Collapse of the Philippine peso: Who's the culprit?

Wednesday, September 24, 1997

By Sonny Melencio

A longer version of this article was written in July, a week after the much publicised devaluation of the Philippine peso. It was circulated among members of the progressive trade union organisation Bukluran ng Manggagawang Pilipino. Since then, the situation described has worsened as currency attacks on the Philippines and other south-east Asian economies continue.

On July 11, the halls of currency trading in the Philippines reverberated with a mild shock brought about by unusually intense peso trading with the dollar. The next day, the government announced the devaluation of the peso (its depreciation vis-a-vis the US dollar). From the official rate of P26:$1, the exchange rate floated to as high as P32:$1.

The peso devaluation capped a series of shock waves through the financial market following the devaluation of the Thai baht in April. In May, frenzied trading of the peso began, threatening to deplete the Philippines' dollar reserves. The banks had to increase their overnight lending rates to mop up the peso's excess liquidity. On May 19, the lending rates rose to 20%, compared to 10.5% in April.

The Philippine currency survived because the central bank had enough dollar reserves to absorb the "peso glut". The exchange rate stabilised from the last week of May till June 19, when the lending rates went down from 18% to 12.75%. In a meeting with businessmen, President Fidel Ramos boasted of a "robust" Philippine currency.

From June 27 to July 2, the market was besieged again by "peso dumping". Lending rates moved up to 24%, a few percentage points higher than the peak rate during the first shock wave.

Two weeks before July 11, money trading became feverish again. The Philippine Dealing System reported that the volume of exchange leaped to $400-600 million, compared to the average of $100-150 million. Lending rates rose to 30-32% in the week to July 11.

Local capitalists demanded that the interest rate be reduced so as not to jeopardise industry expansion. Some, especially exporters and local investors, pressed for a peso devaluation, arguing that it was the only way to stabilise the exchange rate and make their products competitive in the international and local markets.

The Ramos government buckled under the pressure. Whatever the economic affect on consumers, it knew that it had to secure its main financial backers.

A few days before July 11, the government allowed six major financial institutions to bid "on a wider margin" for the US bonds and instruments that it would put up for sale. This was called "widening the spread" of bond trading in order to freely adjust the value of the peso vis-a-vis the dollar.

On July 11, the financial speculators dumped billions of pesos onto the trading floor to corner the dollars. Already awash with dollars they had acquired previously, and disposing of billions of pesos to propel another rise in the value of the dollar, the financial speculators gained windfall profits by the end of the day. The next day's exchange rate of P30-32:$1 netted them a 10% profit!

Financial vultures

Senator Ernesto Maceda told the media that the culprits were those who had plenty of money to play the money game. He threatened to sue the six "universal banks" for the "economic sabotage" that led to the peso collapse.

Surprisingly, not one of those banks was named, and all references to them disappeared from the news media within two days.

These banks are well known. They are Citibank, J.P. Morgan, Salomon Brothers, Merrill Lynch, ING Barings and Morgan Stanley — the six institutions authorised by the Philippines government to bid on dollar trading. They are just some of the giant financial corporations preying on the south-east Asian currency markets.

Together with another 14 international banks and financial institutions operating in the Philippines, the six have between them a large chunk of "portfolio investments" used in short-term lending to banks and industrial firms. Compared to foreign direct investment, which goes to industrial expansion, "portfolio investment" mostly circulates in the financial market and is used for money speculation (trading of treasury bonds, stocks and other financial instruments).

This is the kind of capital that has primarily boosted so-called economic growth in the Philippines. If not for this — and the millions of dollars being remitted yearly to the country by more than 5 million Filipino workers overseas — the "sick economy" of Asia would not appear to be recovering.

The economic strategy of the Philippine government under the leadership of "Steady Eddie" (the Australian media's endearing term for President Ramos) revolves around procuring the precious dollar, even if that attracts more financial vultures to prey on the country's economy.

Portfolio investment represents trillions of dollars that the capitalists cannot use in the advanced capitalist countries ("surplus capital").

They are enticed to the Philippines (and some other south-east Asian markets) by the higher interest rates: Philippine interest rates average 12-15%; the London Interbank Offered Rates in advanced capitalist countries average only 5-7%. Foreign financial investors are assured a higher return than they can get in the money market of their countries of origin.

However, in order to attract investment, a Third World economy has to assure investors that their investment is "risk free". A stable currency exchange is a guarantee that the "principal" the capitalists sink into the economy will easily convert into more dollars that they can ship out whenever they want.

So why did the financial managers in the Philippines conspire to bring down the peso?


The financial market is inherently speculative. Competition is rife because of the presence of surplus money capital in big institutions. Everyone tries to corner the surplus capital. Like any commercial capital, its profits are derived from buying cheap in order to sell dear.

A major part of the financial market is speculation around the exchange rate. The finance managers make agreements among themselves for a defined "trading spread" (usually through a manageable 1-1.5% movement of the exchange rate). There are occasions, though, when trading gets out of hand because of stiff competition, or when bigger financial institutions heat up the competition in the trading floor.

If the Philippine exchange rate does not stabilise in the next few months (that is, if the foreign currency reserves continue to deplete), it may be a signal that the financial vultures are preparing to ship their money back to their base or to other profitable ventures outside the country.

Interest rates, with profit rates, increased in the US during the first months of this year. Speculative capital, mostly from US-based financial firms, could have been waiting for this favourable climate to invest in industry where a more stable profit margin awaits it.

Thus the main factor attracting portfolio investment in the Philippines — a high interest rate — can also cause it to flee. A continuing rise in the interest rate points to the volatility of the country's economy and a creeping slump in economic production.

The Philippine economy is held hostage by international financial institutions. This finance capital attacks the weaker currencies of smaller countries to reap huge profits. It first shook the economy of Mexico, then Thailand, Malaysia, Philippines and now Indonesia. This is a facet of "globalisation" that stifles economic growth in most Third World countries.

The bubble that is the "economic miracle" in a number of south-east Asian countries is starting to burst. The economic bust experienced by Thailand, highlighted by the collapse of its currency and the slowing down of industrial investment as a whole, reveals once more the destructive role of finance capital. As Marx said, this pure money capital is the slaughterer of industrial capital.