Bullet-proofing the economy

Ominous clouds are hovering over the horizon, and yet the government seems unprepared.

What would happen if the US receives a credit downgrade? This scenario is appearing more likely as reported today. This same week, as Ireland joined Greece and Portugal in receiving “junk status” for its bonds, there was talk of Spain and Italy joining them. These are the so-called PIIGS economies (Portugal, Ireland, Italy, Greece and Spain) that are miring the EU and the IMF with costly bailouts.

In the US, US Fed Chair Ben Bernanke signaled that he stood ready to assist their ailing economy with a third round of stimulus via quantitative easing (translation: the central bank buying US treasury notes) but then quickly quashed speculation of it definitely happening. Meanwhile, the political leadership in Washington could still not arrive at an agreement to lift the US debt ceiling with Republican tea partyers unwilling to cut a deal with Pres Obama before the August 2 deadline.

What all this means is that global economic recovery from the financial crises of 2008 is in jeopardy. A second crisis could hit our shores soon. Some ominous signs of this are already apparent with our exports experiencing an annual decline in May. The last one was registered in October of 2009, when the first wave hit our shores.

The threats

There are two simultaneous shocks that will occur once the US credit rating is downgraded. One, the dollar will devalue, potentially leading to more portfolio investments into the country causing the peso to appreciate. This will have an adverse effect on our already dwindling exports sector. Two, the excess liquidity flowing from these funds would put upward pressure on inflation which in turn would make interest rate hikes more likely. This will impact on borrowing costs.

So in the coming months, weak demand for our products and services from advanced economies coupled with an unfavorable exchange rate will create an enormous drag on our economy. Combined with higher domestic interest rates which would dampen consumer spending and private capital expenditure, and you could end up with quite a powerful cocktail of doom and gloom.

Compounding these problems are the woes suffered by our overseas labor force in the Middle East with the policy of Saudization to impose quotas on hiring of foreign nationals as well as the overall disturbance of deployment to the region as a result of political instability, and the second half of 2011 could turn out to be pretty tough one for labor exporting countries like the Philippines.

Growth predicated on PPPs

Multilateral institutions and national economic planners have already pegged expectations for growth at 5%, but that is predicated on the government being able to wheel out its PPP projects and ramp up government spending in the second half. So far though, the roll-out has been anything but brisk, with several delays hampering the timetable. Even scheduled projects involving overseas development assistance had to be cancelled for alleged overpricing and poor technical specifications. This led Ricardo Saludo in an op-ed piece for the Manila Times to write

The government recently issued more assurances that the much-awaited partnership program guidelines are under way. But investors are getting tired of yet more pledges to roll out the program and give adequate protection to joint ventures. Until one deal actually gets done and well, PPP may only encourage the perennial wait-and-see attitude toward the Philippines.

The budget department has signaled it plans to extend social safety nets to more indigent families through the conditional cash transfers program by re-channeling unspent public works expenditures from the first half. Meanwhile, PNoy began distributing benefits relating to social reforms (land, health, and social safety nets) in an apparent move towards a permanent campaign mode.

Political circus

Congressional investigations into alleged corrupt practices involving former president Gloria Arroyo and officials of the Philippine Charity and Sweepstakes Office heat up. The pornography of corruption involving hundreds of millions of public money being siphoned off to unlawful purposes and to questionable tranfers to religious persons and their charities has once again made for captivating viewing.

As the trial of the Ampatuans over their alleged masterminding of a massacre of political rivals and their escorts in Maguindanao, a new round of poll fraud and corruption allegations involving the former first gentleman surfaced courtesy of Zaldy Ampatuan son of the accused principal conspirator, Andal, Sr as part of an offer to turn state witness. Once again, as dark economic clouds gather, the Philippines is engaged in the theatrics of political scandals, investigations and trials.

Second SONA

All eyes and ears will be turned to the president’s second State of the Nation Address to Congress on July 25 to see what set of priorities he lays down for the sophomore year of his term. Will he continue to focus on the alleged waste and corruption that took place under his predecessor? Or will he lay down a plan for bullet-proofing the economy against the increasingly menacing global environment?

In the final analysis, it will be nearly impossible to ignore the controversies involving the past administration, as it brings out the contrast between the old and the new. A year after he unveiled PPPs as his government’s centerpiece program for growth, not a single project has been awarded. Markets and observers anxiously await PNoy to pivot towards his economic blueprint for the future, before the impression that the present is just a continuation of the past settles in.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • J_ag

    When There is Blood on the Streets, BUY BUY BUY…..

    http://www.project-syndicate.org/commentary/skidelsky40/English

  • J_ag

    One of the most corrupt state agencies on this planet is the U.S. Department of Defense.

    http://www.alternet.org/story/151617/why_is_the_most_wasteful_government_agency_not_part_of_the_deficit_discussion?akid=7267.199266.TptnJc&rd=1&t=18

    They make our guys here in the Phils look like amateurs.

