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Asiaweek: Capital Controls - Don't Even Think About It - Gloria Bte Mahathir
By Assif Shameen
11/8/2001 6:19 pm Sat
Webfiles: Don't Even Think About It
Capital controls are not the answer for the Philippines
By ASSIF SHAMEEN
Friday, August 10, 2001
That put the business community in a flap, and analysts are already
wondering aloud what the measures might do to the Philippine
economy in the longer term. So much so that Central Bank governor
Rafael Buenaventura had to do some damage control in the hours
after the president's statement was flashed around the world on
trading screens. Buenaventura said the peso would remain "market
determined," though he reiterated that capital controls were an option
"always available" to the government.
Arroyo hasn't specifically talked about the level of any peso peg, but
she has said in the past that she believes the fundamental value of the
Philippine currency should be around 50 to the dollar. Until she arrived
in Kuala Lumpur, the peso was trading at nearly 54 to dollar -- not
far off its lowest point earlier this years in the dying days of president
Joseph Estrada's rule.
I believe a currency peg would a be huge mistake for the Philippines
-- as well as for any other Southeast Asian country that might be
contemplating taking the Kuala Lumpur route. Thailand's Prime
Minister Thaksin Shinawatra has talked about some form of currency
control and is known to be a big admirer of Mahathir. Indonesian
bureaucrats too have talked about capital controls and a peg.
President Abdurrahman Wahid resisted the temptation, but it is still
early days to predict what his successor, Megawati Sukarnoputri, will
There are plenty of reasons for Arroyo to tell her advisers to take a
hike if say to her, "Look, Ma'am, how well Mahathir has managed his
own currency controls." The Philippines is no Malaysia. And Arroyo is
no Mahathir, no matter how much she might admire him. She should
certainly avoid becoming his clone. A strong peso would hurt
Philippine exports and the manufacturing sector at a time when the
country needs to export its way out of trouble. A strong peso would
make the Philippines less competitive and drive more foreign direct
investments away to places like China at a time when Manila
desperately needs new investments to boost its economy and battle
rising unemployment. What's more, the Philippine does not have the
sort of reserves to defend a peg at, say, 50 pesos to the dollar. The
Philippines has a huge fiscal deficit, a low savings rate and, at 6.8%,
one of the highest inflation rates in a region that is struggling with
A country can have a fixed exchange rate if it has its fiscal deficit
under control and doesn't have a huge balance of payments problem.
Malaysia was already raking in a trade surplus and a current account
surplus when it imposed its controls. The Philippines is currently in the
market for up to $1 billion in sovereign bond for its urgent financing
needs. External debts are nearly $60 billion, with debt servicing nearly
20% of exports. Capital controls will hammer sovereign debt ratings
and make it difficult to borrow money -- not just for the government
but also for the private sector. Already, analysts are predicting
economic growth this year will slow to under 1.5% from 4% last year
and 3.4% in 1999.
And there's another problem: Once the controls are in place, how
would they be implemented? It would require an even more bloated
bureaucracy and, given the level of corruption, some people will almost
certainly turn to bribes. What's more, there would be slippages and a
black market would develop for U.S. dollars. All in all, the controls will
create a bigger mess than exists now.
For the moment, the peso has strengthened, closing Aug. 10 at under
52 to the dollar for the first time since late April. Philippine banks and
companies who were holding short positions on the peso scurried to
wind down their positions, and that contributed to the strengthening.
A slight appreciation of the yen and the Singapore dollar also helped.
Arroyo says she is trying to tackle peso speculators. Mahathir
attacked foreign speculators and hedge funds when he erected those
huge walls for his own Fortress Malaysia. Hedge funds are really no
longer big players in currency markets and certainly not even bit
players in Asia. The biggest speculators have been Philippine
companies hedging against a falling peso. One wonders whether
speculator is just a term used by a government that feels helpless in a
volatile currency market.
Whatever Arroyo does, she must avoid Malaysian-style currency peg
and controls. A Fortress Philippines would set back the country not
one or two years but perhaps a decade or more. Capital controls will
send a wrong signal to the international community at a time when
Arroyo is still trying to put together a coherent policy to ride the
cyclical downturn and when she has yet to start tackling most of the
economy's structural problems. Though it is been a regional economic
laggard, the Philippines has had a generally liberal and open regime. It
doesn't need to imitate Malaysia.