Tuesday, 2 March 2010

The reality of the Philippines

John Mangun
Outside the Box
Business Mirror
http://www.businessmirror.com.ph/index.php?option=com_content&view=article&id=22474:the-reality-of-the-philippines&catid=28:opinion&Itemid=64

Too often when I pick up the newspaper and read business/economic stories, I feel as though I am reading from a fantasy script, something from an old Joey de Leon-Rene Requiestas movie. By that, I mean something completely outside of reality.

At times, the thinking from some people in the Philippines is so detached from the real world that the Philippines must be on some planet other than Earth. On the other hand, some of the discussions make me believe that these people think the Philippines is right down the highway from Chicago or perhaps is a small US state wedged in between New York and New Jersey.

Yesterday newspapers covered comments from the Philippine Exporters Confederation (Philexport) criticizing government for allowing the peso to further strengthen against the US dollar. Philexport warned “this policy could revert the industry to a negative growth this year.” This falls under “What planet are you on?”

Surely there must be someone at Philexport that can understand or find out how foreign-exchange rates work. For 2009 the US dollar depreciated by 16 percent against a basket of major currencies. By the dollar depreciating, that means that other currencies have to appreciate; like opposite sides of a balance scale. The peso in 2009 appreciated less than 10 percent. Had the Bangko Sentral ng Pilipinas (BSP) any sort of a strong-peso policy, the peso would have gone up, at least as much as the dollar went down. But in truth, the BSP has pursued weak-peso policy to the extent that it spent some $7 billion not supporting the peso, but supporting the dollar in the local currency market.

But then again, I am probably wrong. Maybe it is a good idea to adjust the peso rate to help the export sector, the outsourcing companies, and those overseas Filipinos who send money back to the country. The BSP should then make sure that the peso goes to 65 to the dollar. That will certainly make the exporters happy.

Of course, after a month at 65 to a dollar, the transportation sector will go crazy with P100-a-liter fuel price and start complaining. Then the BSP can put the peso at 25 to a dollar. Fuel costs drop to P20 a liter and all our other imports drop in price. The BSP can set a policy of extreme foreign-exchange rate swings and every month at least one part of the economy will be extremely pleased, at least until the following month.

Or perhaps the best strategy is for all the different sectors to adjust to the fact that the BSP is doing a fantastic job of keeping the peso very stable and at an exchange rate that balances the total economic needs of the country and does not give too much favor or too much pain to any particular industry sector. Welcome to planet Earth.

It does not matter if you paint a mango bright red; it is still not an apple. And the Philippines is not like just any other Western economy. Whenever you read economic data being used to make a point, keep in mind that the data are suspect and, therefore, the conclusion is suspect also.

For example: The government budget deficit as a percentage of gross domestic product (GDP) is an area for concern. Or not. Theoretically, our budget deficit stands at 57 percent of our GDP versus 41 in Singapore. Are you sure? I can trust the Singapore numbers. That government has an inventory and historical record of every tree that is growing on publicly owned land.

How much of the Philippine GDP is off the books, not recorded in the government data? If only 25 percent of the GDP is not included in government numbers, then that budget-deficit number is actually slightly higher than Singapore and much less than any European Union country. When was the last time you received an official receipt from a doctor, a sari-sari store, in Divisoria, a taxicab, an auto-parts store, or a hundred other kinds of businesses that we buy from every day? How many people do you know who buy and use purified water? Ever seen a receipt from those purchases? One Australian economic think tank estimates that 40 percent of the Philippines’ GDP is off the books. If true, our budget-deficit problem is better than most of the world and certainly better than any major Western economy.

This is the Republic of the Philippines, not the 51st US state where government and economic bookkeeping are more complete and accurate.

Judging the financial stability and soundness of the Philippines can be done in the real world by looking at two things. When the government goes to the global financial markets to borrow money, what is the response? They love us. We pay a higher interest rate than other countries. We pay on time and in full. You do not loan money to people and countries that are having economic problems. That is the way the real world functions.

We have a tiny little stock exchange that accounts for zero percent of the economy. But foreign money is not stupid. Net foreign inflow to the Philippine Stock Exchange in February was some P3 billion. Read this from The Economic Times: “With a net withdrawal of $754 million in 29 trading sessions [since January], India trails just behind Taiwan [$2,488 million] in terms of foreign outflows. Indonesia and Thailand, with net outflows of $238 million $294 million, respectively, are among the other Asian markets that have seen foreign-capital outflows since the beginning of this year.” But not the Philippines.

That is the reality of the Philippines, and the Philippines is not necessarily what you read about in the newspapers.


E-mail comments to mangun@gmail.com. PSE stock-market information and technical analysis tools provided by CitisecOnline.com Inc.

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