Thursday, 29 January 2009

The best and worst scenario for the Philippines in 2009

John Mangun
The Business Mirror

The Philippine economy in 2009 will grow at no less than 0.5 percent below 2008 growth. Take the final gross domestic product number for 2008 that will be released in a month or so, subtract that 0.5 percent, and that is the absolute worst-case scenario for 2009. My best-case scenario is that the economy will grow at a rate of 0.7 percent higher than for 2008. The only exception would be in the event of a major natural disaster.

How can I be so sure? I am not an economist. I do not have a research “think tank” at my disposal. I do not use any sort of economic models.

As I mentioned weeks ago, major financial institutions have Philippine grow estimates ranging from 1.8 per cent to over 5 percent. How could there be such a wide disparity among these experts? They supposedly use the same data to make their predictions. They speak to the same business and political leaders. They have the same training and experience. Yet, they cannot agree and, in my opinion, most are going to be completely wrong. And I am going to be right.

Economic forecasting is based on economic models. In other words, if this happens, then that will happen, because all parts of an economy interconnect and interact. Seems simple. Every business owner understands the principle. Extending your retail-store business hours may increase the number of customers you serve, but also increases operating expenses. Then you calculate to see if that move would be profitable. That is a business model.

An economic model works the same way, but you must know and understand all the factors. I believe that most of the economic models do not have a clue about how the Philippine economy really works.

Note that about 70 percent of the beer that San Miguel sells is through sari-sari store-type operations. In order for the traditional economic models to work properly and the forecasting that comes from them, you must know what happens. You must be able to calculate the economic impact of a bottle of beer from before it is manufactured, all the way to the last drop finished on a Friday-night drinking spree. But after the San Miguel truck drops off a few cases at your local sari-sari store, the economic models are dumb and blind. And that is why the economists can rarely get a handle on this economy, particularly in these times of many uncertain variables.

The cap on the bottle of Red Horse I drink every night says the price is P26. Except the nearest store charges P28, and the one a little farther away prices at P27. No one at Deutsch Bank,

JPMorgan, UP, the National Economic and Development Authority or any another expert knows that my neighbors and I pay 5 percent to 8 percent more than the “official” price. Their forecasts are based, incorrectly, on P26.

Every month the owner, Lola Beng, pays P350 on her memorial plan. None of the experts have any idea where that money comes from. They can count the payment but cannot count her income contribution to the economy. There aren’t any ORs and she does not file any tax return. Lola pays a teenager to deliver me a half-case once a week. She pays him and I tip him, again, off the books. He buys 2T oil and tires for his motorbike without any records. When he eats at the local karinderya, the value-added portion of the price of his meal does not show accurately. And this scenario is repeated a hundred different ways, a million times a day in the Philippines. It all adds up.

If a public official can testify before a congressional hearing that he did not report nearly a million pesos in bank transactions for his business “that’s part of the informal economy,” and any profits on which taxes were probably not paid, how can the “informal” economy and its impact on the total economy ever be measured?

There is no way economic forecasts can be made accurately when the forecasters have very little idea about the way the money flows and how the economy functions.

Furthermore, negative perceptions are created based on totally incomplete information and analysis. Read this: “The value of imported mineral fuels, lubricants and related materials plunged 44 percent to $539 million” in November 2008 from November 2007. Well, obviously, oil imports “plunging” means the economy is in very bad shape because people do not have money for gas and business is not using fuel to deliver products. Wrong, wrong, wrong.

In November 2007, crude oil averaged nearly $90 per barrel; in 2008, the price was below $50. Of course, our import bill for oil went down. Nearly 30 percent of the drop in Philippine imports for November was because of cheaper oil prices. And that is good for the economy.

Electronic imports fell like a rock. But electronic exports contribute slightly more to the economy as the outsourcing business, both in foreign revenue and employment. And because demand is down, computer prices are also dropping like a rock. A brand-new HP computer selling in the United States two months ago for $900 is now priced at $300. A year from now, the headlines will read, “Electronic imports up 50 percent.” That is the way the markets work. And that headline will not give an accurate picture, either.

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