Who's the culprit?
South-east Asian currencies have come under repeated attack by financial speculators in recent months. Sony Melencio* explains the causes and effects of currency speculation in the region. On July I1, the halls of currency trading in the Philippines reverberated with a mild shock brought about by unusually intense selling of the peso and buying of US dollars. The US dollar, which soared from an official exchange rate of P26 to P32 in a few hours.
The Philippine government then announced the official devaluation of the peso: it ordered the Philippine Central Bank (BSP) to allow the "flotation" of the peso. It removed the previous system of "defending" the peso through state intervention on financial markets.
This official devaluation capped a series of shock waves which had sent Asian financial markets spinning ever since the devaluation of the Thai baht in April. The depreciation of the baht had a knock-on effect on other south east Asian currencies, including the Indonesian ruppiah, the Philippine peso, and even the Singapore dollar. The first shock wave
In May, as an aftermath of the Thai devaluation, selling of Philippine pesos to buy US dollars became more intense, and threatened to deplete the dollar reserves of the Philippine Central Bank. To protect the peso, the banks increased their overnight lending rates, from 10.5%/year in April to 20%/year on May 19. By increasing the interest paid to currency traders holding pesos, the Central Bank hoped to encourage them to hold pesos, rather than sell them (in bankers' jargon this is called "mopping out the peso's excess liquidity in the market.").
For a while, this policy seemed to work. From May 22 to June 19, the exchange rate stabilised, and the overnight lending rate was gradually reduced to 12.75%. The collapse of the peso was avoided because the Central Bank had enough dollar reserves to absorb the "peso glut" . In a meeting with businessmen, Philippine President Fidel Ramos boasted of a "robust" Philippine currency and, in a gloating mood, promised that he would never allow a currency devaluation, as the Thai government had done. He would recant on this promise a few weeks later. The second shock wave
Between June 27 and July 2, the financial market was again besieged by "peso dumping" . The overnight lending rates shot up to 24%lyear, or a few percent higher than the peak rate during the first shock
Peso-dollar trading became more 28 International Viewpoint #293 feverish. The volume of currency exchange leapt from 100-150 million/day to $400-600 million/day. Overnight lending rates to 3032% in the days preceding the July I1 devaluation.
A number of local capitalists, including many whose companies figure in the country's Top 100, demanded that interest rate be pulled down to manageable levels. They said that industry expansion was being jeopardised as interest rate soared to levels where it was unprofitable to borrow money. The demand
Philippine capitalists demanded a devaluation of the peso. The banking sector said it would bring stability. Exporters said a devaluation would cheapen their products, and would make them competitive in the international market. Investors in the domestic market argued that their products would become more competitive, because devaluation would push up the prices of imported products.
This was a nightmare for President FidelRamos. However one looks at it, devaluation was like an axe falling towards the heads of the consumers. Ramos' posturing about the country's "economic growth" would fizzle out and might jeopardise his party's chances in the 1998 elections.
The government finally buckled to pressures from capitalist circles. Whatever the economic effect for consumers, Ramos knew that he had to secure first the support of his main financial backers.
In early July, the government liberalised the terms on which six major financial institutions could bid for U.S. bonds and other financial instruments. This was called "widening the spread of bond trading in order to freely adjust the value of the peso against the dollar."
On July 11, the financial speculators outbid themselves in frenzied trading. Billions of pesos were dumped into the market in order to acquire these new dollars. Windfall profits were made. Speculators who had acquired dollars at P26.40, were able to sell them on July 12 for P30-P32. Ten percent profit, overnight! Who are the culprits?
Senator Ernesto Maceda told the media that the culprits were those who had "plenty of money in the first place to play the money game." He threatened to sue the six "universal banks" authorised to bid for dollars in Philippine markets for their "economic sabotage" that had led to the collapse of the peso. Surprisingly, not a single bank was named, and any reference to the issue disappeared from the news within two days.
