, February 4, 2005
(STAR) DEMAND AND SUPPLY By Boo Chanco  -  I can understand why Ate Glo burst out in a joyful yahoo when told about a couple of good news on the economy. Last year’s growth was clocked at 6.1 percent (even if the 4th quarter was a sputtering 0.6 percent) and the peso is strengthening fast against the dollar. Given that we haven’t had really good news lately, the presidential reaction is a normal release of pent-up tension.

I just hope she and her overeager PR spin doctors will not over dramatize these developments to make it look that things are irretrievably looking up. Senate President Frank Drilon had the right reaction: the job’s not done… too early to be lulled… that growth rate, while good, is not good enough. Let us not be ecstatic about performance slightly above our normal mediocre rate. Let us benchmark against the region and set goals that would make a meaningful difference to our nation’s poor.

I suspect Drilon’s perspective on this bit of good news on the economy is tempered by the reality he sees every day on his way to the Senate. I saw that reality too last week when I had the chance to go around Manila Bay on a friend’s boat, (okay, it’s a yacht but calling it a boat assuages my conscience a bit) but anyone can see what I saw from Roxas Blvd. There was hardly any merchant ship on anchor… the Port of Manila was almost a ghost port.

Why is that worrisome? Simply because the number of ships unloading, loading and waiting to load or unload at the Port of Manila is a good indicator of the state of the nation’s economy. While it is true that our largest exports are semiconductors and electronics and are exported via the NAIA, the number of merchant ships at the Manila Port still tells us an unadulterated story about how our economy is doing.

Maybe our economy was powered last year not so much by imports and exports that passed though Manila Port but by OFW remittances, call centers and business process outsourcing. It is good to know that we are now starting to sort of catch up.

But to even describe our six point one percent growth as starting to catch up may be a stretch. We have a long way to go. Given our high population growth, we need eight to nine percent sustained growth over seven to eight years to make a dent on unemployment and poverty. In other words, we need to be a China. Anything less is simply not good enough.

As for the strengthening peso, we have to put it in context. Today’s "strong peso" is by no means an indicator of an economy that is out of the woods. As BSP officials explained it, the depreciation of the peso had been somewhat overdone in the past months and perhaps, what we are seeing now could be partly explained as a delayed correction.

A former NEDA chief wrote in his newspaper column that he doesn’t see the rise in the peso’s exchange rate to be a result of increased OFW remittances nor by increased export earnings. But figures released by the BSP indicate a strong flow of what is known as "hot money" or funds that are invested in our stock and money markets that are here today and could be gone tomorrow.

I asked BSP Governor Paeng Buenaventura what is going on. He said that actually, in the first four weeks of this year, there has been a strong portfolio inflow both for fix income and equity. He attributes this to "some good news... the two new IPOs...Semirara and Banco de Oro. Now the third was announced... SM investments will do a very large IPO."

Government has also just borrowed $1.5 billion on the expensive side but consistent with the one notch downgrade by S &P and the potential one or two notch downgrade by Moodys. Buenaventura observes that in the short run, inflows are based on positive news, but priced expensively because of concerns related to, among others, whether our legislators would pass the VAT increase, plus removal of exemptions. "If the revenue measures fail to pass, ERC does nothing and the Napocor privatization gets delayed, then you can see the portfolio investments flow out as fast as they are coming in now. Its all up to us."

Of course, it could be said that the entry of "hot money" is an indication that our investment climate has changed for the better. That’s because of good corporate earnings, and no thanks to the government. The cellphone companies did well… so did some banks and Henry Sy’s group. There are also the IPOs, as Buenaventura pointed out. Those are the things attracting all that hot money that’s having an impact on the peso-to-dollar exchange rate.

Then there is also an important external factor – the weak dollar – to consider. Money managers abroad are diversifying out of dollar assets and they are running out of options. A Reuters report predicted late last month, that Asia’s new stars could be Southeast Asian currencies, including the peso.

"Thailand, Indonesia and the Philippines could see their currencies outperform those of richer Asian neighbors in the coming months," Reuters reported. The three economies fell off the radar screens of global investors after the 1997 Asian financial crisis. The rise of China and India since the turn of the millennium pushed Southeast Asia further into the shadows.

The Reuters report points out "leading stock market indices in all three countries have almost doubled in the past two years, even as their currencies weakened or underperformed those of their powerful neighbors South Korea, Taiwan, Singapore and Japan. Analysts now say it’s time for the Southeast Asian currencies to play catch up with, or even outrun, their northern rivals. In some cases, this is to reflect an improvement in their economies but also to show the confidence investors have in the region’s companies.

"Our indicators are pointing to an outperformance of the Southeast Asian currencies in the coming months and a stalling of the (north Asian) currencies," Philip Wee, a strategist at Singapore’s DBS Bank, Southeast Asia’s largest lender, told Reuters. "Although the dollar looks weak, it’s difficult to squeeze out more from north Asian currencies. So the path of least resistance is Southeast Asia."

The central banks have largely stayed out of the currency markets in the past few months even as their counterparts in South Korea, Taiwan, Singapore and India accumulated tens of billions of dollars – brought in by foreign investors and local exporters – to curtail strong gains in their exchange rates.

Some analysts say this intervention could well continue as demand for North Asia’s electronics exports slows. That would make currencies of economies boasting resurgent domestic demand – such as Thailand or Indonesia – relatively more attractive.

In other words, let no politician or bureaucrat claim credit for the "strong" peso or read anything more to it now than the effect of regional currency developments and the flow of "hot money" attracted by good corporate performance and investment opportunities.

Purisima’s Math

Reader Ray Angeles wrote to say he has heard it all before and wonders if the likes of Purisima can deliver on their bright ideas.

if...if...if...if... that’s how mathematical problems are defined and then solved. Inevitably, Sec Purisima’s solution through SMEs would take the same route. Trouble is, the problems’ causes and areas or consideration go way beyond his definition.

A basic assumption in growing the economy by increasing the number of entrepreneurs in the SMEs is that majority of them will survive cut-throat competition, that majority of them have competitive advantage on product, price, etc., that their target markets have indeed the need and the capacity to buy their products and services.

SMEs do in fact fold up for lack of competitiveness and for lack of a responsive market. You see this happening with tiangge mushrooms. So, an investment in the wrong place, at the wrong time and operated by the wrong people can wipe out not just the expected $2 increase but also the initial $2 investment.

Mr. Chanco, from time immemorial our economic policies have been created and directed by the likes of GMA, Purisima, Neri, etc. They were good where they came from (schools, investment houses, accounting consultancy firms). But truly… it takes more than talent in consultancy work and taking commissions on lending to poor countries and selling bonds internationally to run and grow a successful economy. A hardnosed and enterprising businessman with competitive spirit and experience in growing business from meager resources is what we need for the job.

Pessimist, Optimist

A friend who isn’t keen to be identified here, sent this reaction to the column on General Almonte’s speech. It’s a Filipino adaptation of a Jewish joke that captures the same theme:

What is the difference between a Filipino Optimist and a Filipino Pessimist?

The Filipino Pessimist would say: ‘Things are so bad, they can’t possibly get any worse!"

The Filipino Optimist would reply: "Oh Yes they will!"

Boo Chanco’s e-mail address is

Reported by: Sol Jose Vanzi

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