‘PHL must raise more $ vs US rate-hike effects’

THE Philippines can only “adapt” to the effects of US interest rate hikes by raising more dollars, House Committee on Ways and Means Chairman Joey Sarte Salceda said.

In theory, there is no level in which the Philippines can raise interest rates without some damage to aggregate demand, said the economist-lawmaker.

“After all, the purpose of interest rate increases is, to some extent, tamp down consumer demand,” Salceda said last Wednesday. “That said, it will all depend on how high the US intends to increase its rates further.”

Any additional interest rate hike from the world’s largest economy will cause other central banks to also raise their interest rates.

Last week, monetary authorities hiked interest rates by 50 basis points to 4.25 percent effective September 23.

But Salceda said the country can significantly offset the effects of the hawkishness of the US Fed by raising more dollars from the business process outsourcing, tourism and foreign-employed freelancer sectors and overseas Filipino workers.

The lawmaker said he’s been “advocating for this position for quite some time already.”

“Because there’s not much we can do to impact what is obviously a global trend, we can adapt by earning more dollars.”

Citing a recent study by former Harvard President Larry Summers, Salceda said the US still needs some 425bps in rate hikes to bring down core inflation to the 2-percent level that, historically, the US economy has been comfortable with.

No choice

ALSO, Salceda said Chicago Fed President Charles Evans has made statements recently saying they will be comfortable with a Fed rate of up to 4.75 percent.

“To keep our current interest rate differential of 50bps, we will need to increase rates by another 150 basis points by that time,” he said. “I think we can handle that.”

“By that point, we can handle that much and we wouldn’t have much of a choice anyway, because we are a peripheral economy,” Salceda explained. “And credit growth here appears to have more of a relationship with the decisions of major economies like the US than with our own monetary policy decisions.”

Also, the lawmaker said there appears to be weak transmission of policy rates in lending by banks because Philippines banks are “conservative by default anyway.”

“Again, since we cannot move the needle globally from our own country, the best we can do is adapt until this global storm settles,” Salceda said. “This is a global storm; and no rate hike from our little corner of the global economy will make a meaningful dent on a global trend. Best we can do is adapt.”

The lawmaker said he believes that dollar earnings from the mining industry, BPO, OFW, freelancers and tourism can “stop the bleeding of foreign capital.”

The latter can be achieved, he said, “through robust and reassuring commitment to fiscal and economic reforms that will cure our rigidities [including] land ownership constraints, power costs, ease of doing business, etc.”

Structural reforms

SALCEDA is recommending long-term and structural reforms in the republic’s agriculture, energy and way of doing business in the country.

To lower power cost, the solon recommended the creation of a committee to cure “the oligopolistic, rent-seeking and inefficient market behavior in the Electric Power Industry Reform law (Republic Act 9136).

Salceda also recommended increasing the domestic agricultural production for key staples, maximizing emerging competitive advantages and optimizing export products to lower food cost and increase agricultural production.

Salceda said the government should also remove barriers to efficient land use through lifting ownership and size restrictions and condoning agrarian reform beneficiaries’ loans.

We should also reduce sensitivity to global energy price volatility through significantly more indigenous energy or the doctrine of renewable energy surplus, the lawmaker added. Salceda said government needs to massively increase renewable energy surplus while taking care of the country’s baseload, likely through nuclear power.

Lastly, he said the ease of doing business should be strictly implemented by shifting the burden of processes from law-abiding businesses to government offices.

One day approvals in all LGUs for ministerial permits, single-interface requirements and, all-digital payment of taxes were among the specific actions that the Philippine government must undertake, according to Salceda.