The six "universal banks" in the foreigndominated Philippine financial world are known around the globe. They are Citibank, dth Thay r Cthank JP Morgan, Solomon Brothers, Merrill Lynch, ING Barrings, and Morgan Stanley. All are awash with paper money, and trade in trillions of dollars and other currencies all over the world. They are just six of the giant financial corporations preying on the Southeast Asian market.
Financial speculator George Soros, who the Malaysian government holds responsible for their currency's forced devaluation, is insignificant in comparison to any of these six banks. In any case, a large part of Soros's financial dealings are brokered by these money trading firms.
Together with 14 other international banks and financial institutions, the six "universal banks" do a huge amount of short-term lending to banks and industrial companies in the Philippines. Rather than being used for industrial expansion, these "portfolio investment" funds circulate mostly in the financial market. They are used predominantly for speculation: short-term trading of treasury bonds, stocks and various financial instruments.
It is above all this kind of capital that has boosted so-called economic growth in the Philippines. Without this inflow of speculative cash - and the millions of dollars that are sent home every year by more than five million overseas Filipino workers — Asia's "sick man" could never have appeared to recover in recent years.
The economic strategy of the Philippine government under "Steady Eddie" (as the Australian press endearingly calls the Philippine president) strongly revolves around procurement of the precious US dollar. Even if it means attracting the financial vultures to prey on the Philippine economy. Financial vultures
Portfolio investments represent trillions of dollars of surplus capital that cannot find a use in the advanced capitalist countries. As a result, the owners are on a constant look-out for profitable investments that bring in fast profits.
What entices them to "invest" in the Philippines (and Southeast Asia in general) are the higher interest rates in the region. In normal times, Philippine Inter-bank (base) interest rates average 12-15% compared to 57% in advanced capitalist countries.
This means that US dollars earn more if they are invested in local currencies and financial instruments (through the purchase of Philippine treasury bills and shares in Philippine companies) rather than in low-interest US bonds, the main alternative. Foreign financial investors are assured a higher return than they can get in the money market of their home country.
However, in order to attract financial investment, a Third World economy has to
assure investors that their investment is wick assure investors that their investment is "riskfree," through a stable exchange rate. This is a guarantee to investors that any capital they bring into the economy, and whatever profits they make, can easily be converted into dollars, which they can transfer out of the country whenever they want.
So, if it is in the interest of financial managers that the exchange rate in the Philippines remains stable, why did they resort to conspiracy to bring down the value of the peso?
To understand, we must look at the operation of the financial markets. This "industry" is inherently speculative. Competition is rife because of the presence of surplus money-capital in a number of big institutions where everyone tries to corner the surplus capital in the shortest possible deals.
One of the major operations on these financial markets is speculation on exchange rates. Just like any commercial capitalist, financial speculators try to make protits by buying a currency cheap in order to sell it dear. In the case of the Philippines, they started to buy dollars when the rate was P26 to the dollar. . They then dumped more pesos in the trading market to raise the dollar value.
The finance managers do this in a conspiratorial way through agreements among themselves to fix a "trading spread" (usually a manageable 1-1.5% movement of the exchange rate). But on occasions the trading gets out of hand because of stiff competition, or when bigger financial institutions start to attack the trading market by heating up the competition in the trading floor, and the system fully gets out of hand. Crisis after crisis
To solve the crisis brought about by money speculation, the Philippine government's response was to whip up another crisis. It officially devalued the peso, purportedly to stop the speculation and to recoup the dwindling foreign currency reserves in the Central Bank. By doing so, the government expects to stabilise the exchange rate, and allow interest rates to settle at a manageable level, which will no longer discourage industrialists from borrowing money to finance their investments. They also hope that devaluation will strengthen the country's exports, and that this will encourage further capital investments.
Unfortunately, this "textbook solution" is only applicable to fully industrialised countries and strong exporters. This is not the case of the Philippines, which is dependent on imports, and lacks competitive export products.
And in any case, even in the "textbook" solution, currency stabilisation after depreciation usually lisation after depreciation usually lasts for only six months. And the post-devaluation "economic boom" led by the export industry usually occurs a year after depreciation.
