Forging Your Weapons, Battling the Currency War

I finally found the first feature I drafted for the Official Publication of the Student Organization previously. Well, I kept reiterating this write-up from my previous posts and luckily it was safe-kept in my emails. Yehey~! There you go.. 

Oh yeah, a brief introduction:

This column was wrote 30 minutes after reading Sun Tzu's The Art of War in Time Magazine, but in a perspective of a economic / financial setting. This ignited my inspiration as most of my colleagues from Graduate School are curious about the relevance of cross currencies to our economy and trade-setting. Most are interested but lack additional knowledge. This is my way on how to laymanize the Currency War for the benefit of my MBA friends. They appreciated it and I received positive feedback from it.

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Forging Your Weapons: Battling Currency War

“The art of war is of vital importance to the state. It is a matter of life and death, a road either to safety or to ruin.” – Sun Tzu

THE COUNTRY’S FINANCIAL health has survived the harmful effects of the global financial downturn. And yet, the nation is confronted with another war – sparked by the combative economies worldwide. Economic leaders and finance ministers are conducting their regular gatherings, arguing about money and exchange rates, and how to deal with the risks and tension arising in the international trade.

A common individual once heard of a “Currency War” perhaps. It is a headliner for what the economists describe as “Competitive Devaluation.” This is a state where countries all over the world are competing to make their home currency attain the lower exchange rate. Think that any currency, whether it is a Philippine Peso, a US Dollar, or a Japanese Yen, as a commodity: Its value goes up and down based on the market forces. At any given point, any currency in the global market is determined by the principle of supply (how much of a currency exists) and demand (how much investors want to buy goods or services denominated in that currency).

A nation, through its fiscal or monetary policies, can make its goods and services appear “more competitive” in the global market by “devaluing” its currency. Through the passage of time, more policies are being formulated to attain the winning point – to attain the lower exchange rate. One famous way is the Quantitative Easing, wherein a nation prints more money to increase its supply; thus decreasing the value it bears. Another way is buy another country’s currency (to be placed in Fund Reserves); hence increasing the demand for it. A perfect scenario would be illustrated by our Bangko Sentral ng Pilipinas (BSP), who lately has been buying up large amounts of foreign currency, especially dollars from the open market to try to drive the peso value down. This also means that it releases a lot of our currency—into the system. With the law of supply and demand, the price of dollars goes up as the BSP itself has added to the demand for it. Equivalently, the value of the peso goes down, because the BSP has increased the supply of it in the market.

If you are happy on our devaluing peso, then you must be a person who loves to buy lots of imported goods, doing investments overseas, or paying debts in a foreign-denominated currency. But if you are the otherwise, you must be an employee in an export-oriented business, or a dependent on a family member’s remittances from abroad. Of course, if you were a government official who didn’t know better, you would be happily and proudly taking credit for our “strong peso,” claiming that it is proof that our economy is being managed well. Then again, you don’t know better.

BSP’s moves to fight the war are warnings to each and every one of us. Bear and bull as it may be, in the long run, we would feel its detrimental scars. Closer to home, the central banks of Japan, South Korea and Taiwan recently moved to make their currencies cheaper. Central bank of Brazil is very much alarmed. To stop the Brazilian real from appreciating any further against the dollar, for instance, Brazil increased taxes on the on foreign investment. Each nation wants to enhance their competitiveness through reinforcing their exports at lower rates, thus, creating a domino effect. In time, the widespread devaluation can have a devastating effect on all. Unstable exchange rates can deter international trade and investment, slowing the pace of global economic recovery. And of course, when countries are fighting over currency, they're less likely to agree to bilateral trade. This is a zero-sum game – some will gain profits, while others are grossly losing. Investors and companies are being caught in the middle of crossfire.

We must be wary that these effects would be coming soon. We cannot hinder the responses and formulated policies of our neighbors. The country’s finance leaders, economic and finance ministers should forge their weapons through teamwork and be able to be adept in the volatile forces of international market. They should also take advantage of the lower rate of peso to dollar in servicing the debt, thinking of slapping higher add-ons to the cost of imports, and reinforcing the density of the country’s export level.  Instead of ensuing political will and meddling it with formulating plans that would not benefit a party for a specific period of time, why not combine plans and platforms to create an optimal fiscal, trade, and monetary policy that would be helpful to our country? After all, no one will win in this war, but we at least contribute something to make the world better.

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Ella, 24, is a financial analyst of the Department of Finance. She is one of the vigilant soldiers of the national economy that performs Corporate Finance Services and Operations Oversight on the Government Financial Institutions, Social Security Institutions and Guaranty Institutions.