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THE International Monetary Fund (IMF) said it best last week when it
called on governments to pump prime their economies, citing the
inadequacy of monetary easing in softening the impact of the global
economic downturn.
In an update issued a month after its most
recent World Economic Outlook, the world’s so-called lender of
last resort said the “financial stress is likely to be deeper
[than] envisaged in October,” with recovery seen sometime late
next year.
It further cut its global growth forecast for
this year and next to 3.75 percent and 2 percent, respectively, with
the developed economies suffering a 0.25 percent contraction in
2009. For the developing economies, the IMF said expansion would
slow to 6.6 percent this year, down from an earlier estimate of 8
percent. In the Southeast Asian region, it said growth would slow to
5.4 percent this year before easing further to 4.2 percent next
year.
Most susceptible to the global downturn are
commodity exporters and countries having external financing and
liquidity problems. Now the Philippines is not as heavily dependent
on external trade receipts, but its main shipment abroad—assembled
electronics and semiconductors—is already suffering from a sharp
drop in orders starting in the fourth quarter.
The country also has managed to trim its foreign
liabilities, after embarking on a repayment campaign starting about
a year ago when it had enjoyed a stronger currency and record-low
domestic interest rates. The likely blow to the domestic economy
would come from widening risk aversion leading to a credit crunch
similar to what is happening in the US, which is ground zero for the
current crisis, and other developed markets.
This is why the Bangko Sentral ng Pilipinas is
moving fast to secure access to credit required to keep the domestic
economy humming along. On Friday, it announced it would cut banks’
reserve requirements to 19 percent from the current 21 percent,
effective later this week.
Reserve requirements pertain to money banks have
to set aside as non-earning resources locked up either in their or
at the Bangko Sentral ng Pilipinas’ vaults. The central bank’s
move to make available part of this cache to lenders would let loose
more money into the local financial system to meet liquidity
requirements of businesses and households.
Maintaining confidence
The idea behind facilitating credit access is to
maintain confidence in the domestic economy despite the global
turmoil. It is precisely the erosion of confidence that has roiled
financial markets worldwide, and led to households and businesses’
reluctance to spend, fearing that parting with their money would
leave them vulnerable when the credit taps do run dry. Slipping
confidence is a self-fulfilling prophecy because once everyone holds
back on spending on poor job prospects and falling profits,
liquidity is bound to shrink if not vanish.
De facto interest rate reduction
The textbook response to this is monetary
easing, primarily by cutting the central bank’s interest rates,
which is what the Bangko Sentral ng Pilipinas charges lenders for
tapping its overnight credit windows. The reduction in banks’
reserve requirements also has the same effect, which is why on
Friday’s, Bangko Sentral ng Pilipinas move is considered a
de facto rate reduction.
But as the International Monetary Fund warned,
there are limits to the wonders brought on by monetary easing. This
is so because households and firms may be in financial straits and
knee-deep in debt, which means they would only be using the extra
cash made available by central banks to resolve their liquidity or
solvency issues. Add to that the rising risk aversion and general
lack of confidence, which would hold back additional spending.
The classic, and quite recent case is Japan.
During that country’s “lost decade” starting in the early
1990s, successive easing by the Bank of Japan failed to shore up
confidence and trigger the resumption of business and household
spending. What happened instead is that the world’s second biggest
economy fell into a “liquidity trap,” wherein Japan had more
money than it could deploy to crank up economic activity. This is
why the Samurai bond market surged during that time, as companies
elsewhere tapped the huge and unused liquidity slish-sloshing in the
Japanese financial system.
In the face of limited benefits from monetary
easing, the IMF has urged governments with “fiscal space” to
spend more to keep their economies afloat. In the Philippines, the
government has announced its intention to spend its way out of the
current global crisis. But the question is how it can afford to do
so, especially with the collection deficit of its main tax revenue
agency.
Raise money abroad?
With a more hospitable global environment, the
government can go abroad and raise money through the sale of debt
papers or some asset. But with the current crisis, not only is money
hard to come by, but potential investors may be averse to parting
with their cash to take up a stake in some state-run corporation.
This is why the government may put off a plan to
sell Philippine National Oil Co.-Exploration Corp. (PNOC-EC), and
why it has dilly-dallied on the privatization of its power-sector
assets. There may be buyers, but the government may be unable to
command the right price amid the worldwide risk aversion.
Short of bright ideas, it may have to bite the
bullet and sell at a discount (in the case of PNOC-EC or some other
state-run firm) or swallow the huge premium lenders may charge (in
the case of a bond float or some other borrowing). Provided the
central bank’s monetary easing pays off, the government may yet
tap the domestic market, taking advantage of lenders that have few
investment options to make more money.
Whatever it does, the government has to spend
its way out of the current global crisis. With slumping exports,
weak consumer spending and slipping private investment, a fiscal
stimulus increasingly has become the only viable leg on which to
prop up the Philippine economy at this point in time.
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