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.
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.
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.
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.