Thursday, 26 August 2010

Trust translates to prosperity

Written by John Mangun
Outside the Box
Business Mirror

Where have all the “gloom-and-doomers” gone?

For more than one year, all these “experts” with negative attitudes about the Philippines were featured prominently on the opinion pages of the local newspapers. Now, they have suddenly disappeared. Has the situation and condition changed so dramatically that these experts are now forced to turn their attention to other topics? Yes and no.

The global economic and financial meltdown has had virtually no impact on the country. And what little impact it had was more than offset by local growth and prosperity. This was obvious last year when corporate earnings continued to grow.

Yet even during the first half of 2010 there was a caution in the business community that was equally obvious. The first-quarter 2010 economic-growth numbers were very good, but a nagging suspicion about the sustainability of that growth was strong. Now well into the third quarter, everything has changed.

The longer-term problems facing the Philippines—food security, mediocre educational standards and weak employment growth—are still with us. However, there has been a radical departure from the general sentiment of only 12 months ago.

In about two months, the Americans are going to elect one-third of their Senate and all of their Congress. While Obama has been president for less than two years, the economic policies of the US are actually put in place by the legislature that has been controlled by the Democrat Party for the last four years. This is different than in the Philippines, because here, the Executive branch, led by the President, is the group that determines the economic focus of the government.

The US public’s approval rating for Congress and its economic policies, in particular, are at historic lows. These polls about approval ratings for policy are somewhat distorted. By that, I mean that when people answer these polls, they are actually speaking less about “approval” and more about “trust,” and more specifically about confidence.

The longer-term problems for the US economy in regards to its unmanageable debt burden are not going to go away if the US electorate changes the party in power. It is all but impossible to see a situation where the US is going to be able to pay its debt obligations without a massive decrease in government spending, reducing the overall standard of living, or with a huge devaluation of the dollar pushing inflation to historically unseen levels. But a change in who is running the legislature may give time for the disastrous result of the Democrat economic programs to be smoothed out and slightly lessened.

Business does not have any confidence in the Obama/Democrat administration. The private sector is holding in reserve more than $2 trillion that could be used for business expansion and job creation. For months, through the catastrophe of this US administration, the private sector has stopped spending. An economy cannot grow unless the private sector spends its profits and excess cash. The government can never replace the private sector as an engine for economic growth.

We may well see by the middle of 2011, this hidden cash begin to come to the surface and a change in the direction of the US economy.

What does this all have to do with the Philippines?

From the Philippine Star: “Business confidence for the fourth quarter has hit an all-time high on the back of higher-than-anticipated economic growth, stronger peso, robust overseas remittances, benign inflation, strong export earnings and smooth transition of political power.”

All of the factors are accurate and do come into the play in making business feel more confident for the future. But as I mentioned above, confidence is really all about trust, and specifically trust in government.

While not interested in debating the success or failure of the past administration, it is no secret that there was a confidence problem brought about by a lack of trust in the government.

Trust and, therefore, confidence in the general environment that a business has to operate in translates into genuine plans and action. The Employment Outlook Index for the fourth quarter 2010 is at plus 24 percent. This is the highest the index has ever reached since the Bangko Sentral ng Pilipinas started this quarterly survey in 2001.

When you read daily about company after company planning on spending a billion pesos here and a billion pesos there for new projects and expansion, you can clearly see the results of this newfound trust in government.

The stock market went up 50 percent in 2009. But the stock market is a cash market. It takes an investor 10 minutes to commit funds, and those funds can easily be withdrawn in another 10 minutes.

However, when a property company funds a P10-billion project, spending a few hundred million just for a feasibility study, that project cannot be turned off on short notice without a substantial financial loss.

No one at this point can speak of the competency and capability of the Aquino administration. It is too soon and little in the way of economic policy has come forth. Yet there is no doubt that trust and confidence in the government has increased. The private sector has the wisdom, experience and the capital to drive the growth of the economy. What it needs is a non-hostile environment to do its job. And the confidence that the government will back sound, ethical business practices in word and in action for both the private and public sector.

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