EU debt crisis

What the country really needs

Talk to the pundits and commentators and hear their lamentations over the sluggish fourth quarter GDP growth figures of last year. Talk to the investment analysts and you hear a very different story.

Having used up much column space last year predicting an inevitable slowdown of the growth rate, and seeing it materialize, I find it useless to now cry over spilt milk. The government will try to paint a rosy picture, seeing the glass as half-full to counter the reasonable level of criticism it has to cop for tripping over itself. But as someone whose warnings and predictions came true, I would rather focus on the future, not the past.

The reason why analysts seem quite bullish over the country’s prospects is that they see the pipeline of projects that are either underway or about to flow through. It has taken about a year and a half to lay the groundwork, but the government has finally regained its footing. Forget about the invisible hand, last year it was the government’s usually visible boot that failed to leave an imprint.

If government was primarily the cause for the deceleration in growth last year as the external environment gradually deteriorated, this year external factors will pull growth down as both fiscal and monetary policy seek to restore it to its normal trajectory. If uncertainty persists in the EU, if President Obama gets his wish and the US Congress enacts laws to limit outsourcing, if the situation in the Middle East particularly in Iran continues to boil over, it could deflate the economy and counteract many of the measures government puts in place to invigorate it.

Despite all these what ifs there is still much reason to be buoyant if you are an analyst comparing the Philippines with other potential investment sites. The impeachment trial is a mere distraction from their point of view. Regardless of whether the prosecution or defence wins the case, it will not have a shred of influence over the current spend program. That is the good news. As far as the domestic economy is concerned, there should be a decoupling of political and economic events.

Portfolio foreign investments are sure to flow through the local bond market as the major players in the Phisix are set to corner different contracts under the public-private partnership program. They will thus have to raise capital as they breach their single borrower limits with the banks that they control. Forget about foreign direct investments, this is FDI by stealth.

As the government shifts the external debt obligations from the public to the private sector, the question now is whether it will have the fiscal fortitude to use the inflow of foreign currency in a more productive manner than just parking it with US treasury at near zero interest rates.

A more impactful use of these reserves would be to complement physical infrastructure investments by the private sector with economic and social infrastructure investments in education, health and housing. What the country needs is to plug the deficits in these areas of government spending.

But that is merely the first step. The next one would be to fund and implement the completion of the land reform program and to make agriculture and pockets of industry resilient to the global downturn and the emerging global business environment over the coming years. To do the latter, the government will have to roll-out a package of tax incentives and subsidies to boost productivity and encourage investment in capacity.

Of course there is nothing particularly new or fresh to this agenda. The extent to which governments become distracted or side-tracked from it by internal and external events, man-made or natural, self-inflicted or otherwise, determine to a great extent how successful they become in building prosperity and opportunity for all.

So perhaps in this year of the water dragon, the government could focus on letting the money flow so that our country gets what it needs and raises its clout as one of Asia’s newer economic dragons.

Spend More, Talk Less

With the release of third quarter GDP figures upsetting all but the most ardent economic apologists for this administration, the time has come for it to re-think its priorities.

image from wallpapers-diq.net

The situation is nearing a critical level. As the whole of Europe is placed on credit watch and as recovery in the US struggles for momentum, the vibrancy in the domestic economy is being sucked out by government’s poor infrastructure spending rate just at a time when it is needed. Cabinet officials throughout the year have been promising a more rapid deployment, but this has so far not materialized.

The incorrigible ‘prophet of boom’ from the Ateneo Graduate School of Business Cielito Habito despite his best efforts at painting a rosy picture for the government has himself acknowledged the third quarter results to be disappointing. Here is how this professor of ‘Aquinomics’ concludes his most recent column for the Inquirer entitled, Is confidence dissipating?

(W)hat worries me most is the possible dissipation of the initial confidence surge that greeted the new administration and led to brisk private domestic investment growth over the past year. With these private domestic investment numbers now apparently slowing down while price increases have been speeding up, the President and his men on top of the economy should keep a close eye on the ball—or risk losing steam altogether (emphasis added).

That’s it—the penny has finally dropped. Only a delusional person would keep insisting that the government is headed in the right direction when it comes to managing the economy. Will this lead to a teachable moment, or will the administration remain antagonized by criticism seeing sinister plots behind them, spooked by shadows and haunted by the spectre of its immediate predecessor?

Throughout the year, the government has continued to fall back on its good poll figures to demonstrate that it has been performing to the satisfaction of the people. Poll figures however may not be a good barometer of the government’s competence in economic affairs given the ‘halo effect’ that has made the administration appear more creditable than it should.

Market analysts have already pointed out and the Bangko Sentral agrees that stimulating greater demand to address the slowdown in growth lies not in the hands of monetary authorities at this point but with fiscal managers. What this means is that the government has to spend more and talk less. Or in the words of Jerry Maguire, it has to “show me the money!

All talk, no action

The government talks profusely about the need to ramp up infrastructure spending in its Philippine Development Plan released early this year (see page 17). “An inefficient transport network and unreliable power supply”  is what has created a poor investment climate according to the Plan. Solving this meant greater spending, but when it comes to actually delivering on this, the government fell short of its rhetoric. Next year’s appropriations will hit a mere 2.5%, when the benchmark for a middle income country such as ours is 5% of GDP.

P-Noy in his first SONA said that the infrastructure build-up would be achieved through public-private partnerships, but nearly eighteen months on and counting, the fulfillment of the now diminished scope of this program remains to be seen. The confidence of the business community will eventually wear thin as Habito suggests if delays persist.

When the president addressed a meeting of the Makati Business Club, a community highly supportive of his candidacy, there was some disappointment over his over-emphasis on the case against former president Gloria Arroyo and his squabble with the Supreme Court. As these businessmen suggest, the risk is for P-Noy to get so focused on prosecuting Mrs Arroyo that he fails to keep his ‘eye on the ball’.

And it requires some doing. To ramp up spending by 2.5% of GDP will require as much concentration as he can muster. In a ten trillion peso economy, this will mean doubling the present effort of 250 billion pesos a year. This will dwarf  the growth of the CCT or conditional cash transfers which cost about thirty billion.

Because the president closed off the avenue of raising revenues through new taxes, he found himself left with no other option but to fund his development plan through private financing. That has proven tricky as well, which is why he now needs to consider a third option.

That third option which I had first written about late last year which then got echoed by no less than the BSP Governor a few months back is for the government to issue infrastructure bonds to the BSP which is at present earning negative returns on its foreign currency reserves.

Better returns

By offering the Bank a better yield, the government would be doing it a favour. Raul Fabella a former dean of the UP School of Economics has lent this proposal his seal of approval. He believes the risk from runaway inflation to be negligible under the proven monetary stewardship of the BSP.

The continued growth of foreign remittances from OFWs makes this option feasible, but if the government needed further convincing, then the following points should help build the case for it:

  1. Infrastructure spending is needed as we face a slowdown of demand from Western economies for our goods and services.
  2. It is the best vehicle for avoiding the ‘Dutch disease’ that afflicts countries experiencing windfall profits from resource booms (in our case, this stems from human not natural resources).
  3. Unlike increased social entitlement spending during a boom which becomes painful to retract at the end of the cycle, infrastructure spending leaves a tangible legacy and productivity dividend.
  4. It will help our exporters remain competitive because the increased spending will lead to a modest rise in inflation which will stem the appreciation of the peso against the greenback.
  5. It will unlock complementary investments by the private sector which is being deterred by poor public infrastructure.
  6. Government failure will be minimized as most transport and power projects can be turned over to the private sector under a PPP arrangement once completed. Revenue earned from transport and power projects would settle the interest and debt owed to the BSP.
  7. It will help prop up employment and growth which will spur increased tax collection.
  8. It will reduce the cost of doing business for most firms, not just exporters.
  9. It will help achieve the government’s growth target of 5-7% in the medium term.
  10. It will fulfill the government’s own development plan and set us on a higher growth plane.