If the Philippine exchange rate does not stabilise in the next few months,
Manila Cha Cha
President Fidel Ramos is trying to change the 1987 constitution so that he can stand for re-election.
Charter Change, known in the capital as "Cha Cha," is massively unpopular. The Archbishop of Manila, Cardinal Jaime Sin, has said that if Ramos stands for a second term he will "lead us back into the dark ages of pre-martial law political dynasties, warlordism, corruption, sham democracy and debilitating poverty."
The September 21st mass rally against constitutional change could turn into the biggest public demonstration since 1986. [JD] *
Philippines * and if foreign currency reserves continue to be depleted, some economists will consider this as evidence that the financial vultures are preparing to ship out their money back to their base country, or to some other more profitable ventures outside the Philippines. The poor pay
The most conservative estimates predict that inflation will rise from 4.6% to 6.1% by the end of the year. Prices of basic commodities like as food, electricity and transport have already increased.
Although the price of crude oil has fallen 30% in the international market, where trade is in US dollars, vultures in the Philippine petrol industry are demanding a further increase in fuel prices. And now that the government has deregulated the trade in oil products, there seems no way of stopping them from doing so.
It is not only the poor who are the losers in the peso devaluation. Capitalist importers, and most Philippine businesses, stand to lose. While the devaluation will be profitable for some exporters, this will not be the case for corporations which have incurred dollar debts in their operations and exporters who use imported components will have to raise their prices anyway.
The main winners from devaluation, apart from the international financial firms, are the transnational corporations (TNCs) which trade mainly between their own subsidiaries in different countries.
The government will see its revenue increase, as price increases generate more sales tax. But this will be counterbalanced by the higher cost of repaying foreign loans. President Ramos is again begging the International Monetary Fund to extend its "exit programme" in the Philippines. Destructive role of finance-capital
The Philippine economy is held hostage by a number of international financial institutions. International finance capital is roaming around the globe in search of the quick buck. It attacks weaker currencies of smaller countries to reap huge profits. It first shook the economy of Mexico, followed by Thailand, Malaysia, Philippines, and
Indonesia. It seems that this is one facet of
"globalisation" that quite clearly stifles economic growth. And the Southeast Asian countries have been hit particularly hard. The "economic miracle" in a number of Southeast
Asian countries is starting to burst. It was always a bubble. The economic collapse experienced by Thailand in particular has proved once more the destructive role of finance-capital. As Marx said, "pure moneycapital" is the "slaughterer" of industrial capital. * industrial canital. + This article was first circulated among members of the progressive union organisation Bukluran ng Manggagawang Pilipino (BMP). *The author can be contacted c/o Links magazine, PO Box 515, Broadway NSW 2007, Australia. Tel. +61 2 9690 1230, Fax: +61 2 9690 1381, Email: links@peg.ape.org 29
* reviews
Organizing Dissent: Unions, the State, and the Democratic Teachers' Movement in Mexico. Maria Lorena Cook. reviewed by Dan La Botz The teachers' movement has been the single most important labor movement in Mexico in the last twenty years. The movement in the teachers union (SNTE), Mexico's largest labor union, began in the mid-1970s and came to involve tens of thousands of teachers in marches, demonstrations, sit-ins (plantones), strikes, and myriad other forms of confrontation with their employer, the Secretary of Public Education (SEP). These were usually struggles for higher wages and better benefits, but above all for union democracy.
Over a period of titteen years rank and file teachers in the state of Chiapas and Vaxaca, and to a lesser degree in other states, as well in Mexico City, succeeded not only in creating a mass movement, but more remarkably in an authoritarian regime such as Mexico's, in creating an on-going national rank-and-file organization, the National Coordinating Committee (CNTE) of the teachers union. The CNTE succeeded in winning control of the Chiapas and Oaxaca state organizations, and later played a key role in bringing down the dictatoriai regime of Carlos Jonguitud Barrios, head of Vanguardia Revolucionaria, the political machine that controlled the union.
Maria Lorena Cook, assistant professor
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