THE writing is on the wall that we can only expect the government to lower interest rates further in the coming months or even weeks.  There seems to be sufficient justification in doing this given the low inflation rate and the international ratings upgrade we had which is just one notch shy from being investment grade.  The Philippines also had weak merchandise exports in 2011, with no sign of improving in the near term, further adding to the justification that the Bangko Sentral should lower interest rates to see a somewhat weaker peso which should help improve our export performance.

Rationally, as we lower our peso interest rates, holding on to pesos makes investors earn less. Since there is a natural desire to earn more, there is the expected shift away from the peso into other currencies.  Of course, the expectation is that as investors move to other currencies, the peso will depreciate and help our exporters do more business by making their products cheaper in the international markets. 

However, such is not the case. As we can see, the peso is maintaining its strength.  The reason is on top of our international reserves at all-time highs, other currencies most Philippine investors typically put their money in such as the US dollar, Japanese yen and the euro are at even lower interest rates.

In the Philippines, our 91-day Treasury Bills rates are at an average of 1.768 percent. In comparison, three-month government securities are at 0.08 percent in the US, 0.10 percent in Japan and 0.12 percent in Germany.  

Definitely, it is not a simple matter of lowering our interest rates to revive our export growth.  It will take structural changes in government priority and policy to come up with a permanent solution to make Philippine exports viable and sustainable. So who is the biggest beneficiary of a lower domestic interest rate?  Of course, the largest borrower will benefit the most if the cost of borrowing becomes lower, and this is the Republic of the Philippines.  With government debt running in the trillions of pesos and growing each day, any change in interest rate, no matter how small, has a significant impact.

Probably, the next largest borrower of funds is the domestic banking system that has all our deposits that we get paid a fraction of a percent for keeping it with them.  While we think of these as deposits, they are in reality a loan we have granted to the banks.  However, the lending rates of the banks and other lending institutions have not kept pace with the reduction in the interest rates.  What has happened is that the interest rate gap between their cost of funds and their lending rates have widened resulting in a larger profit.  This is true even in the case of government institutions such as Pag-IBIG that charges 10 percent on their housing loans of over P1 million.

If you are just an ordinary investor or borrower, it would be very difficult to see how the lowering policy interest rate is actually benefitting you directly.  Your deposit in your savings account or time deposit are so low that the interest you earn is not even enough to keep up with the inflation rate. If you are a borrower for your car loan, home mortgage or even on your credit card, the interest you pay has not gone down as much as the lowering of the policy rates.   

Does this mean that we will be better off if the policy interest rates will go up instead of down?  Perhaps, but only to a certain extent.  Swinging the pendulum towards the other end of the spectrum could result in worse problems such as more business failures do the higher cost of debt.  Likewise, we can be certain investors will not see placement rates move as fast as the increase in policy rates. 

What then are we to do?  The simplest answer I can think of is to match as much of your deposits or investments with your debt or advances. This way you can be the one to take advantage of the widening spread between your deposit rate and your borrowing cost.  Use your deposits to pay off your debt and borrow only if you have no other alternative.  Now if you are a net depositor, look for some other investment opportunities that can offer you a better return, such as blue chip stocks that have a cash dividend yield superior to that of money market placements. 

Of course, you have to balance your risks with your returns which means the higher the risks you take, the higher the returns you should expect.  Remember, if the investment is too good to be true, it is.

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