bailout

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.