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


Philippine real estate seeks to decouple if history repeats itself

HOME FRONT Column by Victor Consunjifounder and CEO of Victor Consunji Development Corporation (VCDC)

Earlier this week, the Federal Reserve again raised its benchmark overnight interest rate by another 75 basis points, placing it at 3.25%, its highest level since 2007. Likewise, our Banko Sentral ng Pilipinas (BSP) raised its benchmark rate by 50 basis points to 4.25%, amid the peso’s historic fall.

These moves by the Fed and the BSP were anticipated by many market participants, and now the Fed plans to raise its benchmark rate to around 4.4% by the end of the year, a full percentage point of more than last time in June. It would be dishonest if I said that I am not concerned about what appears to be a mistake in monetary policy that is happening in real time, because it is a mistake we have seen time and time again.

The US central bank is still the tail wagging dog of the global economy and in June I pointed out that inevitably Western central banks will have to pivot on higher rates and resume printing. This will happen in two ways, either through a rate hike-induced recession or through a breakdown in the fundamentals and inner workings of the indebted banking system.

Indeed, history seems to repeat itself, especially for those of us old enough to remember the inflation we witnessed in the 1980s, which led to the Asian financial crisis and the most recent from 2007-2008. It seems that in their haste to solve the inflation problem they have created, Western central banks risk sending developing countries into prolonged economic downturns.

One thing is certain, the Federal Reserve is gearing up for what looks like a long, drawn-out battle against inflation, and that will continue to have a significant impact on the global economy. It’s pretty obvious that he kept rates too low and printed for too long, only to be surprised by a massive spike in inflation, which was entirely predictable.

In order to avoid totally losing face, the Fed seems increasingly willing to continue on this path of aggressively raising interest rates in 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.

In summary, what does this mean for the Philippine real estate market? Of course, a global macroeconomic slowdown could ripple through and bring a recession right on our doorstep, but in the past the Philippine market has shown resilience compared to our Southeast Asian neighbors and that’s something that deserves to be noted.

We must not forget that in the aftermath of the great financial crisis of 2008 to 2009, most of the world was in recession, while only Indonesia and the Philippines in Southeast Asia continued to develop. The reality is that GDP growth in export- and tourism-oriented countries like Malaysia, Thailand, Singapore, and Vietnam is more correlated to US GDP growth, so a US recession is more likely to spread on their soil.

On August 22, 2022, the Department of Budget and Management (DBM) announced the infrastructure budget of 1,196 billion pesos for 2023. Given that the new administration will want to show results, it would be difficult to envisage a significant increase. in infrastructure spending, which will help stem any declines in developing areas outside of Metro Manila.

Maybank recently published a research note highlighting the fact that the GDP of the Philippines showed a correlation of only 0.1% with the GDP of the United States, while Singapore and Thailand were 0.38% and 0.25 %, respectively. Even taking into account the aggressive interest rate hikes the BSP has enacted to date, Moody’s Analytics still has the Philippines’ 2022 GDP growth target at 6.8%, which is among the best in the world. ASEAN community.

While we had a full year of recession in 1998 due to the Asian financial crisis, real estate markets like Thailand were much harder hit due to their construction projects being financed with bank loans. The conservative approach of relying on pre-sales actually played a major role in preventing the cascading bankruptcies seen by our SEA counterparts, and it is still a 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 also rise thereafter. However, the cheaper peso will also make the Philippine real estate market more attractive to overseas buyers and we expect the condo market to avoid sharp declines as prices have still not fully recovered from the pandemic.

It wouldn’t come as a surprise to many if condominiums aren’t where I would turn in a recessionary environment, especially with the new POGO ban being considered as we speak. We continue to stick to the game plan of focusing on acquiring great locations, with a focus on high-end townhomes, suburban oases and vacation homes, building developments quality including durable homes that will stand the test of time.

It’s not an easy job being a central banker in a complex global economy and that’s illustrated by the fact that in the past 30 years only Alan Greenspan was able to thread the needle in 1994 and engineer a landing smoothly with resistance after raising interest rates. . Soft landings have always required lowering the fed funds rate. A simple pause or halt to rate increases will not suffice. For example, in 1994 the federal funds rate was increased from 3.1% in January to 6% in June, but by January 1999 the rates had been reduced to 4.6%.

If for some reason the money masters ignore the lessons of the past and keep raising rates until they trigger a deeper crash, the Philippine real estate market will be in a better position. relative than most to weather the economic storm.

We at VCDC are moving forward with new projects (stay tuned) and in the event of a significant drop in land prices, we will seek to take advantage of any weakness, in order to offer even higher returns to our customers over the long term.



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Don F. Davis