International Monetary Fund

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.

…And PIIGS might fly

The following is an interesting chart that shows the projected debt positions of the various PIIGS economies (PIIGS stands for Portugal, Ireland, Italy, Greece and Spain), the US and other economies with triple AAA credit ratings or near investment grade ratings.

It demonstrates why these economies are in such dire straits at the moment. The debts of Greece are the highest at 1.5 times the economy (Greek tragedy). Ireland is next at 1.2 times (the luck of the Irish) and Italy is third at 1.15 times (Italian job).

The US which has been downgraded for the first time in eighty years is projected to breach the 100% debt to GDP ratio after this year given the tepid pace of its economy and expanding entitlement system. Spain has debts at a mere 64% of its economy but is expecting to see them rise on an upward trajectory to 75% by 2016.

Other triple A rated economies either have low debt to GDP levels (Austria, Australia, Denmark and Finland) or are on a downward path to sustainability (France, Germany, Singapore and the UK).

The Philippines and Indonesia which are both one notch below investment grade do not seem to share the problems of the PIIGS with moderate (Philippines) to low (Indonesia) levels of debt and they are both expected to decline over the next few years. The yield of their bonds are trading lower than the Portugal, Ireland or Greece (translation: creditors have greater faith in their ability to repay their debts than the P-I-G economies).

The Philippines stood at the precipice of a sovereign debt crisis back in the last decade with debts rising from 60% to above-70% between 2000 and 2003, but pulled itself back with a combination of increased taxes, fiscal consolidation and a currency appreciation with debts returning to a more manageable level of below-50% in 2007 right before the Global Financial Crisis broke.

The structural adjustment that occurred after 2004 allowed the country to weather the GFC from 2008 to 2010 relatively unscathed. Now that the new government has continued the cautious fiscal consolidation of its predecessor, the question is whether growth will be as robust as it was from 2007 to 2010.

Some might say the fiscal contraction that took place in Q4 of 2010 and Q1 of 2011 will provide the necessary cushion for the government now. The problem is with the slowdown of GDP that the country has experienced this year and into the next few, revenues might not scale up as they were originally projected leaving it with limited options now that fiscal stimulus has gone out of fashion.

Indeed, fiscal contraction has its merits, but it also has its drawbacks when used excessively. Can a country engage in it indefinitely and expect an economic takeoff? Yes, sure it can…and pigs might fly.