US Fed ‘lift-off’ to test PH’s ability to stay healthy

Nearly a decade of record-low interest rates in the United States came to an end on Dec. 17 after the US Federal Reserve delivered on its much-awaited hike.

Record-low interest rates were used as the main tool to help the US economy and, by extension, the rest of the world, recover from the American sub-prime housing crisis.

In the Philippines, cheap financing propped up car sales and mortgage growth, fueled record levels of foreign investments, and allowed the state to improve its fiscal position.

With the rate hike, global financial conditions are expected to tighten after nearly a decade of ultra-cheap money policies. It is also expected to test the Philippine economy’s ability to stay healthy, without the help of cheap cash from the rich world.
“An out-turn closer to Fed guidance would be a substantial shock for a region where private sector debt levels have risen rapidly and where capital flows have already started to reverse,” Fitch Ratings economist Andrew Colquhoun said earlier.

“This uncertainty puts a premium on credible and coherent policy responses by authorities in buffering sovereign credit profiles,” he said.

Growth stayed positive in the Philippines during the height of the 2008 global financial crisis. In the years that followed the US housing market’s collapse, the Philippines, with its stable base of domestic demand and a recognized improvement in governance standards, emerged a global growth leader.

Macroeconomic forces, however, are never simple and as much as the government would like to take credit for the Philippine economy’s rise, central bankers on the other side of the world helped.

In response to the global crisis of 2008, the US Federal Reserve brought its funds target rate to almost zero percent, and complemented low interest rates with large, regular injections of freshly-printed cash dubbed as “quantitative easing.”

This involved monthly purchases of long-term US government IOUs and mortgage-backed securities from the open market.

Cheap liquidity from the Fed started flooding global markets in 2008, and asset purchases continued until October 2014. In total, the American central bank forked out $3.5 trillion in new money, bringing interest rates across the globe to record lows.

Gross foreign portfolio investment inflows—or placements by foreigners in local stocks, bonds and other financial assets—hit an unprecedented $89.95 billion during the period of quantitative easing, central bank data showed.

Philippine officials pounced at the opportunity. To trim its exposure to the volatile US dollar, the government slashed the amount of money it borrowed from overseas relative to the annual total.

In 2009, foreign loans accounted for more than a third of the government’s annual borrowing program. In 2010, this was brought down to about 25 percent. The proportion went down further to 17 percent in 2014, and this year, the plan is to cut it further to 13 percent.

Cheap interest rates also gave the Philippines a rare chance to get better deals for its outstanding obligations. With so much money to go around, foreign investors were more willing to lend money to the Philippines.

Locally, the Philippines posted improvements in its own fiscal management. From 2010 to 2014, the state’s tax take rose from 12.2 percent of gross domestic product (GDP) to 13.6 percent. Prudent fiscal management has also helped the Philippines keep deficits below 2 percent of gross domestic product.

Amid growing revenue, prudent spending and cheap financing costs, the Philippine government was able to trim its debt level to under 40 percent of GDP as of June 2015 from almost 50 percent in 2009, according to Moody’s Investor Service.

In contrast, other “investment grade” markets have seen levels of government debt rise from 2009 to 2014, Moody’s said in a recent credit analysis. As government debt levels declined, the cost of paying the obligations also went down.

After hitting a peak of 8.755 percent in November 2008, rates for 10-year Philippine treasury bonds declined to a record low of 3.04 percent in 2013. At the shorter end of the yield curve, the 91-day treasury bill rates peaked at 6.122 percent in 2008, before slumping to a record low of 0.001 percent, also in 2013.

With interest rates near record lows, car sales zoomed as loan payments became more affordable. In 2014, vehicle sales in the Philippines rose by 30 percent year-on-year to a record 234,747 units. In 2010, the industry sold just 168,490 cars and trucks, according to data from the Chamber of Auto Manufacturers in the Philippines Inc. (CAMPI).

Post-crisis Fed policies also sparked a real estate boom. In 2009, real estate loans extended by local banks totaled P383 billion. At the end of June 2015, real estate loans neared P1.2 trillion.

The Philippines was not spared from the global crisis. In 2008, economic growth slowed as the country nearly slipped into recession. Financial markets were battered.

The Philippine Stock Exchange Index (PSEi) dropped to 1,704.41 points, or less than half its previous peak, on October of 2008 after Lehman Brothers collapsed. The peso also lost 17 percent of its value, reaching of 49.99-to-$1 in September 2008.

Since then, the country’s fortunes have reversed. Growth from 2010 to 2014 averaged at above 6 percent—a pace beaten only by China among major Asian economies. The peso reached its post-crisis high of 40.57: $1 in 2013, while local share prices have quadrupled in value.

According to policymakers, focus now turns to how much more liquidity will be mopped up by the US Fed.

The Philippine economy has been a net beneficiary of the global financial crisis of 2008. Whether these gains hold will be of great interest.