Psychological barriers broken again and again

As the banking and finance editor of the newspaper BusinessWorld some two decades ago, one of the things that I learned was what analysts like to call a “psychological barrier,” particularly in relation to the Philippine peso.

Simply put, that barrier was the value of the peso vis-à-vis the dollar. Every time the peso fell and the dollar rose, the value would change. Thus, if the exchange rate was at P50 to $1 and it fell to P51.75: $1, the psychological barrier would be P52:$1.

A government would do what was necessary to avoid falling to that barrier, because odds of it going back to below that level would be considered low.

This week, we all woke up to the stunning news that the peso had broken the P54:$1 psychological barrier. It is almost certain to fall to P55:$1 in the near future.

Good news for exporters and bad news for importers, right? Oh, and also good news for Overseas Filipino Workers and their families, as the take home pay of the men and women working in foreign lands would increase automatically.

In fact, this is horrible news. As the peso continues its downward spiral, the effect is completely predictable. Inflation, the bane of a stable economy, will cause prices to rise, sometimes to unbearable levels.

Once inflation hits double digits, then a country is in trouble. Economic unease will result in political unrest. What happens next is anybody’s guess.

The P54:$1 rate this week does not seem to be the end of it, according to some analysts. They foresee a worst case scenario of the peso falling to P58:$1 by yearend.

The next psychological barrier will be P60:$1, by which time all hell can break lose.

The predicted P58:$1 exchange rate is a certainty because of the coming elections, with the campaign season officially commencing in mid-October. By this time, candidates will be spending like crazy, causing inflationary pressure on the economy.

I do hate to be the harbinger of bad news, but double digit inflation is staring us in the face, and there is little that the current administration can do about it.

The public will be fed the line that a little inflation isn’t all bad, which is only half right. Worst of all, the government will use its communications machinery to convince the people that good times are coming soon.

In fact, the opposite is likely to happen.

The worsening trade war between the US and China – two of the Philippines’ biggest trading partners – will also cause inflationary pressure to bear on the country’s economy. The Philippines is said to be the weakest link in the Asia supply chain, and while the trade war may be out of the government’s control, its ability to take pro-active measures to mitigate its effects is in doubt.

It does seem now that the best and the brightest who should serve the government would rather stay in the private sector, seeing that the chief executive of the Philippines has little understanding of basic economics.

Another thing that I learned as banking editor was that it was the primary job of the central bank governor to defend the peso at all costs. I saw the old Central Bank of the Philippines give way to the BangkoSentral ng Pilipinas.

The governor back then was Joey Cuisia, who was doing an excellent job but who was forced to quit due to health concerns. The job had taken a serious toll on his health, specifically his back which was causing him unbearable pain to the point that he had no option but to resign.

Luckily, the BSP governors that followed were generally able bankers and the peso was not only stable, it was strong.

Not anymore. Not with the current BSP head and more importantly, the men and women of the Duterte administration’s economic cluster. With such an unimpressive batch steering the country’s economy, no wonder the Philippines is no longer considered investment grade. No investor in his right mind would place funds in a country run by a psychologically unfit CEO.

That is the real barrier that the Republic of the Philippines faces today.