We all know that the Philippine economy is under pressure as are a number of other economies—developed, mid-developed or developing aka emerging markets. The tell-tale signs of such pressure are all over the place: Current account imbalances, falling currencies, spikes in exchange rates versus the almighty dollar and, of course, scarcities and increased prices of goods and even services. Not to mention all kinds of predictions about the future and, yes, solutions from all kinds of pundits and born-again economists. But what is the score, really? Are we in for a contagion? a meltdown? Not really if we go by the economic fundamentals.
The economy is stronger than it was during the crises enveloping the world in 1998, 2008 and even the most recent 2013 “taper tantrum” as most economists call it, when reports of a slowdown in the US Federal Reserve’s purchases of long-term bonds threw a number of countries—notably India, Indonesia, Mexico, and Poland—into a tizzy. That kind of fear may no longer apply to the Philippines. We have had a good run for the past three years recording growth rates second only to China in the Asia-Pacific region. Foreign direct investments have been pouring and we expect that investment pledges in a number of key projects will ensue despite the noise swirling around. And, perhaps equally important, our foreign reserves bolstered by increased remittances from overseas Filipinos remain solid and steady.
As Bangko Sentral ng Pilipinas Assistant Governor Francisco Dakila noted the country has enough foreign exchange reserves to cover our ballooning trade and current account deficit. Said Dakila in a recent interview: “The country’s balance of payments is financeable and the current account ‘s shortfall is manageable as the country’s gross international reserves remains well above international standards..Our GIR level stood at US$77.5 billion, enough to cover 7.1 months worth of imports of goods and services..which is a comfortable level considering that the international norm is just between three to four months cover.”
So it seems that all that noise about a meltdown, that a Turkey contagion is in our near future, is simply that: Noise signifying nothing. But it has injected some fear into the public consciousness, a fear which can transmogrify into real panic if we do not watch out and do the right things as we confront the real-life problems of rising prices and the devastation caused by the recent typhoons which visited the country are not addressed especially by the political class with a calm and steadying hand. As some analysts know only too well politics can trump economics in a flick of a coin if a sobering presence, a reassuring hand does not hold the swirling forces, internal and external, impacting on the economy.
As has now been shown in the case of Turkey, the defiant response of newly elected President Recep Tayip Erdogan to the sanctions and subsequent tariffs imposed by US President Trump only exacerbated his country’s problems. It took a spin: Within hours, the Turkish lira plummeted, inflation rate spiked to 16 percent and suddenly, Turkish officials were on their way to Washington DC with cups on hand to discuss a possible emergency rescue package from the World Bank and International Monetary Fund.
It did not help that Erdogan tried to muscle his own central bank into “reshaping its monetary policy” (as in do not raise interest rates) and appointed his son-in-law as his treasury and finance chief. That only served as a clarion call for the banks, local and overseas, to call their loans and suspend any more borrowings at the same time that investors in Turkey’s bonds and equities called their chips. The Turkish conundrum then rippled into other so-called vulnerable economies.
As Bloomberg’s Peter Coy described it, the fall of the Turkish lira “pushed down the currencies of Argentina, India, Indonesia, Mexico, Russia, South Africa, and Zambia and raised Italy’s borrowing costs to their highest since May.” The Philippines was nowhere in the path of that contagion.
In the Bloomberg Economics scorecard of which emerging markets are most vulnerable involving four key criteria, namely, current account balance, external debt, government effectiveness, and inflation, we were in number eight—way below the earlier named countries plus Colombia and Brazil and a notch above Russia which, by the way, is emerging out of its own recession.
To Coy, the crisis was actually overdue. The country was ripe for a currency crisis—a situation which apparently Erdogan dismissed as overblown and, possibly, existing only in the opposition’s mind. He embarked on huge infrastructure projects and muscled the opposition while neglecting the basics. In a real sense, he tried to wish the problems away. That is a no-no under any and all circumstances. Which is why in the government effectiveness category, Turkey got the lowest score at 0.05 which is much lower than our +0.01
Which brings us to our point. Our economic fundamentals may be stronger than before. We may have the international reserves to “wait out” any currency pressures from around the world. We may have a backlog of investments waiting in the pipeline. But these may not be enough to cushion our situation if we do not play our cards well. That’s where political decisions and government effectiveness come in.
The case of Italy, a member of the developed countries’ G-7 conclave and a manufacturing and creative works hub but with a serious immigrant crisis, is instructive. As Simon Nixon in an article “Italy Still Has Time to Avert Disaster” published in the Wall Street Journal issue of May 30, 2018 noted the ruling coalition, 5 Star Movement and The League, which run on an anti-immigrant and even a partly anti-EU, anti-Eurozone platform, now realizes it has to come to terms with the real world as they try to move their essentially isolationist agenda.
Reported Nixon: “And while Italy’s debt burden is high at 132 percent of gross domestic product, the market has shown little sign until now of being worried about its sustainability. After all, Rome is running a 2-percent primary surplus before interest costs, private sector borrowing is low and the economy is growing.
Instead, the origins of this Italian crisis are purely political—and how it plays out will be driven entirely by Italian politics. The situation is fast-moving, creating immense uncertainty that has unnerved the markets.
On Wednesday morning, it appeared as if Italy was heading for new elections in which the country’s membership of the eurozone would be on the agenda; by the evening, it appeared that the 5 Star Movement and the League were trying to rekindle their attempt to form a coalition, which they had abandoned when President Sergio Mattarella vetoed their choice of economy minister: Paolo Savona, an 81-year-old economist who had previously advocated Rome adopting a secret Plan B to leave the euro.
So there. By now, the continuing turmoil in the markets enhanced to a large part by fears of an out-and-out trade war involving the developed and most dynamic economies should be lesson enough for us as we face the pressures on the economy to avert any further slide to the doldrums. The Turkish and Italian experiences are more than instructive. Our political class must come to terms with themselves.
Take note. It is not just President Duterte’s ways which affect our situation. As a matter of fact, despite his outbursts at times, the President’s steady hand has helped us move forward despite the internal and external pressures. He has tried to boost our productivity with ‘Build, Build, Build” while pushing for more and better use of the people’s money through more funds for education, health services and agriculture. He has not intervened in the BSP’s measures to combat inflation. Unlike Erdogan, neither has he talked the central bank into doing things other than what they are supposed to work on to keep the economy on an even keel. But there have been a number of kinks along the way of redemption and President Duterte and our people know it.
So, the sooner he and his people do something about it, the better for all.
Compare that to what his critics have been doing in support of getting the economy to survive these challenges. Raising fear and the specter of a meltdown for one. Despite facts and figures to the contrary, they have been trying their level best to discredit the facts and the figures using every emotional guise in their bags to sidetrack responsible discussions. In a word, they are coaxing our people to live a lie. This is not to suggest that we should not even care about the rice lines, the traffic, the rising prices and the like. We should as we must try to resolve these and a hundred more priority concerns at the soonest possible opportunity.
But to insist and let our people believe that the administration is not concerned, that it is doing things for show and is only interested in muzzling its critics is to be petty and unworthy of a real, responsible opposition. Why not come out with credible, fact-based solutions to the problems for once instead of raising people’s fears?
If our foundations are faulty, why not suggest how to strengthen these—if you have any idea at all and care for this country? This administration still has three years to make things right and moving and if you are the authors of a better plan which will carry us through beyond three years people will accept and realize that. Then, you will have your chance in pursuing things to greater heights.
The problem is you had your chance to make things better many times over. What did you do? You know it. Our people know it. That’s that.
