Business World, 17 July 2012


In the face of a better-than-expected 6.4% gross domestic product (GDP) growth in the first quarter of 2012, Malacañang and the Bangko Sentral ng Pilipinas (BSP) run the risk of being too complacent. “It ain’t broke, so why fix it?” says President Aquino in response to calls for amendments of some economic provisions in the Philippine constitution. He asks: the economy has grown at 6.4% in one quarter and the government’s credit ratings have been upgraded to one notch below investment grade, so why rock the boat?

But that’s precisely the problem. There is yet no convincing body of evidence that the present administration has fixed outstanding constraints that bug the Philippine economy. The 6.4% GDP growth in the first quarter of 2012 may not be sustainable. It came after a weak economic performance in 2011. And the Philippines has been rated below investment grade before.

The reality is that not much has been done to date. And as an old song goes: nothing comes from nothing. The perception of corruption lingers. Bureaucratic red tape continues. The regime of rule of law remains spotty. Public infrastructure continues to crumble, with the government’s flagship PPP program yet to take off. Its tax effort — taxes as percent of GDP — remains dismal. And the Philippines continues to attract only a fraction of foreign direct investments (FDIs) of what our ASEAN-5 neighboring countries attract.

The Philippine economy is unwell and sputtering. I will be convinced that the Philippines is on its way to a strong, sustained and inclusive growth only after experiencing 12 quarters of strong and sustained growth, unemployment rates of 6% or less, poverty incidence in the neighborhood of 20%, and Filipino workers abroad trekking back home as decent jobs become available here.

Monetary authorities’ policy response to calls for more aggressive policy actions to stem the appreciation of the peso is half-hearted. It is more symbolic than real.

Last Friday, BSP cut interest rates on special deposits account (SDA), a facility used by the central bank to mop up excess liquidity in the financial system and help contain inflation.

The rate cut was a mere 3.125 basis points across the board. The Bangko Sentral lowered the one-week deposit rate to 4.03125% from 4.0625, the two-week rate to 4.09375% from 4.1250, and the one-month rate to 4.15625% from 4.1875%.

The cut in interest rates was ridiculously tiny; I doubt that it will achieve the desired result of reducing deposits in the SDA, which, to date, has P1.64 trillion ($39 billion) worth of placements.

Why? Because yields on alternative investment opportunities remain extremely low. Philippine treasury bill rates were quoted at 2.275% for one-month tenor in the secondary market. Rates on the most recently auctioned US Treasury Bills for each maturity tranche (4-week, 13-week, 26-week, and 52-week) are 0.08%, 0.10%, 0.15%, and 0.19%, respectively.

The European Central Bank (ECB) recently cut its policy interest rate to 0.75% from 1.0%. The EURO London Interbank rates for 1-week, 4-week, 12-week and 52-week are 0.07929%, 0.14143%, 0.36964% and 1.01821%, respectively.

Given the SDA rates are still above the yields of financial instruments abroad and at home, I doubt whether the new BSP move might make a difference.

The week before that, BSP tightened rules on capital inflows by limiting where foreign funds can put their money. The success of this other move remains to be seen.

The devil is in the details. What happens to those foreign funds that have already been co-mingled with funds from domestic sources? Is this the case of closing the barn doors after the horse has bolted?

BSP’s success in purging foreign funds from SDAs is not guaranteed. On the other hand, the new policy will surely add heavier paperwork to the already burdensome regulation of local banks and trust funds.

The first, best solution is to sufficiently reduce the SDA rates in order to make it less attractive for foreign footloose capital and to discourage local banks from parking their money with central bank.


Policymakers have to set their priorities right.

Do they want the Philippines to be known as the country whose currency (the peso) has appreciated the most this year or do they want it to be known as the country that has created more decent jobs, reduced poverty, and improved the economic wellbeing of its people the most?

The Philippines is the best performer this year among Asia’s 11-most traded currencies, according to Bloomberg.

Should the rapid appreciation of the peso be a source of pride or a source of discontent?

Talk to the families of our workers abroad, to the exporters and workers in the export sector, and to owners of business process outsourcing firms. And talk to Customs Commissioner Biazon who’s struggling to meet his revenue target. Are they better off now than a year ago?

A sensible and thoughtful leader should be open to any and all possible reforms.

The risk is that in the face of the 6.4% GDP growth in the first quarter, policymakers might believe, wrongly, that all’s well, and reject any call for bold reforms in public policy and governance.

That would be tragic.