Thursday, 30 June 2011

Three deadly D’s

Business Mirror

The 1997 Asian financial crisis is distinctly different from what the world is experiencing today.

Interest rates in countries like the Philippines were high in comparison with rates in the West. Crude oil was trading at less than $20 per barrel. The average price of gold was just over $300 per ounce. In an effort to harness their economies to the West, countries like Thailand fixed their currencies to the US dollar.

Companies and individuals took advantage of the fixed exchange rate and lower offshore interest rates to borrow in dollars and spend in local currency. The problems came when it was time to service and repay those dollar loans. There was a shortage of foreign currency in all these countries because of overborrowing (not the Philippines) and they were bankrupt. Foreign lenders were not willing to, in effect, take local currency at the fixed exchange rate to pay the loans because they knew the Asian currencies were overvalued.

Note something important. The Asian financial crisis was not the result of a particularly defective system. It came because of specific policy decisions made by governments fixing currency rates and decisions made by Asian borrowers taking advantage of fixed exchange rates and lower international interest rates.

By contrast, what we have in 2011 is completely flawed economic system that is and will continue to change the global financial and economic structure.

Jason Hsu, chief investment officer at Research Affiliates, a US investment management firm, writes about the three deadly D’s at

“Debt, deficit and demographics is heading to the shores of all developed economies. It threatens to derail the lukewarm economic recovery and to alter forever the heretofore path of robust growth for the developed world. In a sense, debt, deficit and demographics will reset the world to a ‘New Normal,’ an extended period of lower economic and return expectations for the aging and debt-ridden developed world.”

The three D’s have created a new economic world order. The results have been a long time in coming, are totally a systemic failure and, therefore, are impossible to correct in the short term.

The demographic issue has created the debt and deficit problems. The “baby boomers” of the last half of the 20th century in the West and Japan made two mistakes. Rather than work hard for future prosperity, they voted for governments that promised and gave instant financial gratification through deficit spending. “Deficit spending gives an instant and immediate boost to gross domestic product, which can feel like prosperity and good government stewardship.” It is like using your credit card to buy something you cannot afford.

Carrying on with this “financial plan” over decades, governments were forced to borrow, incurring a staggering debt burden. And like the individual who only pays the monthly minimum on his credit card, debt repayment is continuously kicked down the road into the future.

Deficit spending and debt is not inherently a bad idea. It is a bad idea when both deficit and debt grow
faster than the economy. Government spending does not create economic prosperity or wealth. And when both government deficit and debt grow too large, they squeeze the private sector out of the financial markets as is happening now. The private sector loses access to capital, limiting business activity and economic growth. At some point you are forced to use food money to make the credit-card payment.

The demographics created the problem and the demographics are also the reason there is not a good solution.

“Boomers, who have controlled the elections and politics, have rationally chosen a path of more consumption today at the expense of the future generations. Voters and politicians alike would simply misinterpret the economic literature and assume more consumption today will drive more growth tomorrow. In other words, and as scientific as one can put it, the Boomers have screwed Generation X.

“It is projected that the support ratio in developed countries will decline from 3.5 working-age adults per retiree [now] to below 2 to 1 by 2050. In comparison, in 1970, the support ratio was 5.3 to 1. By 2025, at the height of Boomer retirement cycle in the United States, there will be 10 new retirees for each new entrant into the work force.”

During those years of building a massive debt burden, the Boomers did not create enough children to support their spending spree. “Not only does the future appear inevitably poor in aggregate, it also appears predictably unproductive.”

Countries like the Philippines will continue to grow and prosper as the developed economies decline.

“In contrast, emerging economies with healthy government and household balance sheets, responsible fiscal policies, and young labor forces will be the drivers for global growth and will compete with their developed counterparts for economic and political leadership.”

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Tuesday, 28 June 2011

$300-m Boracay job bared

by Jenniffer B. Austria
Manila Standard

BORACAY ISLAND—Conglomerate San Miguel Corp. is investing $300 million to develop Caticlan Airport, the gateway to Boracay, the country’s most famous beach resort island.

San Miguel president and chief operating officer Ramon Ang said in an interview during the inauguration of the newly renovated Caticlan Airport Saturday that the company would build a new terminal that could accommodate 3 million tourists a year, up significantly from the old terminal’s capacity of about 700,000.

San Miguel, through its majority-owned unit TransAire Development Holdings Corp., plans to put a world-class terminal and extend the existing runway from 950 meters to 2,500 meters to accommodate wide-bodied aircraft owned by domestic and international carriers.

Caticlan airport today can accommodate only turbo propeller airplanes due to the short runway.

