Philippines–an economic time bomb

Each kababayan out there owes me a cold beer for the accurate predictions I’ve made over the years about the peso in this column. A San Miguel will do, thank you very much.

And once you consider the rumors circulating about the Philippine economy, you’ll probably need a cold one to calm your nerves. The big rumor is that the central bank may raise interest rates by–hang on to your seats, folks–1,000 basis points, this on the heels of a recent 400 basis point spike.

There are 100 basis points in a percentage point, by the way. I’ll leave the rest of the math up to you.

It’s time to raise the red alert about the Philippine economy. This thing could implode any day now.

But back to the basis point thing. This dramatic increase in interest rates–recent history, in one case, alarming rumor, in the other–signals an attempt by the government to keep the peso from getting any weaker. It’s already sliding towards the 50 to the U.S. dollar mark, and I fully expect it to hit that point and perhaps slide even further.

On an academic note, raising interest rates increases the value of a country’s currency since it increases the demand for bonds denominated in that currency. If you don’t follow that, don’t worry, just take my word for it.

The problem for the Philippines is that the economy is already lousy, and raising interest rates will make it even lousier. For all its good points, the Philippines is not a bastion of coherent economic thinking.

Ponder these woes: Population growth that rivals economic growth, endemic corruption, horrible economic policies, a volatile political situation, and even low-grade civil war in some areas…this is adding up to a big, fat economic time bomb. And the freaky raise in interest rates might just signal that the fuze has been lit.

Which means that our Filipino population here would be wise to hoard all the Yankee dollars it can grab. Sure, it’s possible that the peso will strengthen–who knows? And, yeah, maybe the economy can find its way out of the woods–stranger things have, maybe, been known to happen.

However, to my eye, the odds are vastly stocked in favor of a weaker peso, a weaker economy, and the prospect of a complete economic meltdown.

The situation merits a lot more space than I can give it now, but suffice is to say that I’m sounding the alarm on this one.

So here’s what I say: Avoid the peso–keep your money in a CNMI bank. Be nice to your boss and keep your job here, because the job market in your homeland is probably getting worse. And, most importantly, buy me that beer you owe me.

Stephens is an economist with Stephens Corporation, a professional organization in the NMI. His column appears three times a week: Wednesday, Thursday and Friday. Mr. Stephens can be contacted via the following e-mail address: ed4Saipan@yahoo.com.