Wildfire

Meanwhile, the peso has dropped through the floor.

- ALEX MAGNO

Normally, when the US Fed is poised to lower interest rates, the peso’s exchange value improves. Not this time. The growing corruption scandal is putting pressure on our currency, threatening to penalize Filipino consumers with higher costs for the staples of life.

Two things seem to be driving the peso’s decline: the withdrawal of institutional funds from our market and the increasing demand for dollars in the grey market.

The withdrawal of institutional funds is normal when investors feel uncertainty has risen in the host market. “Uncertainty” is a benign word to describe the political conflagration caused by the corruption scandals.

Grey market rates reflect movements in the informal (undocumented) economy. In the worst case, the decline in the peso’s exchange value signals escalation of money laundering activities. Dirty pesos are being laundered into dollars for more portability.

Some of the dollars in the grey market are physically brought in by returning migrant workers to avoid remittance charges. Given the steep peso decline, many repatriated migrant workers might be choosing to hold on to their hard currencies, anticipating better returns as the peso sours. This will magnify the peso’s erosion.

Of course, when the peso depreciates, the value of our foreign-denominated debt appreciates. Should the trend continue, we will be pushed closer to a debt crisis — or at least higher charges for financing our indebtedness.

It is too early to ring the alarm bells about an impending fiscal crisis. But the corruption scandal that is fueling all these is not about to dissipate. This scandal is beginning to resemble a wildfire.