Ang said San Miguel will also build a 500-room budget hotel, a jetty port that could accommodate two large international cruise liners, a convention center with capacity of 25,000 people and a shopping mall housing several retail shops and restaurants.

Ang said he hopes to complete all development in the two to three years. San Miguel initially plans to invest P2.5 billion to develop the Caticlan Airport before building other facilities into the airport to attract more people.

San Miguel hopes that airfare from Manila to Boracay will go down to as low as P1,500 per person with more flights available. A roundtrip airfare to Boracay could reach as high as P16,000 per person during the peak season.

Meanwhile, with the renovation of the Caticalan Airport, the terminal now has a conveyor belt, x-ray machines, computerized check-in counters, LCD television sets, lounges and air-conditioning units.

TransAire installed floodlights and runway lights, which will allow night landing, leading to a 30-percent increase in terminal capacity.

The airport has experienced rapid growth in passenger volumes in the last decade due to the increased popularity of Boracay among local and foreign tourists. More than 700,000 tourists pass through Caticlan Airport each year.

A dominant player in the food and beverage industry, San Miguel has been diversifying into high-growth industries, including power, mining, oil refining, telecommunications and infrastructure.

US foreign policy and the Philippines

Business Mirror

What is currently perhaps the most difficult geopolitical question you can ask a Philippine government official: “What is the US foreign policy toward the Philippines?”

Getting the answer wrong is probably OK, since it is sort of a trick question. United States foreign policy for the last 200 years has always been confusing. Since the founding of the US, foreign policy has wavered between following a path of isolationism and wanting to be deeply involved in foreign matters.

President George Washington said this in 1796: “The great rule of conduct for us, in regard to foreign nations, is in extending our commercial relations to have with them as little political connection as possible. ’Tis our true policy to steer clear of permanent alliances, with any portion of the foreign world.”

Put in modern terms, let’s have as many McDonald’s stores and Coca-Cola bottling plants as possible without having to deal with everyone else’s problems.

Even those most critical of US policy have a big problem trying to figure out just what it is they want to criticize about US foreign policy. Marching into Iraq obviously for its oil is “American imperialism.” Not invading the Sudan or Rwanda to stop genocidal civil wars is evidence of America’s not caring about the world.

While the conventional thinking about a nation’s foreign policy is that it is all about politics and ideology, in truth, it is all about “commercial relations.”

Countries have always been very willing to spend blood and treasure for its business interests as long as there was a potential profit to be made. There have only been two great ‘”mperial” nations in the modern era: England and Spain. England wanted raw materials and a market for their finished manufactured goods; Spain’s imperialism was simpler: conquer and plunder by the sword.

If the US went into Iraq for oil, it was a blunder, a lost foreign-policy wager. US oil companies got the crumbs. Russian, Chinese, French, Italian, Malaysian, even Sonangol, the Angolan National Oil Co., all got larger oil-field development contracts than the US companies.

While some members of the Filipino political scene see the US lurking in the shadows, waiting to pounce on the Philippines with its imperialistic eagle claws, the current West Philippine Sea/South China Sea dispute sort of contradicts that idea.

This would have been the perfect opportunity for the US to take advantage, if it wanted to do so. The statements coming from the Aquino administration clearly indicate that they would have welcomed direct US support, if not even US direct intervention.

But from the US view, there is not enough potential economic reward here to openly oppose America’s banker, China.

Still, though, the US would love to have a local counterfoil to China in this region as long as there was no fallout in US/Chinese economic relations. America cannot afford that.

The only country that is truly challenging China is Vietnam. But then again, Vietnam has been challenging China for the last 1,000 years after Vietnam won independence in 938 at the victorious battle of Bach Dang River. But Vietnam is not the “ideal” US partner against China.

The US supposedly intends to provide the Philippines with military equipment and training. This provides the US the chance to follow Obama’s foreign-policy doctrine developed for Libya; leading from behind.

To understand US foreign policy, you must understand those original words from Washington. US foreign policy is not ideology-driven. It is a policy of pragmatism and is a balancing act between what is in the national interests outside its borders, and what is in every current administration’s political interests domestically.

The US economic interests here in the Philippines (US call-center accounts, etc.) are relatively minor but important nonetheless. More critical is that the Philippines is its only “ally” in Southeast Asia that honestly cares at all about what the US says. The other members of Asean are indifferent, if not apathetic, about US policy. The loss of US economic influence and power has diminished US importance in this area.

The US will continue to tiptoe around the dispute between the Philippines and China. It will, though, make an effort to be relevant in Asean. And that is the US foreign policy toward the Philippines.

If the Philippine government is at all smart, it will continue to push the US and get all the goodies it can. It will not make a difference in the resolution of the dispute. But it will be a little justified payback. How about at least getting the Balangiga bells returned?

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