Central Bank policy missteps pose risks to the financial system – Manila Bulletin

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Published September 24, 2022, 3:46 AM
by Manila Bulletin
HOMEFRONT Column by Victor Consunji, founder and CEO of Victor Consunji Development Corporation (VCDC)
Earlier this week, the Federal Reserve has again increased its overnight benchmark interest rate by another 75 basis points, placing it at 3.25 percent, the highest it has been since 2007. Similarly, our Banko Sentral ng Pilipinas (BSP) raised its benchmark rate 50 basis points at 4.25 percent, amid the historical slide in the Peso.
These moves from the Fed and the BSP were anticipated by many market participants, and now the Fed is forecasting that it plans to boost its benchmark rate to roughly 4.4 percent by year’s end, which is a percentage point higher than last seen in June. It would be disingenuous if I said I wasn’t concerned about what seems to be a monetary policy error happening in real time, as it’s one that we have seen time and time again.
The US central bank is still the dog that wags the tail that is the global economy and back in June, I pointed out that inevitably the Western central banks will need to pivot on raising rates and resume printing. This will happen in one of two ways, either because of a rate rise induced recession or a break in the underpinnings and inner workings of the debt laden banking system.
Indeed, history does seem to be repeating itself, especially for those of us old enough to remember the inflation we witnessed in the ’80s, leading up to the Asian Financial Crisis and the more recent crash is 2007-2008. It seems that in their haste to solve the inflation problem they created, the Western central banks are risking sending the developing countries into prolonged economic downturns.
One thing is for sure, the Federal Reserve is posturing up for what looks like a long, drawn-out battle against inflation, and this will continue have significant impact on the global economy. It’s pretty obvious that it has kept rates too low and printed for too long, only to be surprised by a massive inflation spike, which was entirely predictable.
In order to avoid totally losing face, the Fed is looking more and more like it will continue down this path of raising interest rates aggressively into a rapidly weakening economy, running the risk of letting the pendulum swing too far in the opposite direction and most countries will be hurt in the process.
When you boil it all down, what does this mean for the Philippine real estate market? Of course, a global macro slowdown could trickle down and bring a recession on our doorstep, however in the past, the Philippine market had shown resiliency when compared to our Southeast Asian neighbors and that’s something worth noting.
We mustn’t forget that the during the aftermath of the great financial crisis from 2008 to 2009, most of the world was in a recession, while only Indonesia and the Philippines in Southeast Asia continued to expand. The reality is that the GDP growth of export-oriented and tourism focused countries like Malaysia, Thailand, Singapore, and Vietnam are more correlated with US GDP growth, so a recession in the US is more likely to propagate to their soil.
On Aug. 22, 2022, the Department of Budget and Management (DBM) announced the P1.196 trillion infrastructure budget for 2023. Given the fact that the new administration will want to show results, it would be hard pressed to envision a significant pull back in infrastructure spending, which will help stem possible declines in the developing areas outside of Metro Manila.
Maybank recently put out a research note pointing out the fact that the GDP of the Philippines showed a correlation of only 0.1 percent to the GDP of the United States, whereas Singapore and Thailand were 0.38 percent and 0.25 percent, respectively. Even taking into account the aggressive interest rate hikes the BSP has enacted to date, Moody’s Analytics still has the 2022 GDP growth target in the Philippines at 6.8 percent, which is among the best in the ASEAN community.
While we did see a full year of recession in 1998 due to the Asian Financial Crisis, real estate markets like Thailand were much harder hit due to the fact that their construction projects were financed by bank loans. The conservative approach of relying on preselling actually played a major role in prevented the cascading bankruptcies seen by our SEA counterparts, and that is still common practice today.
If we continue to see a dramatic rise in the US dollar, the cost of imported goods for Filipinos in this environment will subsequently rise as well. However, the cheaper Peso will also make the Philippines real estate market look more attractive to foreign buyers and we would expect that the condo market will avoid steep declines, as prices still haven’t recovered fully from the pandemic.
It would be no surprise to many that condominiums wouldn’t be the place I would turn to in a recessionary environment, especially with the new POGO ban that is being contemplated as we speak. We are continuing to stick to the game plan of focusing on acquiring great locations, with an emphasis on upscale townhomes, suburban oases, and vacation homes, building quality developments featuring durable homes that will stand the test of time.
It’s no easy task to be a central banker in a complex global economy and that is exemplified by the fact that over the last 30 years, only Alan Greenspan was able to thread the needle in 1994 and engineer a softlanding with staying power after raising interest rates. Soft landings have always required bringing the federal funds rate back down. Simply pausing or stopping rate increases won’t suffice. For example, in 1994, the Fed funds rate was increased from 3.1 percent in January to 6 percent that June, but by January 1999, rates had been reduced down to 4.6 percent.
If, for some reason, the money masters don’t heed the lessons from the past and continue to raise rates until they trigger a deeper crash, the Philippines real estate market will be in a better relative position than most to weather the economic storm.
At VCDC, we are pushing forward with new projects (stay tuned) and should there be any significant pullback in land prices, we would look to take advantage of any weakness, in order to deliver even greater returns to our clients over the long term.
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