Bearish

Fortunately, the stock market and the real economy are two different things.

Last week, the PSEi briefly fell below the 7,000-point level, capping a weekly decline of 6 percent. This week, it is expected that the local stock market index will struggle to hold above 7,000 points. That will depend on how events the next few days will shape investor sentiment.

Analysts are now telling us the new resistance level will be 6,800 points. That was where we were about three years ago.

If it is any consolation, our equities market is not an outlier. Nearly all stock exchanges across the globe receded the past couple of weeks. Softening stock prices is blamed on a host of things: the potential destructive effects of Trump’s tariffs on the growth of the global economy; uncertainty over oil prices (OPEC last Friday decided to increase production); and increased interest rates imposed by monetary authorities.

The retreat of stock exchanges across the board wiped away trillions of dollars in market capital. That will limit the ability of companies to invest in growth, eventually affecting the ability of the real economy to expand.

  Our stock exchange has been worse hit than the others in the region. This is because of two things: an elevated inflation rate and the depreciating peso.

The immediate cause is the weakening peso. In the face of a depreciating currency, investors will naturally sell down stocks and convert their money to more stable currencies. We have seen that in the flight of so-called “hot money” from our market.

The elevated inflation rate and the weakening peso are elements of a vicious cycle. The greater the likelihood of rising inflation, the greater the possibility businesses will speculate against the currency.

To break this cycle, it was important for the BSP to further raise interest rates. Doing so will help us shore up the peso’s exchange rate. Other jurisdictions have chosen to raise their bank reserve requirement, which will have the effect of reducing the amount of money in circulation.

Raising interest rates, however, will have several downsides. It will raise the cost of government borrowing. It will discourage business expansion. Eventually, it will slow down overall growth.

Unlike our lackadaisical stock market, our real economy is surging.

We are looking at growing our GDP by seven percent or better this year – unless the BSP steps harder on the brakes using policy rates. Government is investing heavily in modernizing our infrastructure backbone. Private investments remain robust.

A seven percent GDP growth rate, however, has its downsides too. Faster growth tends to build up inflationary pressure. Heftier imports of capital goods puts pressure on the balance of trade numbers and, hence, on the peso exchange rate.

Anyone who pedals a bike knows how this works. The faster you go, the stronger the headwinds.

For our economy, at this time, the threshold seems to be seven percent GDP growth. At this pace, our imports jump. Stronger consumer demand puts pressure on supply, resulting in inflation. We will tend to buy more rice, more oil and more machines from abroad, putting pressure on the exchange rate.

After decades of stagnation in our manufacturing, we import consumer durables, processed food and luxury items in large quantity. Any improvement in the purchasing power of our people reflects in deterioration of our balance of trade numbers.

Only by rehabilitating our eroded manufacturing base can we solve this. But this will take time – as well as a lot of reforms to improve the ease of doing business in our economy.

After decades of stagnation in our agricultural sector, we import much of the food we consume. This includes, apart from rice, other crops such as onion and garlic that we used to produce for ourselves. Now we are talking about importing more sugar, a crop we used to export. The better our people are fed, the more we will need to import.

Neither an inflation rate of four percent nor a peso exchange rate of P53:$1 are fatal to our economic prospects. But we need to understand that all policy options have their downsides as well as their upsides. They need to be well orchestrated and calibrated to avoid disruption.

For this reason, we need to pay closer attention to the work our economic managers and less attention to President Duterte’s propensity to say strange things.

Doldrums

In a single speech last week, President Duterte managed to string together two widely disparate things: he said the God in Catholic doctrine was “stupid” and that the economy was in the doldrums.

The first item does not scandalize me. These were things we raised in high school when we wanted to irritate our theology teachers.

But Duterte is no longer in high school, rebelling against the apparent incoherence of traditional doctrine.  He seems to be lashing out at some in the Catholic hierarchy who were so quick to pin the blame on him for the deaths of priests.

It is the second item that scandalizes me. The allegation that the economy is in the doldrums simply does not conform to facts. 

The economy is growing – perhaps too fast for its own good. Only a handful of economies in the world today, in the post-stimulus era, grow in the vicinity of seven percent.

Duterte can help spur countryside development by vigorously encouraging agro-industry instead of falling into the old mindset of giving away land in small parcels for subsistence farming ostensibly to address historical wrongs.