Defending the peso' is a proven losing battlefield

Point of view

- By J. MANUEL GONZÁLEZ

I have known Eli Remolona since we were both freshmen scholars in Ateneo. Now, he's the Governor of the Central Bank and I'm a struggling innkeeper. Nonetheless, I've had some experiences he hasn't had (and no one on our monetary board has had), and I wonder if "defending the peso" is wise as a policy objective. In laypersons' terms, here are some thoughts to consider.

What is an FX rate? The foreign exchange rate is an across-the-board price setter and adjuster. If the rate drops (the local currency loses value), all imports cost more and some exports are cheaper. Currency under-valuation is sometimes good long-term as it enforces thrift. Over-valuation is rarely good; people import BMWs and local industries become uncompetitive and wither.

However, there is no quantitatively "correct" FX rate. FX rates are a very blunt instrument of economic policy, and slice in many directions. A lower rate is good for some exporters because they can sell more units, but bad for others because they get fewer dollars per unit sold (and due to production or marketing constraints can't just suddenly sell more). A lower exchange rate should in theory discourage imports, but not if those imports are essential, like rice.

Therefore, most less-developed countries just drift into an exchange rate which looks reasonable. Then they try to hold it steady indefinitely.

This usually works fine. Until the day it doesn't.