‘Don’t panic; it’s just a glitch’

With the sudden plunge in local shares — from a historic high of 7,403 in the main index last May to sharp declines in the past few days by as much as 6.8 percent, ending a little above 6,000 levels — a number of businessmen are a bit jittery, especially those playing the stock market. Pullouts by foreign-managed exchange funds have been noted even as foreign investors continue to be gloomy over uncertainties in the US Federal Reserve’s monetary policy, coupled with skepticism on Japan’s strategy for recovery.

 But as one financial adviser calmly put it: “Don’t panic; it’s just a glitch.” After all, fluctuations are a usual part of stock market activity in most countries, with share prices going up and down (at times very sharply) and corrections more often than not occurring. World economists have repeatedly stated that the Philippines has sound macroeconomic fundamentals, and as far as our favorite financial analyst is concerned, we will continue to display steady growth even with the peso dipping to P43 to the dollar.

 What we should be seriously concerned with, he warned, is the tendency to over-borrow – something that many other governments have fallen into – which could negatively affect the economy in the long run. Our friend, Securities and Exchange Commission chair Tess Herbosa, should be carefully watching the mergers and acquisitions and the potential excessive borrowings that go with it.

 Many analysts have noted that each of the disastrous “bubbles” has always been preceded by one, heightened mergers and acquisitions and two, excessive debts before these bubbles burst. A case in point is the 1997 Asian financial crisis that was preceded by a period of highly impressive economic growth in the region fueled by exports, triggering a real estate boom for instance in Thailand. The demand spurred Thai developers to engage in excessive dollar borrowing to fund investments – putting them at risk of increased debt burdens that happen when local currencies depreciate against the dollar.

 The bubble popped when a Thai developer defaulted on a scheduled interest payment of $3.1 million on an $80 billion Eurobond debt. Things started unraveling from that point on — triggering a financial contagion that spread across Asia, hitting other currencies in the region. 

 The US subprime mortgage crisis that precipitated the 2008 financial crisis was preceded by record levels of mergers and acquisitions, with the peak activity noted from 2005 to 2007 when the number of transactions reached almost 10,700 with the deals valued at $1.6 trillion. 

 Interestingly, Canada was able to weather the crisis and maintained financial stability because of the restrictions imposed on big bank mergers, the IMF had reported, because the Canadian government did not like the idea of giving too much power in the hands of a few institutions and then stepping in if problems cropped up. Banks have also warned against consumer debts – which is why many Canadians have no personal debts.

 In any case, we’re obviously far from a “bubble burst,” but we really don’t want to get anywhere near it. The fact is — all economies in the world are treading with caution and now see the need to impose restrictions and implement structural reforms that would create jobs. Latest reports indicate that the unemployment rate has gone up to 7.5 percent, the highest in three years – in contrast to the 7.8 growth in the economy. It may well be true that the gains have not been trickling down perhaps because economic growth cannot catch up fast enough with population growth, with more people flocking to the job market every year.

 But one major concern for the country, our political operative pointed out, is China’s continued belligerence against the Philippines, underscored by the revelation that 18 Chinese surveillance vessels from a total of 31 are inside our territory. While neighboring countries are quiet, they know fully well this aggressive behavior could have far-reaching implications on the region. China’s actions are simply driving us closer to the United States, but at the end of the day, we all must wake up to the reality that we will ultimately have to rely on our own means and resources to defend ourselves.

 All the more reason we have to pursue the military’s Self-Reliant Defense Posture (SRDP) program. Gene Cariño, the CEO of United Defense Manufacturing Corp., sent us an email saying that the Philippines cannot continue buying from foreign sources what local suppliers can provide, for instance small arms and rifles that local defense manufacturing companies – among them Armscor, Cresser and PADC — can produce for the Armed Forces. Filipino engineers and shipbuilders/repairers are comparable, if not better than others internationally, he also said.

 Israel, Indonesia and South Korea all started from scratch and are now supplying their own armies with locally-manufactured hardware — which is what the SRDP hopes to achieve by developing the local defense industry to lessen our dependence on other countries for weapons, not to mention the thousands of jobs that can be generated. This is something that we must pursue even if it takes a decade or two to accomplish, and it can happen if SRDP becomes a law to assure continuity regardless of who becomes president.

 We have fully supported President Aquino’s stand on many issues. Three years can be a long time if we move slowly in resolving critical matters. On the other hand, three years can be considered too short when there are still so many things that need to be done. President Noy was blessed with a great opportunity to do well in his first three years. He must not drop the ball on the final stretch of his term.

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