Imported inflation
The Bangko Sentral ng Pilipinas’ recent move to raise key interest rates by 75 basis points (bps) is a welcome step, perhaps the most crucial of the many outlined measures by the previous economic team to control what has largely been triggered by expensive imports of oils and other commodities.
A key takeaway from this move of significantly increasing borrowing rates is that the market has the capacity to take it in given the first quarter gross domestic product (GDP) growth of 8.3 percent, and an expected higher figure for the second quarter, as per Finance Secretary Benjamin E. Diokno’s recent statements.
BSP, now led by Felipe Medalla, can no longer afford to take baby steps of announcing quarter point rate hikes every month as it had done in May and June this year in view of the giant rate hikes the US Fed had announced in recent months.
The Fed is hell-bent on quashing rising prices of goods in the US, and the latest data showing its consumer price index in June spiking to 9.1 percent, the highest in 40 years, will likely lead to another monstrous interest rate hike call this month.
The BSP has decided to match the Fed hikes tit-for-tat by declaring that the Monetary Board is not averse to giving its go-ahead for another 75 bps rate hike if needed. The central bank’s move is not isolated, though, since a number of other countries have stepped up by matching the Fed movements.
Whether BSP’s interest rate hike will do the trick on our own inflation figures, which hit 6.1 percent last month, bears watching, especially since the Fed’s decisions apparently have not brought about the desired cooling effect on US consumer prices.
In all likelihood, tempering of food prices in the Philippines will take some time. Even with the recent BSP decision to raise interest rates, economic watchers are still talking of higher inflation levels well into the last quarter of the year, and perhaps even in the first quarter of 2023.
If it’s any consolation, oil prices are showing signs of getting back below the $100-a-barrel level, largely because of the slowing down of the Chinese economy because of continued lockdowns resulting from the coronavirus infection breakouts. How successful China will be in controlling the pandemic will dictate future oil pricing.
Shifting investment markets
The peso has been moving towards uncharted territory in the last weeks, with the US dollar continuing to gain muscle largely from its strong export receipts. For the Philippines, which has had to pay double for its oil imports because of high crude prices, a weak peso only adds to the cost, fuelling further inflation.
The BSP’s intent to hike interest rates in step with Fed moves is expected to dampen the peso’s volatility in the world market and temper its movement to match other currencies in the region. As with many other countries in Southeast Asia, the reality is that the US dollar will continue to be measured against ours.
When the Fed raised its interest rates last month, yields on long-term Treasury bonds started going up. This prompted investors to shift their investments away from riskier portfolios to areas where investments will yield higher earnings without exposure to risks.
The Philippines, much like Thailand, Vietnam, and Indonesia, were among the emerging economies that felt the shift away of investments as a result of the calls by the Fed to hike interest rates.
In a pre-pandemic world, we would have had more muscle to contend with this opportunistic market sentiment. However, two years under abnormal pandemic conditions have weakened our fiscal position. Large amounts of borrowings have pushed our debt levels higher, exposing a vulnerability that forces us to not defend the peso with the usual confidence.
While raising our interest rates will not bring the peso back to its yearend 2021 level of about P51 to a dollar any time soon, it should prevent our currency from suffering a worse fate. We can rely on our other strong economic fundamentals, like a healthy foreign exchange reserve and increasing remittances to prevent things from getting worse.
Definitely, the Philippines is still in a far better position than Sri Lanka, whose government can no longer service debts, or from Laos, which is now experiencing liquidity issues from having to pay its debts and to cover for importations.
Return to productivity
Despite the gloom and doom in many parts of the world, the Philippines continues to be one of the brighter spots for investors always on the lookout of opportunities to earn more. The new government has formed an economic team committed to continuing reforms to spur growth.
Even with the massive borrowings made during the last two years to prop up an economy under quarantine restrictions, Diokno and his team have drawn up a cohesive fiscal consolidation program, with targets adjusted to the new realities now taking place.
The Philippines can still look to at least a 6.5 percent growth in GDP this year, which is slightly lower than the original projection made, but still a good growth promise that can be envied by other emerging economies.
The previous economic team had worked hard to deliver reforms in the government’s tax system plus introduce some significant changes in existing laws, and the new team has promised to continue working on programs that are still in the pipeline.
The overall mood is bullish and unfazed by even the possibility of high infection spikes. We are learning to live with the virus while continuing to pursue economic growth, and that is good.
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