Thursday, 1 September 2011

Bad policy means bad results

Business Mirror

THE latest economic numbers for the second quarter were disappointing [see "Q2 growth a disappointing 3.4%"] but they should not have come as any surprise. If government economic policy is designed for 1991, then it should not be a surprise that those policies are unsuccessful in 2011.

The government explained that the problem of slower growth lies with the economy being “buffeted by headwinds from the European debt crisis and the fragile recovery of trading partners.” And “external trade has been lackluster at best.”

Let’s see. The Europeans and the US have had a debt crisis since 2008. The Philippines’ Western trading partners have had no meaningful economic growth/recovery since 2009. So here we are in 2011, facing the same issues as for the last three years, and the government is surprised that gross domestic product growth did not match forecasts.

It must be said one more time: the export business was terrible, is terrible, will continue to be terrible. When is the government going to figure that out? Exports are a break-even proposition and the best we can hope for is to keep it going to keep the jobs it currently has. But forget about growth.

Therefore, alternatives must be found to make up for the lack of exports.

Consumer spending once again saved the day. The government’s public-private partnership (PPP) could have made an important impact on the economy. But PPP is R.I.P. for the time being. It will be at least nine to 12 months before any economic results will come from PPP.

Perhaps it was just coincidental that a couple of weeks ago, the government announced that the Philippines could be a net exporter of natural gas if we could just get the United Nations to designate the Benham Rise area east of Luzon as Philippine economic territory. “The country’s claim over Benham Rise is ‘very relevant’ because scientific surveys indicate minerals and natural gas in the area.”

Methane hydrate is basically frozen natural gas much like “dry ice” which is the solid “frozen” form of carbon dioxide. The Japanese have discovered numerous deposits of methane hydrate in their waters. In fact, there are dozens and dozens of huge proven deposits around the globe, some on dry land. The Japanese have been working unsuccessfully for 16 years through a government/private/university corporation to figure out how to harvest it. The latest estimate is that by 2018, they may have figured out how to get the stuff out of the ocean. It may take another 10 years to put it into commercial production.

The reason I mention all the ridiculous hype about Benham Rise is that the Philippines does have a huge area, filled with natural resources worth trillions of dollars seeking foreign investment. It is called the island of Mindanao.

The President and his business entourage are in China to tell the Chinese that the “Philippines is open for business.” Well, I hope the Chinese believe that because the facts seem to indicate that the Philippines is open but the lights are off.

The Chinese have globally invested hundreds of billions of dollars in the last few years. But if the President believes the Chinese will build their next rubber shoe or iPod factory in the Philippines, he is sadly mistaken.

The Chinese want to invest in natural resources like we have an overwhelming abundance of in Mindanao. But here in PHL, the Supreme Court can issue a writ of kalikasan, allowing any and every foreign-funded nongovernmental organization, ego-driven church bishop and do-gooder attorney looking for publicity to petition, seeking to stop mining operations in, you guessed it, Mindanao.

Never mind that these mining operations have complied with every law, national and local, gotten the free and informed consent of the owners of the land, the indigenous people, spent millions of dollars and years to comply, and still can be subject to a court petition, which, in effect, overrides and cancels the law of the land.

The 2011 reality is this. The Philippines does not have anything to offer for foreign investment, except the outsourcing business and mining.

The consumer market is not developed enough for foreign manufacturing to be set up for domestic consumption. If you want to manufacture for exports, you go to China.

The banking sector is robust and large enough without any foreign entry.

The Constitution directly and indirectly, prohibits substantial foreign investment in real estate, construction, retail, transportation, and the media. Tourism of all types, including medical, is too small. So what is left for foreign investment?

We need one foreign investment thrust with all government policy properly focused to insure beneficial results for all. Focus on mining. The Chinese will come.

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Tuesday, 30 August 2011

Global financial update

Business Mirror

FAR be it for me to assume that I am the best source of information and analysis on the global financial mess. However, these last few weeks have seen movements in the markets that are almost unprecedented.
We are constantly going from periods of seeming calm to times of chaos. There is no way to stop from asking in a loud voice, what the heck is going on?

Is the US having any sort of economic recovery? Is the debt situation in Europe ready to explode? Are economies like the Philippines on the brink of falling off the cliff? What is going to happen next?

It is almost impossible to get a sensible explanation and a reasonable answer to these questions. I will try.

Federal Reserve Chairman Bernanke said this on Friday: “Although we expect a moderate recovery to continue and, indeed, to strengthen over time, the committee has marked down its outlook for the likely pace of growth over coming quarters.” Sorry. I promised a sensible explanation and Bernanke is not the one to go to for that.

The US economy has grown about 1 percent in the first half of 2011. That is so far below a “moderate recovery” as to make Bernanke’s statement a joke. I guess a “bad recovery” is when the US economic numbers go negative.

But growth is only half of the economic picture, the other being inflation. While Bernanke can say, “We expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent.” That may be a nice statement to make but it is unrelated to reality. The July 2011 US inflation rate was 3.6 percent. With 1 percent growth and 3 percent inflation, the US economy is going backwards. One heck of a moderate recovery you have there, Mr. Chairman.

But maybe there are some solutions. Not exactly. “I do not expect the long-run growth potential of the US economy to be materially affected by the crisis and the recession if—and I stress if—our country takes the necessary steps to secure that outcome.” And what are these “necessary steps?” “The quality of economic policy-making in the United States will heavily influence the nation’s longer-term prospects.” Game over, folks.

The only solution to the US economic problems rests in the hands of the politicians. Good luck. It was the “economic policy-making” of the government that created the problems and Bernanke expects them to solve the problems. The US will continue its downward spiral until the current policy-makers (read Obama administration) is thrown out of office in late 2012.

Europe has only two choices: selectively cut nations, such as Greece and Portugal, from the euro currency or collectively pay their bad debts. Nations can only use currency devaluation when foreign debt becomes overwhelming. With gold-backed money, countries ship out the physical gold to pay debts, reducing their ability to buy imports. Now it can only be done with devaluation. So, Greece and other problem nations must leave the euro and devalue their own currencies or Germany and the financially sound economies must pay the bills. German taxpayers are a lot upset about that final prospect.

The Western banking system is hanging by a thread because of these bad debts. Either choice, abandonment of the euro or Germany paying the debt, carries enormous risk and problems.

The Philippines must start instituting some long-range economic plans. The administration mindset is that if we wait long enough, everything will return to the way it was before. Nonsense.

We must have an Asian-oriented tourist business and that means tourism-related infrastructure spending. It means incentives for tourism projects funded by local companies. And it should be opening up and even privatizing Pagcor.

All those Filipino baby boomers living abroad need to be encouraged to come home to retire. It is better for them and better for the Philippines. The government spends millions encouraging foreigners to invest here. Why don’t they use some of that money to encourage overseas Filipinos to invest here?

There is a type of corruption that this administration is not worried about. It is the “corruption” of inaction. Talk to Filipino business people, particularly in the provinces, and you will hear story after story about government agencies sitting on their hands, not issuing government permits, not completing necessary studies, and doing as little as possible to help Filipino businesses to thrive, grow and prosper.

So what comes next? Sadly, expect more of the same in the West. And worry about the Philippines until this country disengages from the West and turns inward.

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