Fundamentally sound?

How many times have we heard our officials and stock market analysts say don’t worry about the depreciating peso because the economy is fundamentally sound?  Too many times, I am afraid. It now sounds like they are protesting too much.

If our economic fundamentals are so good, why is the peso in decline when the rest of Asean is upbeat? The market must be seeing something wrong even as our economic managers and stock market analysts are saying things haven’t been better.

Our economic managers are eager to show our people they are managing our economy well, despite the peso’s decline. Stock market analysts, on the other hand, are worried that with the downward bias, foreign investors that drive our market may hesitate to take forex risk in addition to normal stock price risk.

In the light of developments, the man to listen to is BSP Governor Nestor Espenilla Jr.  He said they have no intention to see the current accounts (CA) deficit go higher than one percent of the country’s gross domestic product (GDP). Gov Espenilla explains:

“For us, (the) CA deficit should remain manageable. Actually having a current account deficit at this stage of our economic development is not bad, but it shouldn’t be too large. So to us what is a concept of a manageable CA deficit is it should be no more than one percent of GDP over the next few years.”

For background, the CA position is an important indicator of the economy’s health. It is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.

We had a CA surplus of $601 million or 0.2 percent of GDP last year, 92 percent lower than the $7.3 billion surplus equivalent to 2.5 percent of GDP recorded in 2015. For 2017, the first full year of President Duterte, the BSP expects the country to book its first CA deficit in 15 years at $600 million or 0.6 percent of GDP.

This means more foreign exchange is going out of the country than coming in. That’s not so bad if the money is going into the purchase of capital goods, or as the economic managers claim, to prepare for the big infrastructure push. If the money only goes to satisfy appetite for consumer goods, then we may be in trouble sooner, than later.

Our problem, as always, is how to fish out the truth from what government says. A good way of doing this is to look at the market.

For one thing, foreign exchange traders have absolutely no respect for statements from finance secretaries or economic ministers. They look at our economic numbers and test how far they can go. Our technocrats will call them currency speculators but they don’t care. They do what they do best.

They keep their antennas attuned to how the central bank will react to the market’s downward trend. Forex traders will keep on testing to see where the central bank draws the red line and starts defending the peso.

In the past, it was easy to guess where the red line was because we didn’t have much in international reserves. But now, we have over $80 billion.

Of course the BSP will not waste its ammunition defending an indefensible peso, if it comes to that. But if it is just to smooth out “volatilities” that happen when the market tests the peso’s real value, it will be money well spent. 

Indeed, if Gov. Espenilla keeps his word, he will likely institute belt tightening in stages rather than allow our CA to deteriorate beyond one percent of GDP. His conservative management of our monetary system is our one hope of averting more serious problems. 

Sometimes, I get the feeling our economic managers and some analysts are whistling in the dark, hoping things will turn out well even if they are not sure. They talk about Build Build Build as if it is already a factor. Indeed, my fears have been confirmed by a recent article in the Financial Times of London.

FT, the respected financial daily, says: “We see no evidence to support the Philippine government’s assertion that the peso’s drop is due to rising imports in anticipation of its infrastructure expansion program. Long-standing bureaucratic bottlenecks appear to be causing delays to this administration’s spending plans, as they did the previous government’s.

“We see risks that the Philippines’ external payments positions – a key indicator of creditworthiness will weaken, if the expected infrastructure expansion falls short of expectations or takes too long to bear fruit.”

The FT continues its review: “Since Rodrigo Duterte became president on June 30, last year, the Philippine peso has lost 9.4 percent of its value against the dollar. Socioeconomic Planning Secretary Ernesto Pernia has admitted that ‘political noise’ due to criticisms of Mr. Duterte’s drug war – which has claimed more than 9,000 lives – has tempered investor confidence in the currency.

“BSP Governor Nestor Espenilla Jr. has said rising imports are justified because of the needs of the growing economy, but we believe this has not been driven by the kind of products and materials that would boost infrastructure construction.

“Aggregate imports have risen in recent months, but shipments of raw materials, such as steel and iron, have been slowing despite government claims that it is already accelerating its infrastructure program.

“Growth in the construction sector is slowing. Private sector construction recorded expansion in the second quarter of just 4.7 percent, the lowest since the third quarter of 2015. Mr. Pernia has attributed this to investors ‘probably tempering the exuberance’ generated by the government’s promises of faster spending. We believe the economy is facing another disappointing year in terms of infrastructure expansion.

“Mr. Duterte’s economic officials had been critical of the infrastructure under spending of the previous administration, under Benigno Aquino, which they said hurt growth. But infrastructure spending under Mr. Duterte has not picked up speed. As of the first half of 2017, capital expenditure rose nine percent year-on-year, the slowest pace for the period since 2011.”

The FT confirms my fears that the problem lies in “old problems of protracted procurement processes that make agencies unable to mobilize funds swiftly.

“For instance, budget disbursements from the public works department have barely moved from 75 percent of its total budget in January to 79 percent in July.” If this persists, that’s it!

If Transport Secretary Art Tugade did not unbundle the modernization and management of five domestic airports, he would have something to show by now. Indeed, the private sector was very interested in the project. Many companies were ready to bid as early as the tail end of the Aquino watch.

It is September this Friday… the Christmas carols are now being played at the malls… soon the year is going to end. Beyond the Clark airport that BCDA is handling, I doubt if DOTr will be able to bid out any other big project.

DPWH Sec. Mark Villar had been talking about six bridges across the Pasig River, but can he even start building one? The infra managers, Tugade and Villar are all talk. In the meantime, the economic managers, Dominguez, Diokno and Pernia are nervously trying to make us believe something is happening at ground level.

Tugade was all showbiz when he scheduled station marking ceremonies for the North Rail very early one morning. That was pure ceremony… they haven’t even secured the right of way on the Malolos to Clark segment. The subway? They will just be signing the funding agreement for the study this November. 

And the NLEX-SLEX connector road, a private sector project, is stuck with right of way problems that are the responsibility of DPWH. This means we won’t have that vital project operational next year. It is claimed it can relieve 50 per cent of current traffic on EDSA.

Adding to the air of pessimism, Secretary Dominguez has warned that he will recommend a presidential veto of the tax reform measure if it fails to deliver what he needs. No tax reform means a further loss of confidence on the economy that will be reflected in a significant peso fall and most likely, the stock market will fall as well.

Looks like Sen. Sonny Angara is the man of the hour! 

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco