Wednesday, 10 August 2011

What is different about the Philippines?

Business Mirror

There is a term, provincial thinking, for someone whose attitude and opinion, is supposedly limited and unsophisticated, not really aware of the big “real world” outside his own little space.

I think there should be a term opposite to that which describes someone whose attitude and opinion is so oriented to the outside that he does not connect to his environment.

How a country like the Philippines can avoid financial disaster and even prosper during the difficult past few years when the West is collapsing is obvious to me, confusing to others. The government would like to believe it is because of its sound economic sense. Others might say it is because businesses here in the Philippines are more financially prudent. Another might contend that it is only the grace of heaven that we have overseas workers and call centers.

All those might play a role but it is simply that Filipinos manage their personal finances differently than in the West. That is what has saved this economy; not the government, not the private sector, and not divine intervention.

Around 1995 or ’96, a bar opened on the “poor” end of Makati Avenue near J. P. Rizal Street called “Planet Beer.” It was one of the first places I remember that had a huge list of imported beers from all over the world. Prices were very high. But the few times I visited, drinking my SanMig Pale Pilsen, the joint was full of young office workers, probably spending at least a couple of hundred pesos for a bottle of exotic beer.

When 1997 came and the peso exchange rate dropped so much, it did not take long for “Planet Beer” to go out of business.

If this situation had been in the US, they would have opened 400 branches, and then declared bankruptcy 30 years later during a bad economy, leaving $1.3 billion in unpaid liabilities. In fact, that just happened with the US company, Borders bookstores.

You might think paying P350 for a bottle of imported Mexican Dos Equis beer is sort of foolish but not if it is done Filipino style. You see, virtually all of Planet Beer’s customers were paying for their beer from their last paycheck, not their next. Buying from your next paycheck is using borrowed money and can be unlimited. Buying from your last paycheck is a part of prudent personal finance. Splurging with earned money is acceptable; with borrowed money it is unforgivable. And ruins the economy.

Because its customers were not borrowing to buy, then Planet Beer also would not borrow to increase business, following a complete business model based on debt. Like in the US.

That’s the reason we survived 1997 and why we are more than surviving in 2011. Why is it so difficult to understand how the Philippines is different?

A man you might have heard of, Randall Tiongson, sent out a Tweet the other day. Mr. Tiongson is a devout man of God and an honest expert on personal finance as well as director of the Registered Financial Planner Institute Philippines.

He wrote, “Headlines-US: Looming debt crisis. Europe: Deep economic woes. UK: Street Riots. Phils: Furor over an art exhibit. Hm, something wrong eh?”

In one sense, he is absolutely correct. With the rest of the world seemingly in ruins, we are caught up in a social issue that might seem unimportant by comparison. But the reason we can take time for the art issue, unlike perhaps the way we would have a decade ago, is now we can afford to.

A group of specialized call-center employees was out for Friday night beer and pulutan talking about how ordering sashimi from blue-fin tuna is bad. Overfishing and all that.

Worrying about the blue-fin tuna as well as the art exhibit is a luxury we can now pay for. If the “tuna worriers” were out looking for a job, worrying about their employment, the poor tuna would be a very low priority and only a tasty meal.

There is more to be done. However, the bottom line is that the Philippines has endured for the last 25 years to achieve some positive measure of success that gives the nation the opportunity to engage in activities beyond daily life struggles. Most important and what makes this country stand above so many others, the accomplishments were built on hard work, not borrowing.

Appreciate the fact that this is not the Philippines of 1987. The country has come a long way and can now afford to worry about tuna and art exhibits.

On a personal note, you can follow me on Twitter @mangunonmarkets.

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Monday, 8 August 2011

S&P, the Peso, the PSE

Business Mirror

Standard and Poor’s US debt downgrade

The United States is the Amy Winehouse of national governments. Their national anthem is now “Spending Rehab” with these lyrics:

“They tried to make me go to spending rehab, I said, ‘No, no, no.’

My finances used to be in the black but now the ceilings’s raised and know, know, know.

I ain’t got the political will and if my daddy China thinks I’m fine, S&P’s tried to make me go to spending rehab, I won’t go, go, go.”

The “experts” and the politicians refuse to understand what the issue is about. It is not about the ability to repay the US debt, as such. It is not really about debt. It is about government deficit spending funded through debt. Former Federal Reserve Chairman Alan Greenspan said on Sunday about the chance of a US default following S&P’s decision to downgrade the credit rating: “The US can pay any debt it has because we can always print money to do that. So there is zero probability of default.”

Printing US dollars causes global inflation. Brazil’s inflation rate is 6.7 percent and increasing each month. Their currency is up 47 percent since 2008 and 11 percent in the last 12 months. From a 7.5-percent gross domestic product increase in 2010, the forecast for 2001 is about 4 percent. And Brazil imports zero percent of its oil needs. Brazilian Finance Minister Manteca said last week, “We seem to be entering a new stage of the currency wars.”

The US refuses to stop spending money that it does not have. The world will not buy all the debt the US wants to borrow so it will move into more Quantitative Easing, with the Federal Reserve creating new money to buy US government debt. QE3: Money printing for as long as it takes and as much as it takes to devalue the dollar to pay for the deficit spending.

The Philippine peso

I feel sorry for Manila bus drivers. They have too many priorities. Stop exactly where the passengers want to get off no matter how difficult. Stop where the passengers want to board no matter how illegal. Follow the MMDA rules. Get to the terminal before the other buses. Go as fast as possible to increase revenue. Pray that robbers do not strike. And if possible while tending to all these important issues, try not to crash the bus.

The government’s peso and monetary policy may be secretly being created by a Manila bus driver.

Keep the peso low to please the exporters, overseas workers and the call-center companies. Keep the peso high to keep imported product prices like oil low. Put interest rates at a higher level to help keep inflation low. But that strengthens the peso and may hurt economic growth. Drop interest rates and the peso devalues, raising inflation because of the higher cost of imported products. And, if possible, while tending to all these important issues, try to keep the peso stable. This is thinking just like a bus driver.

The most practical measure of a currency’s relative value to other currencies is the Big Mac index created by the Economist magazine in 1986. As of July 2011, the peso is undervalued by 32 percent. That means the peso should be trading at 29 to one dollar. Please don’t go crazy yet.

Taking into account the lower labor costs in the Philippines and the work time that it takes an average Filipino to be able to afford a Big Mac, the peso is overvalued by about 30 percent. In other words, the peso is right where it should be without artificial manipulation. However, currencies are relative and as the dollar depreciates, the peso must be allowed to appreciate. Otherwise, we will wind up with a currency grossly undervalued. That’s good for the exporters and call centers and bad, very bad for the other 90 million Filipinos who buy locally.

The peso predictably will appreciate through the year.

The stock markets

It has been a rough ride for market investors these last few days. The PSE is reacting like a child who sees his kuya passed out on the floor from too much gin and pretends to be drunk just like the big boys. PSE buyers are sitting on the sidelines waiting to buy heavily at Support levels, now around 4,350. The PHISIX index can go as low as the 4,150 area before long-term damage occurs. Markets like the PSE including Thailand, Indonesia and Malaysia will soon turn higher with great profit opportunities.

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