Higher interest rates will not deter pump-priming – Diokno

MANILA, Philippines – Higher interest rates from a possible increase in US interest rates next year won’t impede the Duterte administration’s pump-priming thrust, which already began with agencies bidding out projects for 2017.

“Our expansionary (fiscal policy) remains on track. Strong public infrastructure spending will not be slowed down by the threat of a possible Fed adjustment,” Budget Secretary Benjamin Diokno told The STAR in a text message.

To prove this, the Budget chief said agencies have started bidding, short of award, projects for 2017 to help frontload spending in the early months.

“All projects must go from day one. As in all. The best time to implement projects is during the first half of the year because of seasonality,” Diokno said.

Despite keeping rates last week, more members of the US Fed’s Federal Open Market Committee (FOMC) saw the need to raise them as the world’s biggest economy shows more signs of recovery.

Now, many expect the FOMC to act on its next policy meeting in December, which, if realized, will exactly be a year after its first hike in nearly a decade.

While higher rates could indeed make government borrowings more expensive, Diokno said the Bangko Sentral ng Pilipinas (BSP) does not need to follow US Fed adjustment immediately.

BSP kept its key interest rates steady last week. The rates, which stand at four and six percent for overnight borrowing and lending, serve as benchmark for banks and other investors in lending their money.

The government borrows to finance its budget deficit and pay existing debts.

“I believe the current BSP rates are slightly higher than appropriate, which gives it some elbow room to accommodate the increase in US interest rate without changing its current policy stance,” Diokno said.

In fact, he pointed out the government is even confident to take in more risk on its projects, noting a higher social discount rate of 15 percent.

SDR gauges the social risks accompanying projects, thus, a higher rate implies greater risks benefits could be reaped. Originally, the rate was at 10 percent.

“We are not cash-constrained. We want the projects done ASAP (as soon as possible),” Diokno said.

Sought for comment, Emilio Neri Jr., lead economist at Bank of the Philippine Islands, agreed with Diokno.

“The government’s cash position still affords the (Bureau of the Treasury) to reject unreasonable yields at (debt) auctions,” Neri said in an e-mail. “The monetary system remains awash with liquidity,” he added.