It’s a turbulent world
- Boo Chanco (The Philippine Star) - September 4, 2013 - 12:00am

In case you haven’t noticed, there is increasing turbulence in the world out there. A civil war in Syria may yet turn out to be a major international conflict of Biblical proportion.

The United States may enter the conflict even without the concurrence of the United Nations or any of America’s usual allies in Europe. No matter how “limited” and “surgical” President Obama describes America’s entry, it is bound to escalate.

Russian warships are close by and Putin isn’t likely to take any American incursion sitting down. China is on the side of Russia and Syria in this conflict, thus making this look like a resurgence of the old cold war we thought had long been consigned to the dustbin of history.

Other than the safety of Filipino soldiers working for the United Nations as peacekeeping forces in the region and the OFWs in Syria and Lebanon, the immediate impact to us of this perilous situation is the increase in price of oil. Oil prices are sensitive to political signals.

Syria is not a major oil producer but a major war there puts the Saudi Arabian, Kuwaiti, Iraqi oilfields at risk. Iran controls the narrow Straits of Hormuz, a major oil route, and Iran is on Syria’s side. If Iran blocks this passage as it has threatened, oil prices will shoot through the roof.

  Rising oil prices have economic and political implications in our country. Social tensions are already high as it is because of the pork barrel scam and the widening social gap. When consumers start asking questions about expensive energy, a decline in trust affects government’s credibility.

There is bad confluence of events as well. The dollar price of imported oil is going up at a time when the peso is weakening, giving consumers a double whammy in terms of gasoline prices in peso terms at the pump. Even if the country is helpless in the face of this situation, few will want to believe government really can’t do anything.

 Only the more financially sophisticated will understand that indeed, we are a bystander in these significant global economic developments. Try explaining this to your barber, for instance:

The American economy is improving, not as fast as Americans may want it to, but improving none the less. Because their economy is moving out of the shadows of the last recession, the US Federal Reserve is contemplating an end to its so called quantitative easing.

They haven’t done anything yet but the mere fact that Ben Bernanke, the Fed chair publicly contemplated its end was enough to spook the markets. A significant part of all that QE money, meant to help the US economy recover, ironically found its way to emerging markets like ours. That explains why our stock market was registering record highs. That flow has started to reverse as fund managers are bringing back that money to the US in anticipation of the Fed’s next move.

Even if many local observers trumpet our country’s stellar economic performance, the reversed flow of all that QE money has to hurt. That’s the brutal correction we are now seeing in emerging market stocks, bonds and currencies.  

Almost all stock markets and currencies in the region are being affected. Even if we are the best house in a bad neighborhood, as my fellow PhilStar columnist Valentino Sy puts it, we are “not spared when hedge funds and other foreign investors started deleveraging and selling across the board.”

 Ever the optimist as most market participants are, Mr. Sy believes the Philippines will recover first once the market stabilizes. That’s because we have stronger fundamentals relative to our neighbors. The question is, when?

Stratfor, an economic and political risk assessment consultancy, issued a warning that indeed, the world’s emerging economies are under pressure. Southeast Asia, Stratfor believes, is particularly vulnerable because of the region’s “continued reliance on foreign capital and the slowed growth of China -- the driving force of the region’s economy.”

While this has conjured memories of the 1997 Asian crisis, Stratfor also noted that most Asean countries are stronger now. Lessons from the 1997 economic crisis have been learned and regional governments have taken steps to prevent a repeat.

“Each country accumulated foreign reserves individually … From 1997 to 2012, the foreign reserves for the 10 ASEAN members rose from about $200 billion to around $800 billion. For most of these countries, the reserves would cover about seven or eight months of imports -- in 1997, reserves only covered three or four months.” Ours would now cover about a year’s imports.

Stratfor noted that “most ASEAN countries have adopted a flexible currency exchange regime, putting them less at risk than they were in 1997, when most countries had either pegged (or fixed) rates or a crawling peg. The more recent currency depreciations come amid improved financial operations, banking reforms and enhanced fiscal strength in many countries, making the possibility for another full-scale currency crisis low.”

But, the firm warned, “sliding currencies and capital outflows are symptomatic of these countries’ economic vulnerabilities, which have not changed much since 1997. Despite efforts to reduce dependency on trade in some countries, growth is still largely export driven… Thus, any reduction in foreign demand would hurt their economies, and the damage cannot be offset by domestic populations too poor to buy the products.”

Stratfor continues: “…most emerging Asian economies have continued to rely heavily on foreign direct investment and portfolio investment to compensate for account imbalances and to fuel their economy.” But it noted that “the Philippines may actually benefit from a weaker currency, which would help exports.

“Remittances amounted to more than 40 percent of total exports -- critical for a country that maintains a fairly consistent trade deficit and relies on intermittent financial inflows. However, in the long term, these dependencies may further expose the Philippines to global economic maladies -- recessions could cause remittances to decline.”

But Economist Philip Medalla said it is wrong for Stratfor to compare our level of risks as similar our Asean neighbors. 

Medalla: “Yes, our balance of trade has been in deficit for as long as I can remember. But our current account has been in surplus every year since 2003. Thanks to remittances and BPOs, we are not reliant on ‘intermittent financial flows.’  Thus, unless remittances and BPO revenues fall (highly unlikely), they’re wrong about the Philippines.”

Indeed, British bank Standard Chartered, in an Aug. 29 commentary, said that volatility would likely have “limited” effect on long-term Philippine economic trends. “The Philippine has several strengths relative to its Asian peers. Solid domestic consumption and investment are likely to support growth in the next three years,” Stanchart said.

“In addition, strong remittance inflows from overseas workers more than make up for the trade deficit in the current account,” the bank said, noting that the 2012 current account surplus of 2.8 percent of GDP would have been a deficit of 4.3 percent if overseas workers’ remittances were excluded.

BSP deputy governor Diwa Guinigundo admits the Philippines is “not yet in safe waters,” but “the advantage the Philippines has over other emerging markets is its macroeconomic fundamentals… the country’s strong gross domestic product growth of 7.5% in the second quarter, low inflation, sound banking system and liquid market.”

Guinigundo told a Bloomberg forum that on the external front, the Philippines’ balance of payments surplus and foreign exchange reserves will help it “ride out any turbulent period we may encounter.”

But even Guinigundo couldn’t help but warn of “headwinds challenging us… These risks, if not managed carefully, can undermine growth.”

Indeed, the BSP official admitted “there is still a lot to be done.” He echoed the call to make the financial system “more inclusive to sustain growth.”

Guinigundo said we need more programs to “help poor people out of poverty.” That makes sense because as Stratfor puts it, the damage caused by weak foreign markets “cannot be offset by domestic populations too poor to buy the products.”

We have been warned. While we are likely able to ride the shift in the flow of resources back to the US, the headwinds, as Mr Gunigundo puts it, make it more essential for P-Noy to deliver on good governance.

It is not a question of P-Noy being able to deliver Daang Matuwid. He simply must.

 

Exercise

Si Congressman nag-medical check up kasama ng Missis.

DOC: Misis, meron ba namang exercise si mister?

MISIS: Aba oo naman doc!

DOC: Talaga? Anong exercise nya?

MISIS: Madalas ho magbuhat ng sariling bangko, tumatakbo sa mga utang nya, pero ang favorite ho nya eh yung lakarin ang mga estafa cases nya…

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco

ASEAN BEN BERNANKE BOO CHANCO BUT ECONOMIST PHILIP MEDALLA ECONOMIC FOREIGN GUINIGUNDO STRATFOR UNITED NATIONS
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