MANILA, March 15, 2004 (STAR) DEMAND AND SUPPLY By Boo Chanco - It may seem like summer fiesta time for many people out there in the countryside as candidates come and try to woo their votes with the help of the Sexbomb dancers and Kris Aquino. But as I said in a previous column, this may prove to be our last chance to do the right thing with our politics. If you come right down to it, it is still all about economics. If we fail to manage our economy (that could be made all too real too soon by a Latin American type debt crisis), our political stability goes down the drain too.

Alas, it isn’t just me who worries that we may fail what could be our final test at democracy. The Export Finance and Insurance Corp. (EFIC), an Australian government agency that finances exports (such as the "export" of Australian construction services for the North Luzon Tollways) has said as much in a fairly recent assessment of our country risk.

EFIC has observed in an economic paper prepared by its chief economist (and available in their website), that our two leading presidential candidates in May "seems to present a choice between continuing policy drift at best and a much faster erosion of creditworthiness at worst."

My sentiments exactly! I have said that we should ignore the top two leading candidates in favor of choosing one from among the next three. The world out there is no longer buying Romulo Neri’s loud protestations of how great our economic fundamentals are. As the EFIC paper puts it, there is a long string of developments unsettling investors and sending interest rates up and the peso down.

Worse, EFIC does not see relief in the results of the May election if one of the two frontrunners emerges the winner. EFIC’s prognosis is pretty bleak. Financial default may not be imminent, it says, but it cannot be ruled out. "It is difficult to see a decisive stabilization and adjustment scenario that puts the default worries to rest."

Steadily deteriorating economic and financial fundamentals, policy inertia, unsettling political developments in the lead-up to the May presidential poll and recently deteriorating market sentiment are developments all making the economy increasingly vulnerable, EFIC observes.

Add to that are worries arising from Moody’s downgrade of our long term foreign currency debt rating to Ba2, two levels below investment grade, the warning made by Standard Chartered Bank about the Argentina-like danger we face and Loren Legarda’s promise to repeal the law providing for the automatic appropriation for debt service if FPJ wins.

It is no wonder we have vanished from the radar screen of the world financial market. Philippine asset-holders, according to EFIC, are awakening to the risks they face in our country, and they have been trimming asset allocations and demanding higher risk premiums accordingly. Sounds to me like we are headed for the kangkungan!

EFIC observed that the peso has been one of the worst performing Asian currencies for some time, weakening against even the falling US$. Earlier this month it hit an all-time low of 56.35 to the US$. Investors, EFIC notes, are concerned at a yawning fiscal deficit and associated rising public and foreign debt. And to think Ate Glo claims she managed the economy well!

Investors, according to EFIC, are worried. "They see a Congress in deadlock, incapable of passing the 2004 budget or tax reform laws to broaden and deepen the tax base. They worry that under an FPJ administration this inertia would continue. The resultant higher interest rates and lower peso are feeding into higher public debt service payments, which is adding to investor anxiety in a vicious circle."

EFIC confirmed our worst fears that those deficits have caused public external and domestic borrowing "to outstrip underlying growth of government revenues, exports and GDP. Rising debt and debt service relative to underlying revenue and income means, of course, eroding fiscal and external solvency."

And when Neri starts talking about our great fundamentals, you can ask him about EFIC’s observation that "export growth has been volatile, and last year came in at only 1 1/2 percent when many neighboring countries were registering double-digit increases. Meanwhile, FDI, a key driver of Philippine exports, has been on a relentless downtrend from a low base – reaching 0.2 percent of GDP in 2003 from 0.8 percent in 1997 and slumping 45 percent year-on-year in the first three quarters of 2003."

EFIC also cited another worrisome aspect of our economic governance: our off budget debts like those incurred by Napocor. "A final concern is the large off-budget debt, equivalent to 39 percent of the consolidated public debt. (Consolidated public debt is 120 percent of GDP, on-budget debt 73 percent.) Off-budget debt is less transparent than on-budget debt, and has recently been accumulating rapidly. The National Power Corp. (Napocor) is the single biggest contributor to the public debt."

EFIC pointed out that our "fiscal and debt indicators are bad – breaching, for instance, the World Bank’s 20-percent danger limit for the external debt service ratio and the IMF’s 60-percent limit for prudent external debt – they wouldn’t be so bad as to trigger immediate concern, if the government had set upon a course of policy adjustment to stabilize the numbers and bring them down. But that is the rub – it hasn’t. Inertia is the hallmark of the executive government and gridlock of the Congress. So as the IMF puts it, the debt dynamics are unstable."

How Unstable? Unstable Enough To Cause A Debt Crisis, According To EFIC

 "Philippine assets continue to look overbought and could have a long way to fall in the event of further wake-up calls or just a shift in global risk aversion. If such a selloff happened, the resultant lower peso exchange rate and higher foreign and domestic interest rates would serve to increase the public and external debt and debt service indicators, which could in turn prompt further asset selloffs in a vicious circle. Given how large the external and public debt already are, such movements would inevitably undermine debt service capacity significantly. A debt crisis could be the end-result."

My conclusions are clear: the last three years have been terrible and it would be extremely stupid to want six more years of that. On the other hand, the other one who calls himself a king, has spooked the investors and the creditors even before he assumes office. As I said, pick from among the next three. They may not be able to quickly lead us to nirvana but at least, they could give us a fighting chance.

Reported by: Sol Jose Vanzi

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