Tuesday, 11 May 2010

The Philippines is not like Greece at all

John Mangun
Outside the Box
Business Mirror

All eyes are on the election and its outcome. The past week saw cash pulled out of the Philippine Stock Exchange and the peso, in anticipation of the election and continued gibberish from some local “experts” about the situation in Europe, particularly Greece, and how it may relate to the Philippines.

Going into cash because of the election may make some sense, although the majority of the people have more faith in the Philippines being able to overcome a computer glitch than the financial elite. But there is some justification based on the movement of the peso.

The euro was hammered severely as Europe rushed to save itself from financial destruction. As a result, two other currencies benefited—gold and the US dollar. At last count, the bailout of the European Union starting with Greece is going to cost $645 billion. For that kind of money, the EU could simply buy Greece, bring in the Disney people to turn it into an amusement park, and keep all the underworked and overpaid Greeks on the payroll. Of course, there really isn’t $645 billion in cash available until the EU printing presses go on overtime to print the money.

Comments you have read lately about similarities between Greece and the Philippines are absolute nonsense born out of complete ignorance or simple stupidity. If you reacted because of these false comparisons between the Philippines and Greece, you have been made a fool of.

One comment was that Greece and the Philippines both have problems getting their citizens to pay taxes. True. But that has nothing—repeat, nothing—to do with the financial collapse of Greece. If all the Greeks gave everything they have to the Greek government to pay its debts, their country would still be bankrupt and financially dead.

The other most recent comment I read was that we are going the way of Greece because our debt-to-gross domestic product (GDP) ratio is about 60-plus percent versus our Asean neighbors who have a ratio more in the 40-percent range. Yes, that is true. But it means nothing for two reasons.

One, the debt ratio in Greece is 130 percent. That is a long way from 60 percent. Second, the real problem for these financially genius countries in the West is that most of their debt is being held by foreigners. One falls, they all fall. Italy owes France an amount equivalent to 20 percent of France’s GDP. Combined debt from all the PIGS (Portugal, Italy, Greece, Spain), France has loaned over 40 percent of its annual GDP to bankrupt countries, By comparison, (from Standard & Poor’s), “The large share of Manila’s foreign-currency-denominated bonds is in the hands of local investors, and the small share of peso-denominated bonds in the hands of nonresidents.” In other words, the Philippines has not sold its financial soul to the foreign financial institutions like Greece.

Want some other comparisons that the “experts” have not mentioned?

The gross international reserves or GIR of Greece is about $5 billion. The Philippines GIR is $47 billion.

Greece has a current-account deficit of 9.7 percent of its GDP. The Philippines has a current-account surplus of 5 percent of its GDP.

Greece has a debt-to-GDP ratio of 130 percent; the Philippines has around 60 percent.

Greece has a budget deficit-to-GDP ratio of over 13 percent; the Philippines has less than 5 percent. The ideal would be about 3 percent.

Since the financial numbers between Greece and the Philippines do not show any comparison, next the “experts” will be telling us that we are headed down the same path because Greece has a lot of islands and so do we. And the Greeks enjoy singing and dancing as much as Filipinos do. Obviously because of these close similarities, our financial situation is the same as in Greece.

However, for all the talk about “debt,” the real issue is paying the debt. For 20 years, the Philippines has not come close to defaulting, no matter how serious the international and domestic situation ever became. That puts us apart from others that defaulted or were bailed out, such as Russia, Mexico and Argentina, for example. Countries on the current default list, aside from the PIGS, include Argentina, Venezuela, Iceland, Vietnam, Bulgaria, Britain and, to a lesser extent Japan, because its debt is held domestically.

The serious issue, though, is how these national debts are going to be paid. If someone owes you money and does not have the cash, you can be paid off by taking the TV set or other hard assets. Countries cannot do that, although one German legislator suggested Greece sell an island or two to pay some of its obligations.

What governments do is print money. That is why the euro virtually crashed last week with funds moving into the dollar and gold. Note that gold is another currency, not a commodity. Commodities, by definition, are those goods that are intended for direct use or consumption. Gold, just like other currencies, is not eaten, turned into clothes, used to build a house or otherwise consumed. It is a currency, and gold has been reaching historic highs against the euro and near-highs against the yen as funds flee from those other currencies. And the dollar will suffer the same fate soon. But not the peso.

Soon we will see a disconnect of the peso from the dollar, and the peso will trade and be priced on its own merits and value. When that happens, the stock market as well as foreign-currency inflows will resume skyward. Yes, we need a good, successful election also.

Ultimately, what the “experts” do not understand is that the world has changed in the last two years, and that now, the underlying financial value of a nation is found in its currency.

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

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