Tuesday, 8 June 2010

What is the future for the economy?

Written by John Mangun
Outside the Box
Business Mirror

Being positive about the future of the Philippine economy puts you in a lonely place, does not make you any friends and gets you nasty e-mail, particularly from some balikbayan in the US. But someone has to do it.

Newspapers yesterday carried many stories about various favorable developments happening all around us. A representative from the Bank of Tokyo told Trade Undersecretary Elmer C. Hernandez that investors are bullish about the Philippines. Semiconductor and Electronics Industry in the Philippines Inc. president Ernie Santiago said their industry is ready and can drive into sustained high growth with an aggressive marketing campaign. That is the first good word from this industry in a year or so. Another overseas company is opening a new call center, the first Australian collection company to come to the Philippines. Philippine Savings Bank, the country’s biggest thrift bank in terms of capital, expects to pay record cash dividends totaling P804.85 million this year. The US is facing a nursing shortage of over 100,000 that is expected to climb to 1,000,000 in 10 years.

And, of course, the Philippine Stock Exchange dropped significantly as local traders looked to the New York stock market for guidance on what is happening in the Philippines. Interestingly, the biggest up day the Dow Jones has had in a month was after the Philippines announced a 7.3-percent jump in first- quarter economic activity.

One story that was almost ignored was the release by the National Statistical Coordination Board of the composite Leading Economic Indicator (LEI). The indicators (from the Philippine Star) “posted a second consecutive increase for the quarter, improving to negative 0.348 in the second quarter from a revised negative 0.533 in the first quarter of 2010. This marks the second steepest ascent of the composite LEI series since the third quarter of 1986.”

While leading indicators are not that accurate in the Philippines, it is interesting to note that the positive indicators posted a very sharp and steep incline. The indicators are composed of such data as total merchandise imports, consumer price index, wholesale price index, tourist arrivals, stock price index, electric-energy consumption, hotel occupancy rate, and money supply. The positives gave us a look at the future but the negative indicators may be even more important. These are number of new businesses, terms of trade index, and foreign-exchange rate.

While the number of new businesses being set up may not be as high as in the past, I do not think this is that important in comparison to the expansion of the existing businesses. It is hard to pick up a newspaper and not see story after story of some of the household names in the Philippines expanding their operations.

The “terms of trade index” tell us how much we are exporting in comparison to the amount of our imports. There is little that can or even needs to be done about this. The Philippines will always, in the foreseeable future, be a net importer of goods. That is the problem of being a nation of 7,000
islands in the middle of the ocean with limited natural industrial resources. A more important consideration would be the balance of payments, which shows if money is flowing into the country or out to foreign shores. Here we know that the Philippines is positive because of $16 billion in remittances and nearly $8 billion to support domestic outsourcing operations.

The “foreign-exchange rate” being categorized as a negative leading indicator is both interesting and surprising to me.

Of all the areas of the economy that has a direct influence on our daily lives, none is more controversial than the value of the peso. Exporters and remitters want a “cheap” peso because it adds value to their finances. Importers and most end-users want a “strong” peso because it reduces prices such as for imported raw materials as well as finished goods.

It is a darned-if-you-do, darned-if-you-don’t situation. Sort of like the old joke: “Why did you marry such an ugly woman?” “Because if she leaves me for someone else, who cares?” “But what if she doesn’t leave you?” “She’s a great cook!”

In comparison to other similar currencies, the peso is trading virtually unchanged. The peso-baht (Thailand) rate is almost the same as in 2007. Yet in comparison to the dollar, the peso is probably too “cheap”

Since early 2008, the peso has depreciated against the dollar by about 15 percent. At the same time, the euro has depreciated against the dollar by 25 percent. The peso has also appreciated against the euro by 22 percent. Against the yen, the peso has appreciated by 35 percent in the same time, while the dollar is up 25 percent against the yen.

The point of all these numbers is this. Against major currencies other than the dollar, the peso is showing strength, almost the same amount of strength as the dollar. It is unlikely that the dollar will show weakness in the future against the major currencies as they are all about the same; intrinsically worthless currencies issued by bankrupt countries. The only currencies of value right now are gold and those currencies issued by financially sound nations like the Philippines.

Once gold breaks and holds the $1,250 price on its way to $1,650, there will be a strong movement into countries like the Philippines and Thailand because of higher interest rates and greater investment profit opportunity.

If I am correct about an appreciating peso (and baht, among other currencies), foreign capital will begin to rush into the Philippines to buy the peso, the stock market, property, and make investments to take advantage of the “cheap” peso.

The Western press can spin the news to seem positive all they want. Reality is still real. As of this week, the total US government debt will reach 100 percent of the US gross domestic product. Now, tell me again about the future of the Philippine economy.

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

1 comment:

  1. A lot of market forces has pulled the PSE down for the last two weeks but today and yesterday was good enough. The expected trend is for the PSEi to reach 3500 by August which will be achieve if the current uptrend continue even amidst world jitters like the Euro Zone debt crisis(mind you other nations like Spain, Portugal, and Hungary are on their way too), The Korean conflict, and US oil spill and ongoing issues with the financial institutions.Let's cross our fingers and hope for the best for our our beloved Philippines