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AFTER about a year of prodding by financial market players, the
Bangko Sentral ng Pilipinas (BSP) finally succumbed to calls to
limit access to a facility meant to temper inflation.
Its policy-making Monetary Board decided last
Thursday to close some of the windows of its special deposit account
(SDA), which has been competing for funds with the national
government, preventing it from securing short-term borrowings during
its fortnightly auctions of Treasury bills.
What appeared to have been the straw that broke
the camel’s back was the Bureau of Treasury’s recourse to
negotiated sales of T-bills after it had failed to sell these in the
open market due to the attempts of banks to bid up their rates.
Conceding to the high bids would have led T-bill
rates, the benchmark for banks’ lending rates, to shoot up,
removing a key pillar of the country’s recent economic success.
The low interest-rate regime has allowed businesses to expand and
households to leverage their incomes and spend more, boosting
investment and consumer spending, respectively.
Low rates also enabled the government to trim
its debt servicing costs, helping it reduce its budget deficit to a
record low and way below the ceiling ahead of this year’s
objective of bridging the fiscal gap.
The government move to do away with auctions and
negotiate T-bill rates however would have short-circuited the debt
market, which is premised on transparent price discovery. The BSP no
less warned that negotiated rates would throw off course capital
market reform. Its decision to refine the SDA therefore is a case of
walking the talk.
This move also reverts to its regular policy
tools the burden of taming inflation. Alongside refining its SDA,
the BSP also parted ways with its US counterpart, the Federal
Reserve (Fed), suspending further monetary easing by keeping its
overnight rates steady. Had it cut anew in lock-step with the Fed,
the BSP would have encouraged an uptake in inflation.
The consequence of this action however is a
wider differential between Philippine and US rates, especially if
the Fed eases its funds rate later this month as is widely expected.
From then onwards, we should expect a further strengthening of the
peso vis-à-vis the dollar, which would also temper inflation in
light of record prices of imported oil and other commodities.
The downside of course would be felt by, among
others, the export sector, where jobs may be at risk due to slipping
sales abroad. Data for January already showed this, as electronics
shipments, the bulk of the Philippines’ sales abroad, decelerated.
That data also lent credence to our susceptibility to a US slowdown
as shipments to our largest market abroad likewise fell. State-run
Philippine Institute of Development Studies (PIDS) just last week
warned the country may have already contracted the Dutch disease,
which infected the Netherlands in the 1960s when the discovery of
huge gas reserves attracted big foreign investments, sending the
kroner to record highs. This eroded the share of Dutch manufactured
exports abroad, causing job losses.
PIDS said this might be happening in the
Philippines, citing the weak manufacturing amid a strengthening
peso. If we’ve been smitten, then expect unemployment to rise.
This puts policy markers in a bind.
With monetary authorities preoccupied with
reining in inflationary pressures, the task of ensuring the
Philippine economy survives a US recession lay squarely on the
fiscal side of policy. The question is whether the government has
the wherewithal to rise up to this challenge.
Pump priming requires ample resources, which may
not be forthcoming, as the government’s two main revenue agencies
have insisted they are unlikely to meet higher collection targets
this year. Last year’s record-low deficit was largely due to huge
proceeds from government’s privatization, which is also unlikely
to be replicated this year.
That leaves borrowing to plug the gap, which
brings us back to where we started. Incurring more debt to
accommodate the planned spending hike implies that the government
would have to forego its balanced budget goal this year.
It’s a tough call given that this government
has worked hard for the much-coveted upgrade in its credit rating
hopefully by yearend. This Holy Grail would further improve the
government’s chances of securing much cheaper borrowings from
abroad.
But after the BSP’s recent policy move, the
government should push this effort to its logical conclusion: jack
up state spending to support economic growth. Otherwise, the central
bank’s cooperation would all be for naught.
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