How to adapt to the US interest rate hikes:

September 28th, 2022

In theory, there is no level in which we can raise interest rates without some damage to aggregate demand. After all, the purpose of interest rate increases is, to some extent, to tamp down consumer demand. That said, it will all depend on how high the US intends to increase its rates further.

Furthermore, we can offset the effects of that significantly by earning meaningfully more dollars from the BPO, tourism, OFW, and foreign-employed freelancer sectors. I have been advocating for this position for quite some time already. Because there’s not much we can do to impact what is obviously a global trend, we can adapt by earning more dollars.

Where the US is headed and what we can do:

Based on my calculations from a recent study by former Harvard President Larry Summers and others, the US still needs some 425 basis points in rate hikes to bring down core inflation to the 2% level that it historically has been comfortable with.

Chicago Fed President Charles Evans has made statements recently saying they will be comfortable with a Fed rate of up to 4.75%. To keep our current interest rate differential of 50 basis points, we will need to increase rates by another 150 basis points by that time. I think we can handle that.

By that point, we can handle that much, and we wouldn’t have much of a choice anyway, because of the following reasons:

1. We are a peripheral economy, and credit growth here appears to have more of a relationship with the decisions of major economies like the US than with our own monetary policy decisions.
2. There appears to be weak transmission of policy rates in lending by banks, because our banks are conservative by default anyway.

(I second the conclusions from a 2018 study by the BSP on the matter. See: https://www.bsp.gov.ph/Media_And_Research/Publications/BS2018_02.pdf)

Again, since we cannot move the needle globally from our own country, the best we can do is adapt until this global storm settles. This is a global storm, and no rate hike from our little corner of the global economy will make a meaningful dent on a global trend. Best we can do is adapt. EARN MORE DOLLARS – through mining industry (largest potential, pure domestic content, almost totally exported), BPO, OFW, freelancers, and tourism; and stop the bleeding of foreign capital, through robust and reassuring commitment to FISCAL AND ECONOMIC REFORMS that will cure our rigidities (land ownership constraints, power costs, ease of doing business, etc.)

The medium and long-term:

What these global conditions are doing, however, is expose our longstanding and structural vulnerabilities. I would recommend the following long-term and structural reforms:

1. Lower power cost – form a committee to cure the oligopolistic, rent-seeking, and inefficient market behavior in EPIRA
2. Lower food cost and increase agricultural production- increase domestic agricultural production for key staples (mainly rice and corn), maximize emerging competitive advantages (poultry, livestock), and optimize export products (coconut, cacao, mango, banana, pineapple). Remove barriers to efficient land use through lifting ownership and size restrictions, condonation of ARB loans.
3. Reduce sensitivity to global energy price volatility through significantly more indigenous energy (doctrine of renewable energy surplus). We need to massively increase our renewable energy surplus while taking care of our baseload (likely through nuclear).
4. Ease of doing business – Shift burden of processes from law-abiding businesses to government offices. One day approvals in all LGUs for ministerial permits. Single-interface requirements. All-digital payment of taxes, etc.