By Amado P. Macasaet
It was clearly in anticipation of business cycle, common in all market economies, that reputable and not so reputable private corporations issued bonds in the billions of pesos at incredibly low coupon rates and longer tenors.
They knew the low-interest rate regime was too good to last. Investors were hungry for safe instruments such as private and state bonds that provide low incomes. Bonds filled that hunger. The investors found a place to park their funds they did not know much what to do with, having safety at the top of their minds over yields. Sovereign and private bonds are good parking lots.
Money coming from bonds has the lowest cost and the longest maturities compared to higher interest rates charged by banks which collect over shorter periods. The investors gobbled up the bonds. They hungered for more as proven by three to five times over subscription of the issues.
After all the investors can sell or pre-terminate the bonds in minutes through the Philippine Dealing Exchange at market-determined and therefore competitive prices.. Before the PDEx started operations, sale or transfer of bonds and Treasuries were bilateral transactions.. The investor tries to look for buyers. As if there were a cartel among buyers the rates hardly varied. The buyers were dictating the price. The market was denied its rightful role.
The issuers save oodles in interest costs or coupon rates by selling bonds at the right time. A market-determined facility was the main attraction. Signs of higher costs of money started appearing when the Bangko Sentral started raising its key rates by 25 basis points or one-fourth of one percent late last month. Before the end of the year, another increase probably by as much may have to be made by the Monetary Board.
The purpose of raising key rates is to stem what is feared to be slow but certain rise in the inflation rates. Economists say market driven system is always a matter of expansion and contraction.
The expansion, specific in the financial sector lasted four years. Contraction should follow. That, to our simple understanding of the market economy, means the pace of the economy’s growth will slow down. That is what contraction simply means. Private corporations may find contraction less painful in the sense they are saved from having to pay higher costs of money after they sold bonds. They got what they felt they needed when borrowing costs were lower.
Expansion has rewards. Contraction has its own pains.
There is a crisis of minor proportions between the fiscal and monetary sectors. Classically, they are enemies. The fiscal sector would prefer to see growth at the risks of higher inflation. On the other hand, the monetary sector has the duty to balance growth with stability.
In theory, the fiscal sector raises the money to fuel growth. On the other hand, the monetary sector tempers growth using monetary tools to stem the expansion of money supply.
These situations figure prominently in the wisdom of selling bonds when money did not find a comfortable, safe place to park.
Monetary authorities seem to be seeing contraction that follows expansion.. Carried or allowed to reach the extreme, economists would call the situation overheating.
In the real sense, however, emerging economies including the Philippines hardly ever overheat. Inflation simply goes up steadily. The market has long adjusted to periods of peaks and valleys — expansion and contraction. The monetary sector can only try and stem the rise in prices of basic commodities but it really cannot do much. The solution to inflation is balancing supply with demand.
This is a difficult, in fact almost impossible task in a country like the Philippines where the capacity or ability of the economy to generate more employment is effectively checked by uncontrolled expansion of population.
The expansion or growth we experienced in the last four years has not improved the per capita expenditure on education. Neither has the personal or out of pocket expenditure on health decreased.
Before growth can be felt in the areas of health and education, signs of contraction are beginning to appear. Or at least monetary authorities are beginning to feel their coming. So they used tools to stem it before it could come.
The almost immediate effect is for banks to raise their lending rates. In turn production costs will necessarily go up. Or loan demand will be timid. In either case, the effect is a rise in prices.
Smaller appetite for loans will contribute further to contraction of production in the face of rising demand caused — as repeatedly asserted on this space — by ever-increasing number of mouths to feed.
In a manner of speaking, monetary authorities are encouraging with increases in policy rates what they want to avoid — a rise in the inflation rates. In other words, there is hardly any tool against contraction that comes naturally after long periods of expansion. If bonds in the hundreds of billions of pesos had not been sold at lower coupon rates the issuers could be competing for loans. The rise in prices of commodities would be much faster.
On the ground, consumers will bear it although they will not grin. The reality is regulators are genuinely concerned for the pains that consumers will go through from higher prices. They hardly ever take into consideration the fact that the poor consumers find themselves with no choice but to accept the effects of contraction.
The comfort that naturally comes from contraction is seeing leaders share their sad plight. For as long as they see sincerity of purpose from state leaders; a regime of peace and justice, equality of the application of the laws between the rich and powerful on one hand and the poor on the other, they would feel less pain living with the inevitable.
The consumers must be made to feel their plight is shared by their leaders. The poor are frugal by necessity. Leaders must be frugal by choice. That should be the most effective way of reducing the pain of contraction even if the poor hardly benefited from expansion.
The poor consumers must be made to feel they are king, not serfs in the kingdom of the contraction and expansion.
Moderation of greed is a virtue that makes the poor feel they are not alone in their misery.
***
Email:amadomacasaet@yahoo.com
No comments:
Post a Comment