Hawkish

It is unlikely our monetary authorities will roll back interest rates anytime soon.

This paper reported yesterday that the BSP will be maintaining a “vigilant stance” over the possible inflationary impact of surging rice prices. The Monetary Board meets Dec. 14 to make a decision on the policy rate prevailing. Observers believe that the decision will be either to continue the pause or increase the rates even further.

Excepting countries such as Argentina and Turkey plagued by runaway inflation, the Philippines maintains a comparatively higher interest rate regime. The guiding policy rate is now at 6.5 percent.

The BSP is maintaining a hawkish interest rate posture even as inflation decelerated to 4.1 percent for November – which is better than expected and only a touch outside the 2 to 4 percent target inflation range. That is a substantial deceleration from the peak inflation rate we experienced earlier in the year.

The deceleration of the inflation rate is matched by a remarkably low unemployment number. Our unemployment rate is at an 18-year low, matching the lows of the Arroyo era when the economy was solidly managed.

In other economies, the unemployment rate usually rises when monetary authorities tighten through interest rate increases. At first glance, it might seem that our economy is adjusting well to monetary tightening even if we miss our GDP growth target this year and the next. But that is only at first glance.

Businessmen are churning out anecdotal evidence about a tighter environment for our businesses. Expansion plans are being shelved. A number of listed companies are having trouble refinancing their debt, leading to an uptick in non-performing loans monitored by the banks.

The precariousness could snowball. A 6.5 percent policy rate is a high hurdle. Many enterprises cannot afford the cost of money. The exuberance indicated by a lower inflation rate and an even lower unemployment rate may be short-lived.

The US economy earlier this year exhibited the same illusory exuberance. This economy was creating new jobs at a higher rate than expected earlier this year. Over the past few weeks, signs of a mild recession became more insistent.

This should be a cautionary tale for hawkish central bankers fixated exclusively on the inflation rate. The high cost of money is always a dampener for the real economy.

Our monetary authorities are closely focusing on rising rice prices. In November, the suggested retail price of well-milled rice climbed to P52.36 per kilo from October’s P51.67. Regular milled rice, which nobody wants, climbed to P46.96 per kilo from October’s P45.78. That is more than double the P20 rice the President promised in his inaugural speech.

We should give up on the chimera of cheap rice. Our cost of production is among the highest anywhere. Rice available for international trade is thinning. Global warming is producing droughts in many rice-producing areas. The price of rice is not likely to go down in the foreseeable future.

Nor will higher interest rate solve the problem of rising rice prices. This is caused by the cost-push of more expensive inputs. If we try too hard at pushing down the price of rice by non-market means, we will only succeed in forcing our small farmers to abandon their fields, producing a bigger calamity.

It will do well for the present administration to perform a comprehensive review of the microeconomics pushing up costs and forcing business failures.

For instance, we were all shocked a few months ago when we discovered we were importing 93 percent of our salt needs. For an archipelago of over 7,000 islands with one of the longest coastlines in the world, this is bizarre. The culprit, in this case, was a poorly studied 1990s law that required all our salt to be iodized.

Small salt producers did not have the technology nor the capital to iodize the salt they produce. They simply stopped producing rather than get into trouble with the law.

A new law is now being considered to replace that old salt law. We are not sure if this new law would spark a revival of our old artisanal salt production and reduce our salt importation. The old salt flats in Parañaque and Las Piñas now have subdivisions built over them.

In many areas, the sea water is simply too polluted to make salt-making an attractive option. We might, after all, end up harvesting microplastics – the Philippines being among the largest plastic polluters of the oceans, contributing over a third of global ocean pollution. 

I conversed with a businessman who once operated medium-sized fishing vessels. He says a 1990s law extending municipal fishing reserves to 15 kilometers from the shore forced his business to failure. His vessels were too small to make it all the way to Papua New Guinea and too large to fish anywhere in our archipelagic waters.

Had his business, and others similarly situated, survived, we would never have needed to import blast-frozen round scad from China. The Chinese, he says, do not eat fish without scales. The galunggong they find in their catch is sold cheaply to Filipinos, turning trash into gold.

We might need to review the 15-kilometer municipal fishing law. Municipal fishermen cannot catch all the fish within that reserve and Filipino fishing fleets are not allowed to catch them. An amendment to the law will surely cause the price of our beloved galunggong to plummet – improving our people’s miserable protein intake.

Let us do that comprehensive microeconomic audit of our unsound laws now.