‘Third World Basket Case’

The Bangko Sentral ng Pilipinas raised “interest rates” last week covered by one newspaper headline with “BSP hikes rates, first in more than 3 years.” Another article went on to say that “The Central Bank’s Monetary Board on Thursday, May 10, decided to increase the interest rate on the BSP’s overnight reverse repurchase facility by 25 basis points to 3.25 percent”.

If you understand what that means you are in the top 1 percent, maybe not of wealth but certainly of those thousands that have commented about the “rate hike.” It could have been made easier by saying that the BSP loans money to the banks and the BSP also borrows money from the banks and the interest paid both ways on those transactions have been increased.

This was all done because price inflation is maybe too high and also maybe this interest rate increase might do something to keep prices from increasing at the same rate. Or not. We will know the answer to that in a few months.

But the key to the deal on this whole interest rate thing is that for the past nine years, all sorts of weird things have been happening. But, this is what is important to remember: Global interest rates are at 5,000-year lows. In 2011 the United States government’s national debt was $20 trillion but was able to pay the same amount on interest payments on that debt as in 1998 when the national debt was $5 trillion.

However, in 2017, official US interest rates started to go up from 0.5 percent to 1.5 percent, and while still basically at the lowest level in 50 years, the US paid the highest amount of interest payments in history. The point is that global debt is so large that even a small increase in interest rates is having and will have a huge impact on government finances.

Despite the overacting from “certain quarters” about Philippine government debt—and the fear that the nation will become a debt slave of China—there is little to worry about.

Government debt must be examined in total context including economic growth patterns, debt as a portion of total economic activity, and the amount of government spending for interest payments and repayment of that debt. All those are well contained.

What we need to be concerned about is the US dollar exchange rate. While I hate to see the peso at current levels, it is the US rate against all the other currencies—not the peso—that is a major problem.

Argentina just gave new meaning to “Third World Basket Case” with its currency losing about 20 percent against the dollar in the past two months. And it is not China’s fault. The problems are many, including a 25-percent inflation rate and a government budget deficit equal to 4 percent of the total economy. Further, while Argentina’s economy is nearly five times larger than the Philippines’s, its international reserves are 30 percent lower.

If a government’s finances are dismal then major economic problems cannot be avoided. That is not trouble for the Philippines.

Argentina is not the only basket case out there and it is going to get worse as the dollar appreciates in value. Argentina increased interest rates from 27 percent to 40 percent to stop its currency depreciation. It just sold a guaranteed five-year bond at 20 percent.

The local and foreign Philippine bashers are wrong but can be forgiven because it is all politics and has nothing to do with genuine economics. But I forecast this: Twelve months from now you will be saying TGIF— Thank God I’m Filipino.


E-mail me at [email protected] Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.


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