A full-blown economic storm

The perfect economic storm is now upon us.

As our political leaders as recently as this week continued to get caught up in the whirlwind of controversy surrounding the former president Gloria Arroyo, a storm of a different kind had been brewing on the horizon.

A few weeks ago, I had warned that the country was sailing right into this tempest almost unaware as its political class seemed more enamored by internal rather than international events. Finally, the stiff economic headwinds that I had been speaking of have finally turned into a fierce global contagion emanating from the US and Western Europe and spreading into Australasia.

The US is already half-way into a lost decade. Recent economic figures point to a prolonged slow recovery, and the likelihood of another recession now imminent. Western Europe is gripped with the bailout woes of the PIIGS economies with Italy now looking more likely to default. A bailout would require Germany and France, two of the largest economies, to undertake austerity measures of their own.

Even after Democrats and Republicans signed a deal to lift the debt ceiling, credit ratings agencies downgraded their outlook for the country as fixing their fiscal house in the long run seemed unlikely given the highly contentious nature of the package required for this almost ceremonial task. The tsunami has now hit Asian markets with East Asia and Australia taking a battering today.

China which has its own version of the sub-prime mortgage crisis developing with town and village councils saddled with loans resulting from its stimulus program could now find its growth slowing to below sustainable levels. And of course, the uprisings in MENA are continuing to raise the price of oil.

The Philippine government which was responsible for restraining growth in the fourth quarter of 2010 and the first quarter of 2011 with its self-imposed fiscal contraction will now wish that it had done more in those periods to foster growth to protect it from the global economic slowdown that now seems apparent.

What is at stake here are the remittances from overseas and the exports of goods (electronics, cars and machinery) and services (tourism and business processing) that have propped up our economy. With demand collapsing in the global economy, don’t expect these flows to materially rise in the coming years.

Secondly, the flow of investments or hot money would in a period of uncertainty normally seek safe havens. Unfortunately, the traditional safe haven of US treasury may no longer be as reliable as before. This could lead to significant depreciation of the greenback which will hit our competitiveness in global markets even more.

Thirdly, the PPPs which the government was hoping to augment its meager 2.5% of GDP spend on infrastructure (5% is the benchmark) could be threatened as investment funds now re-calibrate their tolerance for risk. The emerging market of Asia would be an alternative to the ailing Western economies, but that is no guarantee. With global demand easing, the need for foreign investments to expand production capacity diminishes.

Finally, what is to become of the government’s 7-8% growth target (minimum of 5%) on average for the next five years? It is more likely that global events will weigh down on the prospects for this. The government will have to work harder now to maintain fiscal and economic stability.

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

    Can one imagine what would have happened if the U.S. government had not acted after the liquidation of Lehman occurred


    If purists allowed the economy to correct itself in 2008 the entire world economy would have been plunged into a world depression…

  • J_ag

    In the good old days of the 19th century a country like the Philippines could not import more than it exported unless it had enough gold to pay for the imports.

    Today it borrows, ships out labor to earn industrial currencies or allow investors with industrial currencies to bring in investments to pay for its imports.

    That is how this country has been running for generations… We borrow money from our suppliers abroad to pay for our own imports. That we can now cover from income earned by our OFW abroad.

  • Thai Anton

    How about the downgrade to AA + ,the tea party strangle hold to the debate of tax cut and spending , the thought of Italy and Spain defaults
    make the Eurozone nervous, and the weak dollar less stellar, what’s next
    Maybe pay off some of those billion dollars we owe with cheaper dollar.other than that RP can just watch it’s dollar reserve lost value with
    No possible gain to RP.

    • J_ag

      If you would have bothered to read the S&P report you would have noticed that the primary reason for the downgrade is political gridlock in U.S. Congress. The primary reason also with the ongoing crisis in Eurozone is politics.

      Financial markets hate politics as this causes extreme uncertainty and when this happens fund managers/banks who are agent capitalists have to take measures to safeguard their positions and thus you have a sell off and massive movement to cash and safe havens which happens to be U.S. treasuries.

      The BSP has enough dollars to pay of the entire sovereign debt of the national government. But that would leave little in the way for a reserve buffer and may cause the peso to devalue sharply in a volatile manner.

      While financial liberalization is the ultimate cause of the past volatility the process of financial liberalization now is causing the fragmentation of markets all over the world.

      As for the Philippines we have a deeply fragmented country desperately trying to strengthen the state.

      Reaching out to the MILF is a good start and now let us wait and see if the CPP will be brought in from out of the cold.

