • 5. Cost of the Peso Appreciation: Method  Measure of real peso appreciation: RER  Base year: 2010; Growth potential: 6%  Rodrik (2008 )and Berg and Mieng (2010): every 10% overvaluation leads to 0.02% reduction in GDP growth  Baseline scenario: keep PHL 41/$ to 2017  GDP lost from appreciation (from PHL 41/$ in 2012 to PHL 33/$ by 2017)  GDP gain from return to PHL 45/$
  • 6. The Cost of the Peso Appreciation • Table and Figure in Paper
  • 7. What to do BSP/Monetary 1.Macro-prudential measures: continue 2.Reduce SDA rate to 1% 3.Raise the inflation target from 3-5% to 4-6% 4.Purchase gov’t guaranteed certificates of indebtedness for infrastructure finance 5.Print pesos to soak up forex inflow: not inflationary!
  • 8. What to do  Finance/Fiscal: 1. Borrow dollar even future $ requirement in domestic market 2. Issue certificates of indebtedness ( Infra bond) that BSP can buy 3. Raise the GCO to 5%-7% of GDP from 2-3% 4. Finance greenfield power generation units to ensure stable and cost- competitive power supply beyond 2016 5. Clear, predictable and simple regulatory rules for foreign and domestic investment in traded goods
  • 9. What to do Public 1.Abandon the false mantra: “A strong peso means a strong economy.” 2.Join coalitions for a weak and job creating peso policy
  • 10. Maraming Salamat “Le’ important c’est invisible pour les yeux” Le Petit Prince (St Exupery)