Economic mixed signals
DEMAND AND SUPPLY - Boo Chanco (The Philippine Star) - December 28, 2018 - 12:00am

SINGAPORE – A lot of kababayans are in the city state this Christmas break. Our PAL flight on a Boeing 777-300ER was full. For the next few days it is all about family and never mind the headaches our leaders will give us in the new year. 

We find ourselves with economic mixed signals both domestically and internationally. Sentiment in the markets is far from upbeat. Will there be enough good news to swing things around?

It is difficult to bet on optimism winning ground in the first few months of 2019. Economics aside, we all have to contend with Trump internationally and Duterte domestically. Both have increased the political risk factor that weighs down economic sentiment.

 Former Federal Reserve Board chairman Alan Greenspan told CNN he thinks the stock market has peaked and warns that if it goes any higher, investors should “run for cover.”

Harvard economist Carmen M. Reinhart warned that “a decade after the subprime bubble burst, a new one seems to be taking its place in the market for corporate collateralized loan obligations.” 

 An article in the Washington Post last week sums up America’s predicament and as a consequence, the world’s as well.

“Statistically speaking, given how long the economy has been growing, a recession is overdue — and the eventual collapse may bear Trump’s fingerprints.

“After all, his new trade barriers have lifted manufacturing costs, closed off markets and clouded the future for American firms with global supply chains. Economists say Trump’s trade war is the biggest threat to the US economy in 2019.  

“In loonier moments, the president has also threatened to default on our debt, ramp up the money-printing press, reinstate the gold standard or deport all 11 million undocumented immigrants. Some of those policies would ignite not just a recession but an immediate, global financial crisis.

 “Or perhaps the contraction will follow some non-Trump-related catastrophe, like an oil shock or a wave of defaults in the growing leveraged loan market.  

“It’s often impossible to ascribe blame accurately. Yet there’s one thing we can expect with reasonable conviction: Even if Trump isn’t the direct cause of the next recession, he’s likely to make it so, so much worse.”

Trump is also getting so frustrated with the Fed chairman that he wants to fire him. If he does, expect pretty bad reaction in various markets as it marks the end of Federal Reserve independence from politics. 

For us in the Philippines, Fitch Ratings thinks our “growth prospects remain favorable, supported by strong domestic demand and increasing infrastructure investment.”

But Fitch Ratings maintains that overheating risks remain in place for the Philippine economy with the rapid credit growth and widening of the current account deficit.

Rapid credit growth says Fitch? BSP Deputy Governor Diwa Guinigundo said that while credit is growing, the pace of increase is within levels “considered manageable based not only on the BSP’s own metrics, but also even on international benchmarks.”

That should be reassuring except for one thing called “too big to fail”. A Chinoy businessman from Davao was reported to have “tripled his borrowings to P85 billion as of 2017 but has shown little sign of slowing down his torrid pace of acquisitions…” No data on total as of end 2018.

According to, the Davao Chinoy has been able to access credit from at least 17 local banks, big and small, to finance his acquisitions. One large bank has lent him over P13 billion. The two government banks lent him P4 billion.

I am sure the BSP is closely monitoring all these credit accommodations enjoyed by just one entity. The banks themselves must have made sure they complied with the rule on single borrower’s limit, as well as attached enough real tangible collateral in case of default.

What seems worrisome is the systemic risk posed by one big borrower on the entire system. While one bank may survive a default, there are worries about the real and psychological impact to the entire system of one major default affecting all 17 local banks simultaneously. Remember Dewey Dee?

Then again, because of the Chinoy’s closeness to the President, maybe such a financial calamity will not happen. But that will bring up questions of potential political pressure on the independence of the BSP.

In more general economic terms, the BSP is expecting a more pessimistic consumer outlook for 2019. Consumer outlook continued to weaken for Q4 2018, as the overall confidence index (Cl) declined to -22.5 percent from -7.1 percent in Q3 2018.

In particular, the current quarter Cl registered the lowest reading back in Q4 2014 and posted the largest drop by 15.4 percentage points since the nationwide survey started in Q1 2007. “The negative index indicates that the pessimists outnumbered the optimists for Q4 2018,” the BSP statement said.

“Consumer outlook across income groups also weakened for the current quarter… Notably, the outlook of the low- and middle-income groups’ was more pessimistic since they saw no increase in income. Meanwhile, the high-income group considered the depreciating peso as another reason for their less optimistic outlook.

“For the next quarter and the year ahead, the sentiment of consumers across income groups was mixed. For the near term, consumer confidence of the low income group was more pessimistic while that of the high-income group was broadly steady.”

Consumers’ spending outlook, the BSP said, is expected to decline in the next quarter. Local stock market analysts are however saying that 2019 being an election year, we can expect this negative consumer sentiment to turn around with the usual election spending.

 Bottom line… we ought to be alert for a potential Trump-induced world economic downturn even as we make sure no too big to fail crony causes a systemic failure of our financial market.

Taxpayers shouldn’t be made responsible for potential failures of politically connected businesses through a public bailout of financial institutions. The BSP may face more tests than they expect in 2019.

Boo Chanco’s e-mail address is Follow him on Twitter @boochanco

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