Shock therapy
The Monetary Board last Thursday administered the equivalent of shock therapy – the sort given to patients whose hearts stop beating. Our economy is in intensive care.
Policy rates were increased by 50 basis points. That is a lot, considering that this event was preceded by a sequence of rate increases. It is as if our economy has been put into a chokehold.
The large interest rate increase was not expected. In a poll of economists, the expectation is that the rate hike would be 25 basis points – as usual. Our business community is still in shock.
The sharp increase brings policy rates to 5.50 percent. This is the fourth consecutive increase and it is met mainly by dismay.
The objective of the rate hike is two-fold: arrest the depreciation of the peso and calm the galloping inflation rate.
The peso did gain a little after the interest rate decision was announced. But the currency resumed its fall the rest of the trading day Thursday, breaking a new record at about $1:P63.5. It now seems unlikely that interest rate policy alone could break the peso’s fall.
Our inflation rate rose to 7.2 percent in September, up from 6.1 percent in August. Raising interest rates is an effective tool if inflation is driven by economic hyperactivity. Our economy is not heating up. It is sluggish. Higher prices are due to cost spikes, such as oil prices.
It is doubtful if a higher interest rate regime will rein in the cost-driven inflation rate. It will certainly drain the vitality of our equities market as savings go to government bonds instead of private stocks.
Ironically, a higher interest rate regime adds to the cost factors pushing up prices. Every enterprise inputs the cost of financing to the price of its products. Higher interest rates is a higher cost factor.
The Monetary Board decides according to its mandate. Its mandate is to manage inflation. Its control over policy rates is the main weapon. Perhaps the only weapon its has in its hand. Fiscal policy is beyond its reach.
But our fiscal policymakers have been passive while all the problems mount. Our budget deficit is yawning. Our trade balance is tilted against us. Our balance of payments is horrifying.
Over the last four years, our propensity to borrow has been unrestrained. When Marcos Jr. assumed the presidency, our debt was at about P12 trillion. The debt, in peso terms, will likely be double that by the time he exits – making him the most debt-addicted president in our history.
Strangely, he tells us the debt is just a meaningless number in the air. How did he come to see it that way?
Our debt is growing because government needs more cash each day to give away as subsidies. This is the only way it could buy legitimacy for itself.
Then there is the massive looting. The Supreme Court finally stepped in and declared the unprogrammed allocations unconstitutional. Our legislators used this device to remove funding for regular projects and throw money at congressional insertions. They effectively skirted the constitutional ban against enacting a budget larger than what the executive branch proposed.
Under this scheme, hundreds of billions in additional spending was inserted into the budget over the last three years. A lot of that was lost to the syndicate of legislators and executive officials. A lot of that was borrowed money.
The massive looting and the looming debt crisis are not unrelated phenomena. One feeds the other. Both require a treasonous degree of mismanagement.
The Supreme Court proved itself the last bulwark against our democracy being overwhelmed by a perilous combination of incompetence and greed. All the looting that happened involved the criminal connivance of officials from both the executive and legislative branches.
In the wake of the Court’s dramatic ruling, some are now arguing that impeachment proceedings against Marcos Jr. must now be initiated. He should ultimately be held responsible for the widespread and systematic looting that happened. His signature was indispensable for making the flawed budgets law.
But who will impeach him? The mafia of legislators who crafted the deeply flawed budgets?
Remember that all the money that was looted includes borrowed funds. The next generations of Filipinos will bear the burden of repaying the loans that funded ghost projects. The pain will be borne a century hence.
Raising interest rates now will not cure the flawed fiscal policies that brought us to where we are now: a nation with a wilting economy and intolerable inflation. The third quarter GDP numbers will likely deliver yet another shock: our economy is deader than we dared to imagine.
Each day the peso depreciates and prices outstrip wages, ordinary Filipinos suffer increasing misery. The mismanaged economy takes its toll – especially on our young. This is what the debt number means. It not a meaningless thing hanging in the air. It is a noose squeezing out our nation’s life.
The increase in interest rates will raise the costs of doing business. It could finally bring our economy to recession. It certainly will not create new jobs or open more economic opportunities.
Our economy is like a dead horse. Our monetary policy is kicking it even more. That will not return it to life. It will only inflict greater cruelty on a plundered country.
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