Greater public infrastructure spending not by new taxes, nor by increased external or internal borrowing (as per Mrs Arroyo’s stimulus program in 2008/09), but by tapping our excess foreign currency reserves is not only appropriate, it would be the most effective and innovative way for this government to sustain economic growth through the turbulence in the global economy and beyond.

But we have to get real now. When faced with a possible course of action that is within the feasible set as defined by technocrats, what often prevents governments from acting is not the lack of rational arguments but the incentive problem. What led to this whole debacle in the first place was the administration’s fear of spending that would benefit internal patron-client networks left behind by its predecessor. In other words, politics rather than economics has been driving its decisions.

Making daang matuwid work

In the past we have seen how corruption and rent-seeking have reduced the amount of money available for developmental spending, but now we see how the opposite has reduced that amount even more. In the words of Samuel Huntington, “In terms of economic growth, the only thing worse than a society with a rigid overcentralized, dishonest bureaucracy is one with a rigid, overcentralized honest bureaucracy.”

The challenge for P-Noy is to make his mantra of daang matuwid work for the country rather than against it. Through the discipline and hard work of Filipinos working overseas, the country has a rather unique opportunity to make up for the shortfall in taxes generated internally. The current situation reminds me of the parable of the talents where the honest, but slothful servant dug a hole in the ground to store the talent that was entrusted to him by his master for safekeeping.

The Aquino government is like that servant. It was entrusted with a small but buoyant economy at the beginning of its term. So far, it has managed to keep it afloat, running while standing still, growing on aggregate but shrinking in real per capita terms. At the end of the story, the master reprimands the servant by saying, “To everyone who has will be given, and he will have abundance, but from him who doesn’t have, even that which he has will be taken away.”

That sound a lot like where the economy is heading under the president’s watch. The little that the Philippines had at the start could be taken away from it, while the plenty that our ASEAN neighbours have keeps on growing. It is time this government put its money where its fiscal mouth has been and start showing us the money. From another biblical parable comes the saying, “to whom much is given, much is required.” P-Noy was given a huge electoral mandate back in 2010. It is time he used it.

Like a Thief in the Night

image of Michaelangelo's Last Judgement from freepublic.com

That is not how the government acted in seeking to put Mrs Gloria Arroyo behind bars. Rather than keep the former president guessing as to the date when formal charges against her would be laid, President Aquino announced back in September what the timetable for it would be. Here is how he phrased it,

We will start filing the cases before the end of this year and with a little cooperation from the judiciary, maybe we can put some of these people in jail next year.

This signalled to Mrs Arroyo that she had to make travel plans as soon as possible, which then forced Justice Secretary Leila De Lima to take it upon herself to place the congresswoman under a departure watch list to keep her in the country even before preliminary investigations were concluded. This according to one justice meant that De Lima was now “more powerful than the court which can only do the same “after the filing of the information and the issuance of an arrest warrant“.

With a little cooperation from the judiciary”: those words of P-Noy now seem ominously prescient of events as they unfolded because straight after thwarting an attempt by the former president to leave by disregarding an injunction from the high court on the watch list order, the government then turned to a joint panel between the Comelec and the DOJ set up to look into electoral fraud to file a case before a regional trial court against Mrs Arroyo. This timeline shows that within the space of a few hours upon receiving their case files which numbered several thick ring binders, a judge issued an arrest warrant.

Had this judge not been so “cooperative”, Mrs Arroyo might have successfully fled the scene since the Supreme Court had by then thrown out the government’s appeal to have its injunction on their watch list order lifted. And so despite the fact that it had foolishly forewarned the former president of its intended moves, the government somehow managed to keep her in the country long enough for an arrest warrant to be served.

In the process of doing so, however, the government may have committed a few grave mistakes. These might come back to haunt its case. Certainly if it is found that it acted inappropriately, the president needs to own up to it because it was he who set the wheels in motion that eventually landed the government in a whole heap of trouble. Particularly with respect to his campaign promise to uphold the rule of law, P-Noy will be ultimately responsible if it is determined that his government usurped judicial powers or acted in contempt of court.

At the moment, the president is assailing the Supreme Court for the speed in which it issued its injunction on the government’s watch list order as he spoke before his “home court” the Makati Business Club, saying

(O)ur lawyers all know that it takes the Supreme Court 10 days, normally, to attend to motions, and it decides to issue a TRO for Mrs. Arroyo in three, who can avoid wondering what she did to merit such speedy relief?

And yet the president doesn’t see the irony of his position because the government was quite happy to get a lower court judge to issue an arrest warrant on his adversary in a matter of hours, which was a far more difficult decision to make. Certainly, when it comes to fostering the rule of law, what this government has in mind is something quite different from the standard.

Like a thief in the night–that is how the Hacienda Luisita decision was handed down by the high court in the midst of all this. Oral arguments had been heard and the judgement of the court had been pending. No one knew the day or time when it would materialize. Suddenly either by coincidence or by design the justices rendered a unanimous vote in favour of the farm worker beneficiaries to have the Aquino-Cojuangco estate title transferred directly to them.

Having justified its bold and decisive actions against the court’s injunctions because of the ensuing confusion surrounding it, the government through its spokesman immediately informed the public that it would respect this particular decision as public support had been mounting in favour of it. The only caveat was for the determination of ‘just compensation’ for the president’s relatives and other issues that the court still has to settle.

The initial action by the Arroyo government to revoke the stock distribution option taken by the Cojuangcos in complying with the agrarian reform law was suspect according to US officials based on confidential diplomatic cables as a form of retaliation by Mrs Arroyo on the matriarch of the Cojuangco clan for supporting calls for her ouster back in 2005. What the Supreme Court ruling now does is open up the possibility for a counter-retaliatory move on the part of Mr Aquino against the Macapagal-Arroyo clans who also own sugar plantations.

This tantalizing opportunity could reverse the destructive pattern of competition by ruling elite factions to accumulate wealth through landholdings using the weak system of property rights in the country in order to consolidate power. Now in a bid to weaken each other, these same ruling elites might now work to dismantle each other’s landholdings. Given that one faction controls the executive and another holds the sympathies of the judiciary, this feud might actually produce something positive for the country.

Like a thief in the night—that is not how events overtook this government on the economic front. For one, the debt crisis in Europe was unravelling like a train wreck in slow motion for several years now. The seeds of this crisis were actually sown during the last one when governments pumped liquidity into their banking systems and engaged in stimulatory fiscal spending. It was only a matter of time before bond holders began to raise the cost of public debt.

The government had ample time to prepare the nation for this crisis, to bullet proof it by sustaining demand through public construction and investment. The early warning signs that its fiscal consolidation was going too far and actually dampening growth in demand were quite evident during the end of last year. The government had ample opportunity to correct its course and make the necessary adjustments. It may turn out in the end that a transition to a new government may have caused unnecessary disruptions to patron-client networks in the bureaucracy. Reconfiguring these networks took too much time.

Finance officials might have taken this as a welcome blessing as the slow spend rate allowed them to limit the fiscal deficit while sticking to the president’s no new taxes pledge. Meanwhile,with the fiscal space it had from fiscal consolidation, it cut tariffs on certain industries. It balanced this decision by removing power subsidies to exporters in special economic zones. These could threaten the growth of some industries and lead to the closure of others at a time when global demand for our exports is already weakening or restructuring as some economists have noted.

