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THE Bangko Sentral ng Pilipinas’ (BSP) announcement that it saw no
need of injecting additional money into the local financial system
is hardly reassuring.
Last week central banks from as far as North
America and Europe, to as close by as Japan and Singapore, infused
liquidity into their respective markets to counteract a developing
credit crunch signaled by the sudden rise in short-term interest
rates.
The sudden tightening of credit markets was due
to the widening impact of the United States’ subprime mortgage
crisis. The subprime mortgage segment of the US housing industry
refers to loans taken out by Americans who had questionable credit
profiles. In other words, their capacity to pay back those loans is
highly doubtful, and very unlikely in light of the ongoing decline
in property prices.
The crisis infected a number of lenders,
including big-name investment banks and hedge funds that were
cashing in on the higher premium these below-standard financial
assets offered. As many homeowners defaulted on their loans and the
prices of their houses collapsed, holders of these loans as well as
those who bought these receivables to make a quick buck, were left
holding an empty bag.
The US Fed Reserve Bank’s decision—as well
as that of other central banks in developed countries—to infuse
additional liquidity into their markets is an exercise of their role
as lenders of last resort. The bail out is aimed at extending credit
to the banks that were knee deep in the subprime mortgage morass so
they don’t fail and infect the rest of the financial system.
Had those central banks not acted fast enough,
they could have risked a credit squeeze that would have put a brake
on their expanding economies.
These developed economies make up the biggest
markets for developing countries like the Philippines. A sudden
slowdown in these markets would hurt our economic growth prospects,
as at least 40 percent of our output is tied to our external trade.
Coming at a time when the Arroyo administration
is likely to miss its budget deficit target, the last thing it needs
is a worldwide economic slowdown. Perhaps the only good thing going
for the Philippines nowadays is its resilient economy. If we keep up
on this front, then we may contain the damage wrought by a fiscal
blowout.
This explains the optimism of the National
Economic and Development Authority secretary-general even after he
pulled a fast one on the finance secretary and glibly said that the
government would end the year with a P100-billion budget deficit, or
way above the P63-billion target ceiling.
The crucial measure that our creditors are
keeping tabs of is less the actual deficit figure and more the
funding gap as a percentage of the country’s economic output, or
the so-called deficit-to-GDP ratio. GDP stands for gross domestic
product, which is the amount of goods and services the country
produces.
Under the government’s medium-term plan, that
ratio should go down to 0.9 percent this year. A global slowdown
therefore would be a double whammy as it would cut the
Philippines’ GDP and with it, wipe out any chance of meeting
fiscal targets.
Having said the above, we don’t mean to
trivialize the BSP’s announcement that local banks are immune from
the US’ subprime mortgage crisis, as Philippine lenders’
exposure to that sector is supposedly minimal if not nil. This in
itself is good, if it were true.
But if we read between the lines, what the
central bank is actually saying is that our financial system is not
so well developed, thus its marginal exposure to the crisis. And
that is something we cannot be proud of.
In any event, the challenge for the Philippines
at this time when global markets are in turmoil is to ensure the
economy is less susceptible to the spillover of a crisis that is
largely financial into the real economy. As for the external sector,
we can only hope that the US Fed and its developed-country peers
keep up their pace in containing the credit crunch.
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