In my BizNewsAsia cover story this week, I declared Bangko Sentral ng Pilipinas Governor Felipe M. Medalla, 73, as the “Man of the Hour, Hero of the Year.”
Man of the Hour because Philip is running against time to beat inflation, which has sizzled to its highest in 14 years, at 8.1 percent in December 2022.
The price spiral began at a 3.0 percent clip in January and February 2022 and climbed steadily to 8.1 percent in the final month to average 5.82 percent for the whole of 2022—the highest since the 8.3 percent of 2008, making the 5.82 percent annual rate a 14-year high.
If you remember, 2008 was the peak year of a three-year global financial crisis and America’s Great Recession.
This year, inflation, or the rate of increase (or decrease) in prices, at 8 percent clip, will impoverish millions of Filipinos and will deny millions more at least one of their three meals a day.
Medalla has more than doubled the BSP policy rate, from 2.2 percent when he began office in June 2022 to 5.5 percent by December.
The policy rate is the interest rate charged by the BSP when banks borrow from it overnight. In effect, that is the cost of money of lending banks.
The banks usually add from two to three percentage points as their margin or profit or administration cost.
With inflation the highest in 14 years, the BSP policy rate, of course, is now at its highest in 14 years.
Despite consecutive BSP rate increases, the inflation rate has remained unrestrained, more than doubling from a low 3 percent in January and February 2022 to 5.5 percent by December.
The betting is that Medalla will increase BSP rates to as high as 6.5 percent in the first half of 2023.
According to the BSP chief, Philippine inflation has lately been what people expect it to be. Self-fulfilling.
So if consumers start believing prices will go high, they go on a buying binge, because the goods you buy today will have a higher price tomorrow.
To stop people from speculating, the BSP issues a punishment—a sharp increase in interest rates thru an increase in its overnight lending rate.
So high has the policy rate gone up, at 5.5 percent, that this rate is just one percent above the overnight lending rate of the US Fed, which is 4.5 percent.
Buying the US dollar is just one percentage point cheaper than buying the peso.
It is to Medalla’s credit that the BSP has gotten away with only a percentage point differential between the US cost of money and the Philippine cost of money.
One of Asia’s poorest nations is in effect lending money to the world’s richest country, the USA. The Philippines is awash with cash.
Albay Second District Rep. Joey Salceda, an economist, estimates that from OFW remittances and business process outsourcing forex revenues, the Philippines is making $90 billion.
This $90 billion is 100 percent value added.
Unlike exports (of $76 billion), from which the country probably generates just 20 percent in value added ($15 billion), and from investments for which the government gives away easily P200 billion ($3.6 billion) in annual incentives and tax perks.
The $90 billion is 8.5x the record 2021 Philippine foreign direct investments (FDI) of $10.5 billion, 5.8x the $15.5 FDI of Vietnam, 8x the $11.4 billion FDI each of Thailand and Malaysia, and just 10 percent below the $99 billion FDI of Singapore.
Medalla projects inflation to collapse to 4.5 percent in 2023, and to between 2 and 3 percent or 2.8 percent in 2024.
Having contained inflation, Medalla has in effect rescued President Marcos Jr. from the depths of unpopularity. Seven of 10 Filipinos are mad that prices are high and the price increases remain unabated.
“We are committed to take all the necessary monetary policy action to bring inflation back to a target-consistent path,” vows Medalla.
“While we may be off-target now in part due to strong supply shocks, we are confident that the actions that we have taken so far—and the full force of our expanded toolkit—will bring us to a target-consistent path of inflation,” the BSP chief explains in a prepared statement.
He adds: “Together with non-monetary measures from the national government, we hope that the combination of the three tools or policy levers—rate adjustments, letting the peso depreciate, and selling dollars—will bring us back to target-consistent inflation path with the least amount of pain or output loss.”
One problem with interest rate increases—they make capital expensive.
Capital is what you need to produce goods. If the cost of borrowed money is oppressively high, you don’t borrow, you quit producing. You lay off people. You rest muna.
“Of course, the central bank cares about growth,” Medalla assures, “but it is important to note that it is not an explicit part of our three pillars. When we do our job—our three pillars—and do them well, we create the conditions conducive to growth.”
The BSP has three tools to cope with inflation—interest rates, a flexible peso-dollar rate, and intervention in the foreign exchange market, like selling dollars when there is a huge demand for it.
Those dollars come from foreign reserves—currently at $96 billion.
Explains Medalla: “If you have low and predictable inflation, for instance, it becomes easier for the government and the private sector to borrow in order to support the development agenda. If you have strong banks that are actively lending, that bodes well for the economy.”
This year, the BSP chief expects the economy to grow robustly, at 6 percent. That is the highest in the ASEAN. Growth could even be 7 percent.
Based on the BSP’s estimates, remittances will likely grow by 4 percent and BPO receipts by 5 percent this year, which bode well for household consumption and job generation.
Meantime, good exports are seen to grow by 3.0 percent this year versus imports growth of 4.0 percent.
Against this backdrop, the country’s gross international reserves, or GIR, are seen to remain hefty at $93 billion, equivalent to 6.6 months of imports of goods and payments of services and primary income.
The banks, meanwhile, are expected to remain a pillar of strength for the economy, with the continued rise in deposits aiding growth in lending activities.
Says Medalla: “We expect more banks to adopt sustainability principles in their operations as the BSP continued to advocate for sustainable finance.
“We also want to see more consolidation, particularly in the rural banking industry, after we launched the Rural Bank Strengthening Program last year.
“Finally, the BSP expects the Philippines’ continued transition from a cash-heavy to a cash-lite and digital-heavy society.”
Under the BSP’s Digital Payments Transformation Roadmap, “we set twin goals of at least half of financial transactions being down electronically and at least 70 percent of Filipino adults having transaction accounts by the end of this year.”