    Almost the entire bureaucracy here in the country including the judiciary are composed of fiefdoms. Our knight on his white horse is ill equipped to break this system since it actually gets stronger when threatened.

    When the rulers of these fiefdoms are threatened they simply adapt and co-opt the new guys on the block. Look at the lawyer of Zaldy taking advantage of his accessibility with the men around PNoY.

    You have a DOJ, you have an Ombudsman, why does the Palace not let these agencies do their work. Let the publicity slut De Lima lead the charge. She has not met a mic/camera she has not fallen in love with yet.

    This government is governing just like Gloria around the 24/7 news cycle.

    These guys including PNoy should understand that they already won the elections.

  • Thai anton

    US default on the dollAr will be a disaster for the USA and ,deadly for RP
    we have majority dollar reserve just imagine 60 billion dollar becomes 60
    Billion worthless paper ? How do you price your for export products ? all of a sudden the inflow of worthless dollar will mean nothing ? so those dependent on the dollar family will be poor, they stop buying,the economy slows down and enter into a recession until the world find a suitable solution something like the new and improved NDUSA (new dollar USA)worth 20 cents of the old dollar and effectively demonitize the old
    dollar in all personal business transactions
    Only the highly productive countries of the world will survive such a blow,but with major displacement in their economies, for RP we can barter
    coconuts .

    20 cents of the old dollar

    • J_ag

      In case you got up from your long sleep the U.S. dollar has devalued by almost 50% from their rate with the Euro already… When the Euro was created, all you needed was $.80 to buy a euro. It has almost touched $1.60 already.

      Handsome the dollar ate must always have an exchange pair.

      At one point one needed Rnmb 8 to buy $1. In time this will move to Rnmb 4 to $1.

    • J_ag

      At one time both the Phils and Thailand had similar exchange rates to the U.S. dollar. 25 to 1. After the Asian crisis of 1997 both the Phils and Thailand saw their rates go to 56 to 1.

      Today Thailand is back at 30Bhat to $1. While the Phils BSP is holding the peso to above 42 to $1. Could the peso strengthen to 30 to 1. YUP.. But that would cause an economic collapse which would be good for the long term.

  • Bert

    “Once again, as dark economic clouds gather, the Philippines is engaged in the theatrics of political scandals, investigations and trials.”-Doy

    My goodness, here it is again, the usual utterances of the ‘Move On’ crowd. They’d say, ‘it’s just politics’, ‘let’s forget what happened’, ‘what’s done is done’, ‘it’s just posturing and theatrics’, ‘forget the past’, “let’s Move On”. 🙂

    • Bert

      And so, indeed, we will move on. And justice will be done. Because we, the Filipino people, we know better.

    • I don’t think I was saying move on. I was saying don’t take the economy for granted.

    • Bert

      I just want to clarify, Doy, that except for that one sentence I quoted, I am actually appreciating, even admired, most of your efforts to explain to us readers and to the government people your vast and wide perspective on economic policies which I find enlightening. I sincerely believe that the government and the president can learn much from your ideas.

      It’s just that I don’t agree with the proposition that anomalies involving the loss of government money amounting to billions of pesos and other criminal offenses such as killings and election cheating be set aside in favor of economic measures, and investigations being done related to those crimes labelled political theatrics.

      No offense meant, Doy.

      • UP nn Grad

        Bert: PresiNOYiNOY has made it clear he is willing to risk economic slowdown in order to prevent GuLO’s BFF’s from making money from gov’t contracts and PresiNOy enjoys rhe media spotlight while he makes more promises that GuLO’s BFFs maybe will go to jail. The one I am not clear on is how much effort P.NOY exerts so his own BFFs and their BFFs do not do their own kurakot. Stop kurakot bedore it happens– gobyerno saves a dollasr on a dollar. Convict korap-from-3-or-5 years ago ans gobyerno rewcovers what — 15-cenbts-on-a-dollar? Just think PCGG

    • You know if there is prima facie evidence that a crime was committed, then why not file the necessary cases before the Ombudsman and Sandiganbayan? File as many cases as is necessary. Instead we have to drag it before the media and create a political circus of it before pressing charges. That was the point I was trying to make.