      One aspect of the debates about policies in open societies is that each sector will defend their positions in debate but should when the chips are down come together form the common good. In the U.S. and Europe ideologies are being defended and a take no prisoners attitude is the primary cause of the uncertainty that induced S&P to downgrade the rating of the U.S.D.

      Here in the Philippines we are drowning in the debate of yellow vs the Marcos/GMA debacle till now.

      Wang wang should set up a task force funded with all the4 necessities to include investigators, prosecutors and ask the Sandigan Bayan/SC to set up special courts to try these cases.

      Put a tape in the mouth of that publicity slut De Lima and do the work quietly and diligently as holding press conferences will not cut it.

      Enough of this communication team BS when they should concentrate on the important issues at hand instead of trying to project Wang Wang Aquino as an effective leader. State craft is a tedious grinding process.

      Enough already …….

      • “Here in the Philippines we are drowning in the debate of yellow vs the Marcos/GMA debacle till now.”

        I don’t think the debate is as dysfunctional as in the US. Here it is more a debate by the public, or the sniping of the Arroyo backers at certain infringements or pressures that derive from being examined. The only way to relieve them of the pressure would be not to examine them.

        In the US, the divisiveness IS the government, where extremes have blinded representatives as to their greater need to care for the nation. I think the Philippines is actually much more constructive, as I have opined in a blog this morning.

        • J_ag

          In case you have not been listening or reading about the debate in the U.S. Congress I suggest you brush up on the debates during the Great depression..

          It is about state power vs private sector.. In case you just got up from a long sleep no country that issues its own currency to pay for all its debts even its foreign debt can default on its own debt.


          Greece is presently defaulting on some its loans simply because it gave up the power to create its own currency… It used to be the drachma…
          The power to create fiat money is mostly in the hands of private banks in the U.S. It is however backed up by the full faith and credit of the U.S. Republic. Libertarian purists and market fundamentalists hate the fact that we live in a world of fiat currencies…

          The battle is similar to the one fought by FDR during the time when the U.S. was still mainly a domestically driven economy. However this does not hold through today. FDR took the U.S. then off the gold standard……….

          Nixon ended the short experiment of the dollar backed gold standard.

          The ideas of Keynes vs Hayek /Schumpeter are resonating all over the capitals of the more advanced economies of the world.

          That is as it should be in open societies… The U.S. credit rating was downgraded simply because of ideologically backed political dysfunction… Holding the U.S. economy and the world economy hostage by refusing to raise the debt limit to cause a default was entirely political.

          The U.S. can never default since it can issue new money to cover its debt

          They call it the open market operations of the Fed. Quantitative easing.

          I recall you said you were a banker… The prerequisite for open societies are a tolerable rule of law backing up contracts and regulated market mechanisms.

          Point of fact, the law created under FDR creating a wall between investment banking and commercial banking was scrapped under the religion of the markets know best and we have had numerous financial blowups since the early 90’s that preceded the big one in 2008…

          Any student of monetary history of the world would know this…

          Now please tell me where are the debates on economic policy in this country since we have given up the power to create our own currency in favor of a de-facto common currency with the U.S.

          It would be useless to get into a discussion of TFP (carbon based) backing up industrial currencies over a currency backed up by carabao power.

          At the root of economics lies human behavior. How to manage and control it has been the subject of debates for centuries. Democratic open societies have so far been the best way…

          The U.S. has been the exemplar of that model.. Now that is no longer true… During times of economic crisis the fringe becomes loudest. In a world of 24/7 news and modern inexpensive communication devices thinking has become passe. A large portion of Americans believe that Obama is a commie Muslim fundamentalist.

          Intolerance has become the new religion in the U.S.

          Slogans and buzzwords pass of as facts.

          • Maybe the rating downgrade will encourage the Philippines to have the kind of dialogue you are looking for. Other than that, I agree that the US is becoming a nation of extremists, and I take your educational thrust as helpful, as your historical underpinnings are a whole lot deeper than my surface impressions.

  • J_ag

    Italy defaulting??? The ongoing battle between the financial markets and the ECB is an interesting one. Firstly both Spain and Italy are in no danger of defaulting. No the sky is not falling… Have we seen a drop in OFW flows????

