"The market is paying for Malacanang’s stupidity," cried an exasperated FX trader at one of Manila’s domestic banks, referring to the presidential palace. "We are already over-regulated and now we are being harassed by the central bank."
This explains the head-spinning freefall of the Philippine peso which reached a 32-month low of 45.60 against the dollar on Tuesday.
"It’s not about economic fundamentals which are already bad," continues the trader. "It’s about banks unwilling to trade because of these reporting requirement hassles."
At the Philippine Dealing System (PDS), the interbank currency trading market, the peso opened Tuesday at Ps45.40, reached a high of Ps45.60, touched a low of Ps45.37, and closed at Ps45.595 with a total trading volume of $154.5 million.
While in Hong Kong, Rafael Buenaventura, the governor of the Bangko Sentral ng Pilipinas (BSP), was quoted by newspaper BusinessWorld as saying: "We are not intervening. We are letting the peso seek its own level."
This was said after an opinionmaker in the same paper publicly derided Buenaventura’s 'intervene from time to time' policy as creating a moral hazard situation.
"That is just a free trading mantra," demurred a trader. "In public, they say they will not intervene but in fact, last week the BSP intervened twice. Each time with a $20 million to $30 million tranche."
In attempting to find the logic of the peso’s current freefall, one can point to inflation figures released on Tuesday which saw inflation of 4.6% in August compared to 4.3% in July.
But that is not enough. There is a more mundane reason that is being mouthed by the market players in Manila.
"We are now being hassled," concurred another trader. "For transactions over $250,000 we have to report all the client’s details including name, address, et cetera. We are supposed to report the transaction two days after. But now, the BSP staff call us to inquire about trading details.
"If we tell them to wait for two days, they get annoyed. They say they can’t wait for two days. If we don’t give the details to them now, they threaten us with a fine of Ps30,000 per day. We can’t trade anymore. We have become administrative people. They don’t want us to trade."
The traders noted that the Malacanang and BSP often have an imperious attitude. They do not mind the attitude but they do mind the unreasonable demands. Banks are now unwilling to sell because if they buy it back during the day, they are asked to explain their act. Therefore, they choose not to sell which in turn dries up liquidity on the offer side.
"We hesitate to sell," says an FX trader. "We can’t do much trading this way."
In one case, a foreign bank’s country head was out of the country and failed to sign the report sent to the BSP. His deputy signed instead. The bank was fined.
Banks in Manila are limited to long positions of $10 million or 5% of unimpaired capital, whichever is lesser. This alone grants a narrow speculation leeway for the Philippine Dealing System dealers.
Instead of going short on dollars, the banks try to avoid the hassle and hold on to their dollars instead.
Or else they execute the most injurious marketing strategy: widen the bid/offer spread. Instead of the 45.60-45.62, the banks would go for the 45.60-45.65 spread.
This spread widening penalizes the buyers of dollars.
When will the peso turn around? "At 46.50, I would rethink my position. In the meantime (4:30pm Tuesday), I’ll go long on dollars and am selling at 45.65 and I know the s.o.b at the other side will take it."
