Global risks
DEMAND AND SUPPLY - Boo Chanco (The Philippine Star) - May 10, 2019 - 12:00am

We were still celebrating Standard & Poor’s upgrade of our sovereign risk rating to just a notch below A when our party was disrupted by a tweet from President Trump. All at once, the market reacted in fear that the trade war with China is alive and well.

President Donald Trump tweeted that he would slap tariffs on almost all imported goods from China effective today, Friday. The market sell-off started Sunday as investors instinctively sought cover.

Wall Street’s top investment banks started to warn clients for a “worst-case scenario,” CNBC reported Tuesday, with all banks predicting steeper losses to come. Markets fell across the globe with the Dow slipping by 471 points.

US Trade Representative Robert Lighthizer told reporters the US would go ahead and raise tariffs on Chinese imports from 10 percent to 25 percent, starting today.

Treasury Secretary Steven Mnuchin accused China of reneging on matters already agreed upon during previous rounds of negotiations. There were fears that China would not send or would downgrade the delegation due in Washington to finalize the trade deal.

China eased worries somewhat by announcing it would still send a delegation to Washington this week to continue trade negotiations. China must really want to secure an agreement and that eased market anxiety somewhat.

The Trump tweet surprised the markets. There had been a period of calm in recent weeks, with both sides assuring progress in talks. The crucial trade talks affect not just China-US relations, but also  the world economy as well.

International Monetary Fund head Christine Lagarde warned that the US-China spat over trade represents a threat to the global economy. The IMF head said the recent “rumors and tweets” are not conducive to any agreement.

The Organization of Economic Cooperation and Development noted that “High policy uncertainty, ongoing trade tensions, and a further erosion of business and consumer confidence are contributing to a global slowdown.”

When threats to global economic growth happened in the past, our economic officials  reassured the public that we will not be gravely affected because our economy is domestically driven. Our export sector is small and our consumption-led economy will continue to grow.

Fortunately, the current economic team knows better. In a recent statement, BSP Governor Ben Diokno noted “the continued increase in global crude oil prices and possibility of a prolonged El Niño episode could be a source of upside price pressures over the near term. On the other hand, the weakening global economic environment could present downside risks to inflation.”

Indeed, no matter how insulated we might think our economy is, global economic turbulence impacts us.

For one thing, OFW remittances, our main economic driver, can be negatively affected as host countries adjust to the downturn and send some of our workers home. Same thing with BPOs that can lose foreign clients and forced to downsize.

And while inflation is significantly down to 3 percent, the threat of higher oil prices is real. Venezuela, the country with the largest oil deposit is off the market due to its domestic problems. Oil from Libya may be curtailed by current worsening internal strife.

Trump’s attempt to totally ban any Iranian oil export is almost guaranteed to go badly for the world economy. If he is successful, that’s a big chunk of supply out of the market, reducing world market supply and raising prices. Trump is probably banking on Saudi Arabia pumping more oil to cover the shortfall but that’s not guaranteed to happen automatically.

Iran is expected to retaliate, possibly by closing down the narrow Straits of Hormuz where about 30 percent of all seaborne-traded crude oil and other petroleum products pass. If this happens, Middle Eastern oil will be largely shut off.

Trump says Iran cannot do that because the Strait is international waters. But Iran shouldn’t be tested once it is pushed to the wall. As the narrowest point of the Strait of Hormuz is twenty-one nautical miles, all vessels passing through the Strait must traverse the territorial waters of Iran and Oman.

Even in the old days, we were always worried about the possibility of Iran blocking the Strait. It influenced our policy to diversify our supply by developing sources that will not be affected by any such blockage.

Our government no longer has the ability to diversify the geographic sources of our oil product imports. That makes us very vulnerable to supply disruption.

No doubt about it… Trump is bad news for the world economy.

But what can we do? When a bull tramples a china shop, the mice must simply get out of the way. Or figure out how to mitigate potential inevitable harm.

A flareup of a shooting war with Iran will bring the other superpowers to the scene, each with their deadly nuclear warheads. Trump may just be bullying China and Iran as negotiating posture but that may end with bad unintended consequences.

It doesn’t look like the world can continue to pretend it is business as usual. We can’t do much to influence any world power but we can start thinking of how to protect our people from the impact of these global risks.

For example, what must government do if and when war flares up in the Middle East because the US or Iran was too quick on the trigger?

Evacuation of OFWs is on top of the list and that requires serious contingency planning.

If oil supplies run low and/or prices go through the roof, what can government do?

Is it even ready to implement fuel rationing on a moment’s notice? We prepared during those turbulent 70s and early 80s with a detailed manual of operation. We were just happy we did not have to use any of the fuel coupons already printed and ready for distribution.

Someone somewhere in government should be thinking of these global risks. We can wake up one morning in a world where those risks have turned into reality. Bahala na? 

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

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