Before the Asian Financial Crisis in July 1997, a group of economists which included Dr. Raul Fabella of the UP School of Economics (now a National Scientist), the late former Socio-Economic Planning Secretary Dr. Cayetano “Dondon” Paderanga Jr., former UP Professor and presently Bangko Sentral Governor Ben Diokno, and myself, were calling for a pre-emptive devaluation of the peso.

To our collective minds, the peso then was grossly overvalued. “Hot money” or volatile capital flows were propping up the peso artificially. The overvalued peso created a property bubble with the excess liquidity caused by these financial flows flowing into the non-tradable sector. The overvalued peso also created an environment conducive to the mismatching of risks. Banks and corporations borrowed cheaply in dollars and lent in pesos, profiteering from the interest rate differentials. Worse, a number of banks and corporations indulged in double mismatching, borrowing dollars short term and lending in pesos medium and long term.

The Bangko Sentral ng Pilipinas (BSP) then did nothing to discourage the hot money flows and the overvaluation of the peso. It allowed the peso to strengthen to P24 to $1, with implicit guarantees of the peso value. Exporters suffered. So did local manufacturers. However, the property boom made the factory land more valuable than the business assets, muting the pain for the tradable sector.

However, it was a crisis waiting to happen. That was the reason why the four of us wanted a devaluation of the peso — to discourage the hot money flows and the property bubble, to protect local manufacturers, to encourage exporters, and to curb banks’ reckless lending behavior.

For making the call and sounding the warning, we became the target of vested interests. PR guns were hired and we were smeared as “jukebox economists,” because presumably we didn’t have “independent” minds but were singing the tunes paid for by some people, like a “jukebox.” It was a lie peddled to defend the strong peso policy.

Well, the crisis we were warning about happened. We, the “jukebox economists,” were vindicated. The Asian Financial Crisis blew up in July 1997 with the devaluation of the Thai baht. Financial panic — contagion no less — descended on other currency markets. The peso plunged from P25 to $1 to as low as P40 to $1. Hot money suddenly pulled out of Asian financial markets and currencies plunged, leading to huge losses and severe impairment of the balance sheets of major banks and corporations. The property bubble popped. Banks were saddled with a high number of non-performing loans. Economic recession followed.

A number of factors — hot money, the devaluation of the Chinese yuan in 1994, the depreciation of the dollar against the Japanese yen — all contributed to the Asian Financial Crisis. However, the weakness of regulatory institutions and inordinate belief in free capital flows were the major factors.

We felt vindicated, but only up to a point. The idea of a competitive exchange rate still did not take root. On the contrary, during the presidency of former President Gloria Macapagal Arroyo, a strong peso was touted as an achievement.

The reason for this is that the political economy didn’t favor a competitive exchange rate and an outward looking economy. Firstly, the Philippine oligarchy is in non-tradable industries, primarily real estate and regulated service industries such as power, telecommunications, shipping, and ports. Secondly, about 40% of our exports are in import-intensive electronics with low domestic value added. The competitive exchange rate didn’t matter to most of them, particularly if they were enjoying PEZA incentives. Thirdly, farmers and small domestic manufacturers with a high domestic value-added, who would benefit from a competitive exchange rate, had a weak political voice. Fourthly, the OFW remittances accounted for a big part of the economy only in the last decade. Even then, OFWs didn’t get the right to vote until the Overseas Voting Act passed in 2003 and many haven’t exercised that right (Only about 3% vote.) Finally, the economy is dominated by monopolists, (We have the most concentrated economy in Asia, according to the World Bank) who don’t have the stomach and the competence to compete in the world market.

That was then, but this is now. We are facing an economic crisis like no other. The economy is expected to contract 5% to 7%, rivaling the economic downturn after Ninoy Aquino’s assassination in 1983. Unlike before, the overseas labor market can no longer act as a safety valve to the social volcano of high unemployment and mass hunger.

Furthermore, our institutions have proven to be wholly inadequate to cope with the effects of the pandemic. Despite all the talk of social amelioration and economic stimuli, the government has been ineffective in distributing financial assistance to the 16 million households identified in the Bayanihan Act. Keynesian deficit spending is nice in theory but crashes against the reality of our weak institutions.

Perhaps it’s time for some Jukebox Economics — an out-of-the-box solution to put money in people’s pockets and to protect the economy. I’m referring to a deliberate policy to weaken the currency vis-à-vis the dollar. What are the benefits?

A depreciated currency will immediately put additional money in the pockets of the families of overseas Filipinos, who number about a tenth of the population or 10 million. Filipinos who are technically not OFWs because they have settled overseas continue to send money to their relatives here. Even if the peso would depreciate by just P1, that would mean an additional annual income to millions of households of P29 billion! Their additional spending will have multiplier effects on the economy, benefiting also non-OFW families.

Moreover, the value of the dollar savings of our OFWs, a number of whom have lost jobs and have been sent home, will appreciate, increasing consumer confidence. Unlike the trouble-plagued Social Amelioration Fund, no bureaucracy is needed to distribute the additional money.

A weak or undervalued peso will also help exporters without government subsidies. On the other hand, there has been talk of self-reliance, especially in domestic food production. What better way to shield farmers and local manufacturers from foreign competition efficiently than through a weak peso?

Moreover, a weak peso will cheapen labor and make other domestic inputs more cost competitive to foreign investors. It will foster labor-intensive industries.

Unlike bailouts, which carry moral hazard problems, a weak currency will boost the devastated tourism industry once international flights are back.

It will also immediately increase government revenue, since import value will increase. In fact, government should remove the 10% oil import tax it recently imposed because that tends to strengthen the peso and is contrary to economic stimulus. (Additional taxes when there’s a demand shock make no sense.) Undervaluing the currency is the better and more economically efficient way to generate additional government revenues at this time.

How to do it? There are fiscal and monetary tools to achieve a weaker peso, but the most effective way is for the Bangko Sentral ng Pilipinas (BSP) to buy dollars. This will not only infuse more peso liquidity into the system and thereby lower interest rates, but it will also help BSP build more reserves and add to its ammunition to burn speculators.

Yes, the BSP is supposed to be inflation targeting and not exchange rate targeting. But these are extraordinary times that need an extraordinary response. We need a dramatic out-of-the-box solution. The truth of the matter is that the BSP has already violated tradition and crossed the Rubicon, as Nikkei Asia Review says, when it directly purchased P300 billion of Philippine government debt, effectively monetizing it. In other words, although it was once considered verboten for a central bank, the BSP helped the government print money to finance its budget deficit. (I don’t doubt the wisdom and legality of the bond repurchase, however.)

Due to the collapse of the oil and commodity markets, the risk of inflation by weakening the currency is low. Rice import liberalization will keep food inflation in check. Targeted subsidies can be given to jeepney drivers or poor electricity consumers who will suffer a bit due to exchange rate adjustments.

In sum, Jukebox Economics says a weaker currency will: a.) immediately give additional money, stimulate demand and provide relief to the families of about 10 million OFWs and overseas Filipinos, without increasing our budget deficit or be distributed by an inefficient and corrupt bureaucracy, a.) protect agriculture and local manufacturing industries and create jobs in the countryside, b.) encourage more higher value-added exports without need for additional subsidies, c.) make the country more attractive to foreign investors, d.) promote and assist the beleaguered tourism industry once international flights are resumed, e.) generate additional government revenue without additional taxes, and f.) provide additional liquidity to the financial markets backed by additional foreign reserves.

Because of the pandemic, we face an unprecedented economic crisis. It’s time again for Jukebox Economics.


Calixto V. Chikiamco is a board director of the Institute for Development and Econometric Analysis.