      • Bert

        What’s that? Who’s dragging it before the media? And what circus are you talking about? There are investigations going on, some in aid of legislation by congress, some investigations are preparation to filing them before the Ombudsman and the Sandiganbayan. The media is covering those events by their own volition because that’s the work of the media. Is it necessary to drag important events for the media to have notice of them? Come on, Doy.

      • These Senate inquiries from the Blue Ribbon committee are merely meant to recommend further action, ie to press charges or not against persons involved, but two member from the lower house have already filed complaints with the Ombudsman charging plunder on the part of the former president and Uriarte.

        The media can still report on the progress of these cases. There will be ample opportunity for the public to be made aware of the proceedings. Thank you very much!

        If they want to legislate something then they ought to be calling in expert witnesses like Ben Diokno whose proposal is to change the charters of the PCSO, PAGCOR and Malampaya Fund to channel all their income back to the National Treasury and subject them to Congressional budgetary oversight. But I suppose that’s not the real reason for these investigations, is it?

        No, I think it is mostly for the purposes of political grandstanding.

        • manuelbuencamino

          Ben Diokno. One man’s expert is another man’s fool

        • Yes, but in this case, I think there is no denying the sage wisdom of his advice. I mean had I mentioned the proposal without attaching a name to it, it would seem very appropriate don’t you think? We should not resort to ad hominem arguments.

          • manuelbuencamino

            I thought his proposal was foolish

  • The downgrade may already be factored into prices, but remember that funds have a way of apportioning their investments based on these formal ratings. So that will have an impact. That could further depress the yield on US sovereign papers. What would you do if you were a mandarin in China’s treasury department?

    • J_ag

      I would buy long term Greek , Portugal, Spanish and Italian bonds. Some long term U.S. treasuries. I would bet on the EU.
      The Club Med economies will eventually surrender their fiscal policy to the stronger Northern economies in the EU.

      Handsome if you will note the yields on U.S. debt is already being depressed. The U.S. has the deepest financial markets on the planet. Hence the flight to safety is the dollar treasury and gold. That would mean new issuances would be charged lower interest. (lower yields)

      Lower debt service….

      While the Greek debt paper yields are ballooning. (YTM)
      Meaning they are already being sold a deep discounts. 2 year debt paper and 10 year debt paper for Irleand and Greece are at double digits already. (YTM)10 year papers from Greece are at 16%YTM. While U.S. papers are at 2.9%

      Please note that if your credit rating is downgraded your borrowing costs will rise. This is already happening in Greece, Portugal, Ireland, Spain and Italy. However in the States the opposite is true. Yields are dropping meaning if the U.S. were to issue new papers the cost would be lower.

      Please note the difference between the bond market YTM and the effect on new issuances.

  • J_ag

    http://finance.yahoo.com/bonds Short term treasuries in the U.S. are at zero and are like cash that pay no interest.

    Ho Hum.. so much for the threat of the U.S. downgrade. So on one hand the U.S. Congress fails to increase the debt limit. So what? The U.S. treasury then makes sure all immediate debt payments are met while cutting back on everything else.

    The stock market will tank while the economy will shift in reverse and bond prices will rise since interest rates yields will collapse some more.

    Recession and Deflation will set in. On the political side the Republicans will get the blame.

    This is where Gabby D somehow gets lost. If the peso appreciates some more those who earn in dollars will feel an inflationary effect as their dollars can purchase less here. However those who are fortunate enough to earn in pesos their disposable purchasing power will rise with disinflation. Those who are at subsistence levels very little effect.

    The BSP has long been sanitizing dollar inflow as the volume of the SDA’s (Php1.5 trillion and rising) and the dollar reserves can attest. BSP will raise interest rates and more dollars will come in and more sanitizing will take effect. Deposits in the SDA will rise the reserves will rise and interest rates will rise. But don’t you worry the Communications group and Buencamino will claim that PNoy did it all.

    The EU and the Eurozone are going through the most critical birth pains of a political union to match their economic union.

    The EU and the IMF has already taken over fiscal policy from the Greek parliament but the sad fact in economics is this: You cannot impose austerity on an economy that has already had a collapse in demand. The social and political consequences will not allow it and debt restructuring becomes the only alternative. The bond markets know this and are playing chicken with the EU governments. The ECB will have to agree to the issuance of some form of Euro bonds that will take the place of Greek bonds or the ECB will have to agree to continue to buy Greek bonds to attempt to bring down yields.

    If private bondholders will be forced to take a haircut in with the Greek bonds they are holding they will ask for higher interest rates from Ireland, Portugal and eventually Spain and Italy.

    Either the political union (fiscal union) pushes through or the Eurozone collapses.

    And Mighty “Deutschland, Deutschland über alles” rises from the ashes of the EU.

    The dollar will be maintained as the premier currency of the world.

