Thursday, 4 June 2009

What's wrong with the latest Philippine GDP data (II)

Be careful, Philippines
Outside the Box
John Mangun
Business Mirror

There are far too many people out there that are talking foolishly and, perhaps, dangerously about the Philippines. They are the ones who believe that any comment about the economy is some sort of secret language of politics. Positive analysis of the economy is obviously a cover for being pro-GMA. Likewise, any negative economic assessment is to be against GMA.

The problem, the dangerous problem, is that when you start making economic decisions because of your “politics,” the wrong decision is always the result. If you cannot have a clear picture of the economic situation because your politics clouds the view, then how can you make wise economic decisions?

No one has been able to show me any substantial and pervasive evidence that the Philippine economy is in bad condition or even significantly worse condition than a year ago. My e-mail address is below when you have something more than words to back your viewpoint. And as I wrote two days ago, the latest economic data distort the reality.

However, current government monetary policy from the Department of Finance and the central bank may be extremely dangerous and, in my opinion, is putting this economy at very great risk.

This is a little complicated, but bear with me for a moment.

From my view, current policy seems to be based on the assumption that the Philippine economy is going down and the USA economy is going up. If that is the case, then one proper policy would be to lower interest rates, as the government is now doing, in an effort to stimulate economic activity. Part of the problem with this is that it sacrifices the value of the peso. But that would not be a concern if one assumes that the US dollar is the currency of choice and is going to be strong in the long term, anyway. If the dollar is growing stronger because of a stronger US economy, there is little anyone can do except to accept a P50-to-$1 exchange rate and hope lower interest rates do spur the economy.

But if the Philippine economy does not need any stimulation and if the US economy is not getting better, then the absolute last thing the Philippines needs is anything that would artificially encourage a weaker peso. Further, if the local economy is not going to be stimulated by lower interest rates because the economy is growing as fast as it can without unnecessary government intervention, then the weaker peso will actually make the economy worse.

Anyone who says the US economy is getting better is a fool. The best that can be said is that the USA is not falling quite as fast as it was two months ago. But to say that a bottom has been reached is pure fantasy. But that is short-term. It is the long-term picture that predicts an economic catastrophe.

As I wrote two months ago, the US government took the greatest economic gamble in history. It lowered interest rates to zero and pumped hundreds of billions of newly printed “fake” money into the economy, hoping that a quick rush of economic activity would offset the disastrous inflationary results. It is not working, as evidenced by the rapid drop in value of the dollar.

Have you noticed oil prices lately? Oil is headed back to $75 (and local gasoline to P40) because of the very weak dollar. Higher oil prices will stop any slight improvement in the US economy. And the dollar is going much, much lower. In addition, US interest rates are going up as fast as oil prices.

US government-debt interest rates are at a six-month high because the financial markets are convinced that current policy is going to create massive inflation in the year to come. The economic-stimulus program is not stimulating the economy, and it is creating the potential for historically high inflation rates, maybe 10 percent or more. That is why oil and commodity prices are going crazy. And as the dollar depreciates, the US stock market will soar as stocks become increasingly cheaper for foreign money to buy.

The Philippine government is making the same gamble that the USA is making. It is betting that “stimulus” will offset any inflation risks.

A weaker peso in the current global environment will send local fuel prices (and local inflation) skyward, as happened last year. It is betting that a US recovery and a weaker peso will increase our exports. If the government is wrong, the local economy will sink like a rock in deep water.

What the government should do is appreciate the reality of the incredible strength of this economy given the global situation. The government should do all it can to strengthen the peso to true free-market levels to offset the decline of the dollar and resulting higher commodity prices.

Gambling about and tying the Philippines to the US economy makes no sense and could create an economic disaster.

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