The biblical phrase “like a thief in the night” comes from the parable of the ten virgins found in the canonical gospels of the New Testament. It is also known as the parable of the wise and the foolish virgins. The five virgins who were prepared for the bride-groom came to his wedding feast, while the other five who weren’t were excluded. It has an eschatological message: to be prepared for the day of judgement. The final reckoning.

With the second coming of the Aquino dynasty, will the country be prepared to pass the test? Or will it simply slip into oblivion? The day of judgement is nearly at hand!

Where’s the beef? On the missing “spoils” from P-Noy’s second US trip

Does good governance mean good economics?

In an earlier piece last week meant more to mark the 39th anniversary of martial law in the Philippines, I tried to downplay expectations regarding the “spoils” that P-Noy’s US trip would bring describing the situation there as dire and nearly on the boil.

As P-Noy was to deliver a report to the World Bank, Mr Olivier Blanchard, Chief Economist of the IMF gave an uncharacteristically downbeat outlook for the world economy saying that the global recovery had stalled, revising forecasts of growth down to 4 from 5% (a more significant slowdown for advanced economies with growth prospects halved from 3 to 1.6% and less drastic cuts for emerging economies whose growth prospects decline slightly to 6.1 from 6.4%–the Philippines has seen its growth prospects slashed from 6-7% down to 4-5%).

Sure enough, on the day he arrived back from the US, the Dow Jones plunged nearly 400 basis points undoing the Federal Reserve’s measured response to prop up confidence. This was in reaction to what has been going on in Europe where Italy, the third largest economy received a credit downgrade from S&P and where a Greek default on sovereign debt looms. Meanwhile the Washington elite remained at odds over how to keep the government running with a measure to keep the lights on until November 18 passed literally at the eleventh hour.

With that as an unfitting backdrop, the president remained upbeat upon planting his feet back on home soil. Unlike his more recent trip to China which was expected to yield 2-7 billion dollars worth of investment of which 1.3 billion dollars was realized in firm commitments and cost the Filipino taxpayer 25 million pesos (a return of 52 dollars worth of investment for every peso spent), there were no numbers to be quoted this time around.

The president instead spoke of the keen interest and enthusiasm of US investors who were “lining-up” to come to the Philippines. Strange that the president did not even mention the figure of $15 million over the next four years the only firm commitment to come from Pepsi to be invested in developing a coconut juice processing facility.

That after all would be good news for the struggling farmers the intended beneficiaries of the Marcos era’s coco levy fund which was meant to provide them support in exporting their crop, but instead went to a bank which then lent to the fund’s manager, P-Noy’s once estranged uncle, who because of that now owns a controlling stake in San Miguel the food and beverage giant thanks to the high court’s ruling earlier this year.

So why the omission, which is so uncharacteristic of arrival statements; could it be because the spoils of this trip are so meager when compared to the nearly 25 million pesos spent on it? It would depict it as representing less value for money by producing a mere 6o cents for every peso spent.

This should not detract from the overall mission of the trip which according to the president was fulfilled by him reporting to the World Bank the advances of his administration this past year and greeting the Filipino community there. There was also the side trip to credit agencies to try and convince them to boost the ratings of the country. After all, the budget deficit no longer seems to be a problem with a surplus reported in August bringing the cumulative deficit for the year to be 85% below its ceiling, right?

This is what the president trumpeted as a success in his drive to stamp out corruption. In the spirit of transparency and openess, which were the themes of the Open Government Partnership that P-Noy inaugurated at the Waldorf Astoria (which incidentally means more foreign trips in the near future to Brazil, Chile, UK, Tanzania and Latvia), the Palace should have at least acknowledged that perhaps the Americans were in no position given the state of their economy to be exporting their capital and jobs to countries like the Philippines.

Never gonna happen

That transparent recognition of the state of affairs of course was never going to happen, for the simple fact that doing so would expose the president to accusations of junketing which given the nature of his presidency is something his entourage wants to avoid. For if the question were really to be asked, what would be the real urgency of making this trip to the US a second time in a row within the space of a year, what would be the answer?