    Based on the effective tax rate of the U.S. and the productivity of their economy the debt is a problem but not yet a critical problem.

    • GabbyD

      this whole paragraph makes no sense:
      “This is where Gabby D somehow gets lost. If the peso appreciates some more those who earn in dollars will feel an inflationary effect as their dollars can purchase less here. However those who are fortunate enough to earn in pesos their disposable purchasing power will rise with disinflation. Those who are at subsistence levels very little effect.”

      where do i get lost? u say something obvious: for some people, incomes rise. for others they fall. what happens to overall inflation is unclear.

      • J_ag

        For someone who is supposedly an avid observer of the economic situation in this country being clueless about the fact that the economy is dependent on dollar incomes from OFW’s is strange. I suppose that this is a big mystery to Gabby D. If the peso were to gain vs the dollar by let us say another 10-15 percent, that would mean that the families who depend on that income would see their expenditures rise by that much for less goods and services.

        The effects would affect the demand side and obviously growth rates will fall. The same with export receipts. While in dollar terms they would remain the same the peso equivalent would be disastrous.

        Once again for Gabby D growth rates in the country are greatly driven by OFW income flows. Mostly dollars.

        That is the reason why the BSP sanitizes dollar inflows by buying dollars and cajoling the newly created pesos into the SDA’s. The BSP is baised against the peso If left alone those inflows would create a sudden dis-inflationary effect.

        Now on the fiscal side the weak dollar would affect customs revenues as the peso equivalent would be lower and thus the result would be lower collections.

        Imports would become cheaper as for the uninitiated one would need fewer pesos to buy imports.

        Singapore for instance does not use interest rates to control inflation. it uses the forex rate to do it since they are an almost total open economy. Gabby’ D’s personal consumption basket is heavily imported.

        In case Gabby D is not aware in the Philippines the government has different baskets for different regions
        since income and wage disparity is huge. Hence there are different regional wage setting boards.

        While the NSO and the BSP uses a single representative basket for their CPI it is not representative for the entire population.

        The more advanced economies uses core inflation guide with food and energy costs stripped out while the Philippines food and energy comprise the largest portion of the basket.

        That is the difference between first world and third world economies.

        Hindi pa alam ni PNoy yun.

        That policy cannot be sustained for long just like the zero interest rates in the west cannot be sustained for long.

      • GabbyD

        ha? again, none of this proves anything. if u import, the cost falls. if u export (labor for example), the cost rises.

        also, it depends on whether the trade is with the USA. with other major trading partners, which largely align with OFW destinations, they can convert those currencies to the philippine peso. its unclear how those relationships would change.

  • manuelbuencamino

    The Aquino administration has accomplished a lot.

    http://www.malaya.com.ph/july15/edmacasaet.html

  • UP nn grad

    Times have changed with this “…the present is like the past”.</I

    Before… past is "… like GMA administration".

    Now … past is "… like Noynoy first year administration… Promises promises lah lah lah… with the circus of "Gma talsik diyan!" rhetoric and "…send GuLO's BFF's to the lions of media-media lawsuits sliming" entertainment.

    But wait!!!! Didn't you see in Manila Times???
    (1) Two paragraphs explaining why PresiNOy
    kansel-kalsel Laguna lake dredging?
    (2) Five paragraphs :
    PROMISE!!!! Ten million new jobs for Pinoys-in-PInas and overseas … ten million new jobs by 2016. PROMISE!!!”

  • Bert

    In building structures, there are the phases of implementation, namely; the feasibility studies, the planning stage, the designing, the selection of contracting parties, the civil works, and then, finally, the actual construction. To be able to build a very sound structure it must be of utmost importance that things should not be done in a haphazard, rushed, and careless manner. All of these will take time. In a totally tattered/shattered and hostile environment one year is not enough.

    As in building sound structure, so it is in building sound governance.

    To advocate for a rush, reckless and wanton implementation is folly.

    Noynoy has promised the Filipino people an assurance to leave a good legacy after the end of his term. Let’s help him, and look up to that.

    • So how long is a piece of string? Is this going to be the official line at the SONA? Well it certainly sounds like a cop out to say that more time will be needed. It would seem that the govt is not up to the task, don’t you think, if last year they said we would be further along the process and now haven’t delivered?

      Investors will simply take their money elsewhere and continue to maintain a wait and see posture towards the country as they have.

      Tsk tsk tsk, pity the poor Filipino people who have to wait a bit longer yet again for their leaders to get their act together.

  • GabbyD

    i agree with the devaluation of the dollar, but the short run effects on the trade balance, but inflation (and the interest rate hike) may not happen.