You cannot do whatever it takes if you are not big enough to make it stick. In that sense, the Philippines is finding out it is no Mario Draghi, the former Italian prime minister and European Central Bank president.
Turn the clock back to 2022, when the peso was sliding amid epic dollar strength and post-COVID-19 inflation. Then-Philippine secretary of finance Benjamin Diokno was asked if the government would do everything necessary to defend the currency.
Philippine President Ferdinand Marcos Jr had instructed him to do precisely that. “Don’t be absent in the market on a daily basis, because people might interpret that to mean we are letting go,” he said enthusiastically.
That was considered a statement of resolve for the Southeast Asian country on the order of the European Central Bank president’s line-in-the-sand vow in 2012 to do “whatever it takes” to save the euro during the bloc’s sovereign debt crisis. It has become something of a holy writ that officials — anywhere — like to invoke when they are in a tight spot and want to communicate effectively.
The Philippines is finding itself in such a situation. The currency is again sagging, and this time, authorities have skipped a vigorous pushback. In effect, they have lost their inner Draghi.
The peso fell to a record low last week, dropping below 59 pesos to the US dollar. In response, the Philippine central bank said it would not stand in the way of investors and would let markets do their thing. The bank would cushion the fall should it become extreme.
That is a fairly unremarkable stance on the face of it, but it unmasks the previous bluff. The Philippines does not have the firepower of the euro zone, the US or Japan to repel traders who wish to sell.
“Whatever it takes” has become an arresting phrase to let people know you mean business. That can work when you are the euro zone, an economy that includes about 350 million of the world’s wealthiest citizens with a combined GDP of about US$17 trillion.
What is less well-remembered is Draghi’s next sentence: “And believe me, it will be enough.”
Declaring the defense of arbitrary numbers is a dangerous game. Draghi knew that and was careful not to.
So did former US secretary of the treasury Robert Rubin, who developed the strong-dollar mantra that dominated discourse since the 1990s. The global foreign-exchange market has swollen to US$9.6 trillion a day, almost twice its size in the Draghi era and gargantuan compared with the Rubin period.
While reserves stood at a reasonably solid US$109 billion in September, the Philippines is not playing in the same league. The republic is home to just more than 112 million people and is saddled with lower-middle income status and GDP in the vicinity of US$450 billion.
Three years ago, the defense of the peso might have benefited more from luck than talking tough. The greenback was on a tear. Japan had just waded into the market to support the yen, the first such step in a generation, and a slide in the pound forced out a prime minister.
The culprit behind the muscular dollar was the US Federal Reserve’s aggressive rate hikes. Some of the steam went out of the currency after a top Fed policymaker said the hikes would not be so rapid — or the extent so great — that financial stability would be jeopardized. That calmed things down. Manila and other emerging markets could breathe easier.
Now, the archipelago is largely on its own. Most Asian currencies have notched gains against the dollar this year. Only the peso, the Indian rupee and the rupiah are down. The Fed is cutting rates.
There are not concerns about broader market instability, save for some persistent worries that US President Donald Trump wants to rewrite the international trading system with tariffs, and perfunctory tut-tutting about the danger of an investment bubble in artificial intelligence.
After a swoon in April, the dollar has steadied.
Ultimately, a currency’s value is determined by the underlying performance of a country’s economy and borrowing costs — not just the level, but direction, and comparison with peers.
In August, the Philippine central bank Governor Eli Remolona declared his rates were in a “Goldilocks” state — neither too tight nor unjustifiably loose. So it was a surprise when he eased this month. Officials have indicated that there might be more to come.
What has prompted the shift? The likely cause is allegations of widespread misuse of billions of dollars for flood-control projects. The scandal weighs on the country’s growth prospects and, in turn, has rattled investor confidence.
The fracas is also likely to erode political support for substantial fiscal stimulus, meaning that the central bank has more work to do. That adds to pressure for additional rate cuts, which might chip away at support for the peso.
The bank is not pledging to be entirely hands off, nor is Manila suddenly bereft of support. The government took care to build reserves, which it can deploy judiciously. Remittances from the legions of Filipinos working overseas — one of the economy’s mainstays — ought to prevent a peso collapse.
While growth would probably slacken in response to US tariffs, the economy is unlikely to grind to a halt. Capital inflows from Filipinos working abroad tend to peak toward the end of the year.
There is no question this is an uncomfortable moment for the Philippines. However, there is already a lesson. The Draghi play works if you are big enough to dictate to the market, and only when the stakes are so high that an epic mishap awaits if you do not truly do whatever it takes.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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