Scared money

A global business poll conducted by accounting firm Grant Thornton gives the impression that in the Philippine business sector, the optimists prevail. In a survey that polled more than 7,000 business leaders in 32 countries including the Philippines, 88 percent of local respondents were optimistic about business prospects here this year.

This degree of optimism from businesses that depend on the local economic and business climate, is astonishingly high. In 2005, enthusiasm about the future was limited to only 50 percent of those surveyed while in 2006 it jumped to more than 70 percent. As compared to other countries, only India had a higher score than the Philippines at 97 percent. China and Singapore followed at 85 percent and 84 percent, respectively.

I am happy about this bit of good news but I am not impressed. Expressing optimism, like idle talk, is cheap. For this optimism to translate to a booming economy requires action by way of these business leaders putting their money where their expressed optimism is. Yet, the proof is opposite. They may say they are optimistic about business prospects in this country this year, but they are scared to risk their money by way of actual investments.

Indeed, that’s why we have this phenomenon of too much money floating around. The high liquidity of recent weeks is proof that local money bags are still doubtful about the direction of the economy. Otherwise, they would be among the first to exploit the opportunities that some observers say abound in the Philippine economy today.

Or maybe, the more realistic assessment is that Philippine money is by nature scared... risk averse...segurista. We are not an entrepreneurial people and we move only on the strongest assurance of quick and sure returns. We are rather conservative with our funds, which explains why everyone including our bankers are addicted to risk-free government securities. Now that the government is borrowing less, we are at a loss on what to do with our funds.

This is why the property market is moving up. We think buying property is the next best thing to buying Treasury bills. There may be a very real danger of overbuilding high-end condos. There is a real need for low cost housing but other than from OFWs, there is no real surge of investment activity to satisfy the housing requirements of lower income classes.

We have to be resigned to the reality that the regime of the negative interest rate, one wherein the low yields of government securities translate to real negative interest rates because inflation is higher than the yields, is going to be here for a while. According to BSP Governor Say Tetangco, "the negative interest rate differential has been observed since last year. Despite this, however, capital flows, including those going to the government bond market, continued to be strong."

There are many factors why this situation will continue for a longer while. Government is now better able to manage its borrowings. It is no longer at the mercy of the market. The able stewardship of National Treasurer Omar Cruz made it possible for government to shift to medium and longer term debts and minimize short term TBills Better tax collection by the BIR under Commissioner Jojo Buñag is also contributing to a healthier treasury balance.

On the other hand, all that liquidity is not causing a run-up on inflation because of, among other things, a stronger peso. