Thursday, 9 July 2009

It's going to get ever better

Outside the Box
John Mangun
Business Mirror

The Philippines may be entering the best 12 months in recent memory. That is, if we can concentrate a little more on the Philippine economy rather than on the President’s anatomy.

The very low inflation numbers, due primarily to the dramatic decrease in crude-oil prices, places the country at the threshold of a marvelous year ahead. As I have stated many times, inflation is the No.1 economy killer for the Philippines.

Now there will be those misguided individuals, some of the “experts” who will tell you that these low inflation numbers is an indication that there is trouble ahead because low inflation signals a reduction of spending. That is, no one is buying and sellers have to reduce or hold prices steady to attract buyers. More on that later.

Other than occasional supply problems with certain commodities, rice, vegetables, meat products, prices, and, therefore, inflation, in the Philippines are driven by external factors. A very weak peso drives up many prices because of the high foreign content of certain products. Most critical though is the cost of fuel as we witnessed in 2008 when high global oil prices drove the local price of almost everything much higher.

Why do I maintain my positive outlook for the economy? Simple. The economy is growing, that is, continuing to produce wealth. That wealth is used to buy things and because of low inflation, we can continue to buy as much or more than we did previously. That buying, in turn, creates more wealth. It is a wonderfully productive cycle. And perhaps the most important aspect of this cycle is that it forms the basis of stable, sustaining, and sound economic advancement.

Look at the recent Standard & Poor’s ratings. While the “experts” are casting about for anything that can justify their silly gloom-and-doom scenarios, S&P maintains a “stable” rating. S&P is concerned though that the government must increase its revenue collection. Fair enough. And how better than through the collection of the value-added tax as buyers purchase more.

The politicians and their experts keep saying that the only solution to higher economic growth is a great increase in government spending. This would be disastrous. You cannot have both a balanced budget and increased spending. The solution is private consumption. And once the public finally understands that the economic world is not crashing in the Philippines, they will increase their spending. This consumer confidence will increase steadily over the next 12 months.

What Moody’s and the rest do not understand is based on their ignorance of the Philippine economy. That is why they are worried about the potential of “deflation” as inflation goes very low. Let me explain.

Property prices in the USA have fallen and are continuing to fall like a rock. The main reason is that real- estate companies are heavily in debt. Overseas, property companies borrow all the money they need to develop a property. When demand is reduced even slightly, they must drop prices to get any cash they can (even if they have to sell a breakeven or less) to pay off the loans. Not true in the Philippines.

You see, Moody’s and their “experts” have never been in the Philippines long enough to see the real economy. Do you remember 1997-1998? Real-estate sales died. Construction stopped. I remember holding office across the street from one of Megaworld’s five-star condos in Makati still under construction. For two years it looked like there were only two workers employed on that project. Megaworld spent very little, kept their bottom line intact, until things got better. That would never happen in the USA since the loan payments would force them to finish construction to then sell to raise cash.

When the Asian crisis hit, property buyers walked away because wealth creation stopped and the buyers did not have the money to purchase. But a funny thing happened that Moody’s would never understand. Selling prices did not go down for the projects of the major, financially sound developers. There were no bargains to be found. The developers just waited until the buyers had money a few years later and then selling picked up, but not at bargain prices. That would never happen in the West because, actually, the Philippine economy is more stable than many of those in the West. That is why we get the “stable” rating; the UK gets the “negative” one.

I am not completely happy with the decision to continue to lower interest rates. The Bangko Sentral ng Pilipinas and Department of Finance are taking this action in the hopes that a weaker peso will keep the value of remittances high to then push spending. Fair enough. However, my fear is that a sinking dollar and resulting higher oil prices will offset any benefit because of increased inflation. Therefore, the peso could breach 50 if the dollar holds steady and oil prices do not rise. If they are correct that the dollar will not fall for at least six months, then their strategy will be good as reduced borrowing costs will make for better corporate profits and reduced government debt service costs.

Money is coming in; prices are holding low. Go out and buy something. It is good for the economy. If you and millions of others do also, the third and fourth quarter economic growth will far exceed everyone’s expectations.

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