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PRICES of oil and other commodities in the world market have resumed
their climb to fresh records, threatening to slow down the
Philippine economy this year and even stoke political unrest.
The National Economic and Development Authority
(NEDA) last week said it is slashing its growth forecast for the
first quarter to six percent from an original estimate of 7 percent.
It cited a bearish outlook for manufacturing and agriculture.
The expected weakness in manufacturing is owing
to the anticipated slowdown in exports, the bulk of which are
locally assembled electronics and semiconductors. The export letdown
in turn is due to a possible US recession, which some economists
believe is already under way.
Compounding this, the Bangko Sentral ng
Pilipinas (BSP) recently hinted of a stop to further interest rate
reductions, citing the risks to inflation arising from costlier
commodities, a possible upward adjustment in transport fares and
wages due to more expensive food items, and strong dollar inflows.
This is despite the US Federal Reserve’s
latest signal that it isn’t done with its monetary loosening.
Since September last year, the American central bank has been
reducing its Federal funds rate, which is the rate at which banks
borrow from each other short term. This rate now stands at 3
percent.
The BSP likewise had been trimming its
counterpart overnight rate to 5.25 percent to date, so that it
maintains the difference between domestic and US interest rates. Had
it not responded to the Fed’s rate cutting campaign with similar
reductions of its own, the rate differential would have widened,
making it difficult for the BSP to manage inflationary pressure
arising from too much foreign exchange flooding the local financial
system.
As we all know, investment in a globalized
economy is foot-loose, seeking out the highest returns provided
risks are manageable. So it usually moves out of low-interest rate
currencies and into high-interest rate ones.
Before it mopped up excess liquidity—largely
through allowing more financial institutions to invest in the
BSP’s higher-yielding special deposit account—the country’s
money supply had been growing at above 20 percent, or way above
manageable levels.
Should it decide to put off further rate
reductions, the BSP may yet prevent inflationary expectations from
taking hold, but risks slowing down the economy. The central
bank’s anti-inflation bias is set by law, and so its hands are
tied in this regard.
The key therefore is in the Arroyo
administration’s hands. It should crank up government spending to
mitigate the impact of a possible US recession. We cannot overstate
the importance of the economy to regime stability, as past popular
uprisings in this country succeeded partly because economic
difficulties provided the rationale for people to seek political
change.
The problem with jacking up state spending of
course is that it risks upsetting the government’s fiscal reform
program, which calls for balancing its budget this year. Possible
censure by the international financial community due to the
government’s failure to put its fiscal house in order this year
may reverse some of the gains of its reform effort, including the
record low interest rates, a strong peso, and declining debt levels.
President Arroyo is in a predicament this year.
Record asset sales allowed her administration to outperform its 2007
fiscal target, but proceeds from its privatization program this year
are expected to be a third of what it raked in last year. With the
Bureaus of Internal Revenue and of Customs pessimistic about hitting
collection targets this year, the only way for the government to
meet its balanced-budget goal is to keep spending in check, or
introduce new taxes, both of which are unpalatable politically.
While Mrs. Arroyo had already reiterated her
administration’s commitment to meeting its fiscal target this
year, she may have to reconsider this promise in light of renewed
political challenges to her legitimacy. So, buy some stability.
It’s a case of being caught between the devil and the deep blue
sea, and we don’t envy her position.
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