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THE turmoil in financial markets worldwide has cast darker clouds on
economic prospects for 2008.While every Tom, Dick, and Harry already
put in their two cents’ worth on how a slowdown is inevitable not
only for the US, but also for the global economy, the extent of the
impact on households in countries like the Philippines remains
unclear.
This is partly due to the smokescreen created by
strong dollar inflows, thanks largely to overseas Filipino workers (OFWs).
A strong peso arising from this dollar surge has spared us from the
full impact of a doubling in world oil prices.
The local currency’s appreciation has kept
inflation at low single-digits—in contrast to the double-digit
pace of price increases during the last oil-led recession in the
early 1990s. Despite every dollar fetching fewer pesos for OFW
households, the generally low price levels have allowed Filipinos to
continue their spending binge, heretofore the main driver of
domestic economic expansion.
The peso’s appreciation, which has made it
Asia’s best performer, is also helping the government cut down its
debt. Hitherto haunted by revenue shortfalls, the recent improvement
in government’s fiscal profile also removed pressure on financial
markets, leading to record low interest rates.
Not only can the government reduce its foreign
obligations by paying down cheaper dollar loans, it also can replace
old peso-denominated debt pegged to higher interest rates with loans
based on the current low interest-rate quotes.
Businesses have resorted to this refinancing
tack since last year, taking out cheaper loans to replace the old
ones or retiring them altogether. Expansion was a constant battle
cry among companies emboldened by cheap money last year. Households
for their part waved their charge cards, and trooped to banks for
housing and/or auto loans.
We warned earlier in this space that this period
of cheap money however is unlikely to last long given the
seasonality of dollar remittances. Recent data indicate that this
period of easy money may end sooner than we thought.
The slowdown in remittances last November or way
into the strongest season any year for such money transfers speaks a
lot about the upcoming letdown. If this trend were sustained through
January, then we’re in for a rude awakening earlier than expected.
Hopefully, world oil prices would have eased
from record highs if not due to a brief winter episode in the
Northern hemisphere, then because of slowing demand by the world’s
largest oil consumer, the US.
So would the average Filipino household be
spared this time around? The last US recession wasn’t oil-related,
but inspired by irrational exuberance surrounding the information
economy. That episode similarly hit the Philippines, as the
country’s main export, electronics, took a beating.
A lot depends on what economic policies the
government would pursue. We refer here to how government would steer
demand for the two critical resources that have caused the recent
financial market turbulence, namely oil and credit.
Wasteful use of fuel
If wasteful use of fuel courtesy of
indiscriminate diesel discounts were to continue, then expect an
erosion of the country’s dollar inventory, which in turn would put
pressure on prices, interest rates and undermine government’s
fiscal position. We won’t need a US recession to push the
Philippines over the precipice. The government can pretty much do
that on its own.
President Arroyo has called for a summit on oil.
We hope she won’t use that occasion to cement this misguided
populist policy on diesel discounts. We also fervently pray she
doesn’t use that occasion to accommodate equally dangerous
proposals raised by president-wanna-be’s. Restoring the sales tax
exemption of oil products would only exacerbate the current wasteful
use of fuel while robbing the government of scarce revenues.
Opposite extremes
On the credit front, the Bangko Sentral ng
Pilipinas (BSP) has been responding to every cut in the US Federal
funds rate by similar reductions in local overnight rates. The Fed
is laying the ground for a soft landing for the US economy, while
the BSP’s move is meant to narrow the resulting interest rate
differential, which if left alone, would only flood the Philippines
with more dollars, raise inflation, and further erode the OFWs’
and exporters’ earnings.
We’re on opposite extremes of the credit
problem—the US is short of it while the Philippines has too much
of it. This is why President Bush’s proposal to hand out tax
rebates to Americans makes sense. As Fed Chairman Ben Bernanke
alluded to earlier, the US needs a shot in the arm so people can
have money they can spend right away and prevent a recession from
taking hold.
So far, no one has called for a similar move in
the Philippines. We hope the reasons for this silence are obvious to
policymakers.
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