Tuesday, 6 April 2010

Second-quarter thoughts

John Mangun
Outside the Box
Business Mirror
http://www.businessmirror.com.ph/index.php?option=com_content&view=article&id=23750:second-quarter-thoughts&catid=28:opinion&Itemid=64

As we enter the second quarter of 2010, it might be helpful to look back at the first quarter, creating some sort of a report card for the economy and the nation.

But that would be completely boring and would simply be repeating all the things that you already know. The stock market is up. The peso is up. Remittances are up. Exports are up. Imports are up. Foreign fund inflow is up. Investment is up. What else do you need to know?

Maybe it would make more sense to look at what the second quarter might hold for the nation.

The big event for the next three months will be the election and inauguration of a president and countless other national and local officials. Unfortunately, again the election focuses on character rather than competency, on popularity rather than policy.

Almost everything connected to the political process makes the election for president a beauty contest. Although it seems that everyone complains about that fact, everyone encourages the beauty-pageant mentality. The media breathlessly announce the latest opinion polls on the candidates. And the survey itself does not do anything to enhance the political discussion or help change the way voters choose a candidate. The only question asked is “If the elections were held today, whom would you most probably vote for?”

Voters are the most important and least respected part of the political process. If the surveys were honest, they would ask questions like “What do you think of Candidate A’s singing?” or “Which candidate has the best campaign colors?”

Why not ask the voters “Which candidate has the best ideas for improving the economy?” or “Which candidate has the best ideas for improving peace and order in Mindanao?”

Two things would then happen. The voters might start thinking about issues and policy and not about popularity. Further, if the candidates received a low rating on “The Issues,” they might start addressing the issues with solid and precise policy ideas instead of thinking about which starlet would better dress up their campaign sorties.

When it comes to policy, we get general statements that “Government must do more to improve the economy.” When they move into specifics, worst case is to form some sort of committee to talk about it, hold hands together, and hope real hard for an effective agenda. The best case of policy discussion goes only a little farther. “We need to help small and medium enterprises with additional government funding and assistance.” Okay, what exactly does that mean and how do we do it efficiently and effectively, and how is it paid for?

Electing government leaders based on something other than clearly stated policy ideas and programs is fine. However, then no one has the right to complain when the elected official does not have any ideas or when those ideas are a failure. You get what you pay or vote for.

On to a more enjoyable topic. The Philippine stock market is poised and getting ready to reach to and break above the historic high. It is clear in the last three months that the economy has generated an abundance of excess cash that is finding its way into the stock market. Forget all the expert nonsense of whether or not stock prices are too high or too low. This rally is not about current valuation. It is all about future corporate value. It has taken hundreds of millions of pesos of investment in the Philippine Stock Exchange to raise prices this high and it will takes hundreds of millions more over the next months to go even higher. But it is going to happen.

Why is money flowing into the stock market? Well, excess cash is not going overseas to buy condos in San Francisco, that’s for sure. In spite of the poverty problem, overall per-capita income is rising in the country. More money in the broad economy means more money in the stock market. Investors are looking not only at future corporate earnings, but they are looking at companies increasing their return on equity and their return on investment. What that means is that local Filipino firms are making more money based on the amount of worth of their company. As a company makes more return on the amount of capital in the company, the value of that company becomes greater reflecting in a higher stock price.

Finally, investors are looking at the amount of confidence local companies have in their own future. When you see large companies increasing their capital expenditure and making significant reorganizations in their structure, these are companies that are optimistic about the months to come.

Having said all these nice things about the Philippine economy, there is one factor that has been slow to rally, and that is bank lending. Interest rates have been very low this past year. Conventional wisdom would say that if the banks can borrow at low rates, then they would tend to be aggressive lenders. Not in the Philippines.

Bank lending has been stagnant in light of the increasing economic activity. While local banks are out of the internal financial markets for the most part, neither have they increased lending activity domestically. I believe that over the next three to six months, banks will move to put more money into the economy through their lending.

Bank earnings have been fine but not growing because of their restrained lending. The banks need to increase their business activity to keep pace with the general economic growth. Increased lending by the banks will in turn increase overall business activity.

The first quarter is history and it was a good beginning to 2010. The second quarter should be a continuation of this established trend.



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