    The ECB is not a true Central Bank. The ECB has openly stated that they will not buy EU sovereign bonds to provide liquidity. They cannot do any form of QE. That tool is available to the Fed in its open market operations. I hope you understand what that means. The ECB does not speak with one voice. The Germans who hard money advocates would like to see private bond holders take a haircut in Greece. Naturally the contagion effect of the uncertainty of the policy directions will force traders to start shorting debt. So the benchmark 10 year yields rise in the secondary markets.

    Don’t you know that August is the leanest month for markets in Europe and the U.S. Volumes drop and traders get to influence markets to a great degree. Look what happened here. The BSP called in the local banks to stop dumping dollars in their NDF positions that caused the peso to cross over into Php 41 for a few days. Naturally the dollar gained back what it lost here almost instantly.

    After the debt ceiling debate ended with the increase markets are left with no place to go. The U.S. revised its growth figures for the first half to just half a point. Housing prices continue to drop. The realization now in the U.S. is simple. There can be no help from a new fiscal stimulus nor the task of hastening the de-leveraging process with a combination of debt condonation for households and tax breaks for purchases of capital equipment (accelerated depreciation) is out the window at least till after the next U.S. presidential elections.

    The mandate of the ECB is simply price stability. While the U.S. Fed has a dual mandate of price stability with full employment.

    The U.S. is a $14T + economy. The fiscal stimulus package was for $700 billion spread out for two years. That was meant to plug a hole of almost $2 trillion in lost demand. De-leveraging must come first with stimulus and that de-leveraging process must come with some debt condonation.

    The right in the U.S. would like to see quick liquidation to fast track the creative destruction process. The left would like to see massive intervention through fiscal and monetary stimulus. The U.S. can borrow at almost zero short term. The correct formula is somewhere in between. In a country where there are elections every two years that is tough. While in the Eurozone they cannot speak with one voice since they are not politically integrated. (fiscally)

    U.S. corporations are racking up profits and are flush with cash. However unless consumers are unshackled of their debt burdens growth in the U.S. will be sluggish.

  • The highly contentious debate in the US Congress is exactly what was not needed in a recovery built like a stack of cards. America’s leaders have stopped leading the country and mainly posture for the next election. They follow the money, and the loud voices, most of which seem to emanate from extremes. They have no principles, and the economy reads this well. Markets are true. They can spot weakness in the amount of time it takes to push the “sell” button.

    The Philippines is actually getting a bounce from the shaky dollar for now, cast against its comparative stability (comparative to the mistrust that infested the Arroyo years).

    • Cocoy

      @Joe The GOP’s scorch earth policy, and Obama’s too nice guy approach isn’t doing America any good. Both parties dropped the ball, big time. The democrats for not doing anything when they had control over congress— and now this.

      @Up nG re cell phone. No worries. We got more ideas in the coming months.

      Financial markets: look to the bond market, and people going liquid. It will be an interesting ride in the next few months for American stocks and gold.

  • uP Nn grd

    Malacanang insiders convincing PresidNOYnoy to freeze farm-to-market roads, RoRo and other GuLO infra projects did give PresiNOY at his SONA to say more lines to sustain his campaigning on the “GMA Talsik Diyan!” Theme.

  • uP Nn grd

    To cocoy: thanks for incorporating software to make pROPinoy.net more cell phone frendly.

  • manuelbuencamino

    If only President Aquino heeded your warning…

    • Up nN grd

      PresiNoy is known to disregard suggestions. Evidence — deptJustice recommendations re Quirino grandstand murder events.

    • I think it is important to look at the underpinning and shift in fundamental values that is taking place, not any specific transaction (or event). You will find my elaboration at: http://thesocietyofhonor.blogspot.com/2011/08/american-dumb-bell.html

      • UP nn grD

        JoeAM: History and statistics both are useful to better understand the pulse of the nation. For example, bert would be ecstatic that SWS gives Presi_NOYNOY the “yeah!!! Thumbs up!!!” from Pilipinas population.

        History, though, worth thinking about. This is but month-12 of PresiNoynoy’s reign in Malacanang. Bert may hyperventilate that “YEAH!!! We have a god — flawless!!!” and then, the newspapers will gently show him about QuirinoGrandstand, Torres-invasion-of-a-private-business. Other matters (like proselytizing about the corruption in dredging projects, canning Laguna dredging contract, and NOT naming who are the GuLO BFF’s he knows to be pocketing beaucoup-dollars on the dredging contract…. gives me a deja vu of “… weather-weather…”. Bert will disagree, but Laguna dredging contracts gives me dejavu of weather-weather.

        Different folks, different strokes. And even historians (or statisticians) looking at same data-points will arrive at different conclusions.