His remarks at the World Bank was like that of a star pupil performing a didactic exercise of parroting his tutor. His visit to Fordham University was a sentimental journey mirroring his mother’s footsteps (similar to his visiting an ancestral hometown in China). His co-inaugural of the OGP lent legitimacy to an initiative sponsored by the World Bank which has struggled to make itself relevant.

Finally, his trip to the IMF was unnecessary given that the Philippines exited their program right before he entered office. The only point of this trip it seems was to highlight the advances of his young presidency in proving that “good governance is good economics”.

Unfortunately, the jury is still out on that. For one, the US haul was a pittance compared to the Chinese catch. And China has not really been deterred from investing because of perceived corruption or lack of openness. In fact, China’s development spending in emerging countries devoid of any concerns about corruption in the recipient nation is the main reason why western aid agencies have been struggling to maintain their relevance.

That and the fact that their anti-poverty programs have proven to be inconsequential. So much so that they have jumped on the bandwagon in supporting ideas developed independently by their clients. Programs such as Bolsa Familia which is now called “conditional cash transfers”. Yet as shown in an earlier post, the Philippines could have funded its own variant of this scheme without resorting to multilateral financing.

Second, the “interest” from US companies to invest was sparked not because of a greater sense of openness but from the relative advantages the Philippines has in a couple of areas. One is in the form of coconut plantation; and, two is in the form of a call center industry that has grown from strength to strength even during the period in which corruption supposedly reigned.

Now before you start arguing that the austerity exhibited by P-Noy in his travels is in stark contrast to the “impunity” demonstrated by his predecessor, let me say first of all that this habit of constantly bringing up ex-president Gloria Arroyo as the benchmark for this president’s conduct in office is not really very useful (although I am sure her supporters would be happy to have that conversation). I would prefer to think he should set the bar much higher.

The proper benchmark

Before questions of efficiency and effectiveness are raised, it is important to cross the threshold of appropriateness. How appropriate was it to make the trip at all? If as the president says it was important to send a message about the reforms undertaken by his country, then perhaps it would be pertinent to look at Indonesia’s example. The president of Indonesia the only other Asian country in the steering group of the OGP has trodden the path that P-Noy has just embarked on.

After the anti-corruption campaign started under Susilo Bambang Yudhoyono’s first administration, Indonesia has clearly effected a change in its image abroad. It is sometimes accorded “BRIC” status with  gross capital formation as a ratio of GDP about double and foreign direct investments several multiples of that in the Philippines in recent years. This was another successfully home grown program not driven by donors, the main reason it went from being seen as a basket case after the fall of Suharto to joining the Group of 20 nations.

Yet after accomplishing all this, its president felt no compelling reason to preach the virtues of his nearly decade long administration to other world leaders choosing instead to send a “trusted aid” to the event. Our president on the other hand felt so convinced that his administration after just over a year in office was performing sufficiently well that he saw the need to share his country’s “success story” with people abroad.

Unlike the case of Indonesia where the anti-corruption campaign supported growth, the Philippine government’s attempts to rein in corruption seem to have detracted from that growth as the latest four quarters of GDP reporting have shown (ironically it is in the area of growth where the Philippines over the last decade has not performed too badly against its southern neighbor–but never mind that, lest this statement of fact be interpreted as me giving “props” to the previous dispensation).

While it is understandable for the president acting as Salesperson-in-Chief to present a positive image abroad of our country and his administration, it is equally important for that image to be translated into tangible results over a sustained period of time. Only then will the image correspond to reality. Until then, we can only keep asking, “Mr, Presidentwhere’s the beef?*

*Fresh from his US trip, the president rushed off to Japan for four days. The contrast between the East Asian and North Atlantic nations could not be more stark with one billion dollars expected to be signed off with a taxpayer’s bill amounting to 20 million pesos.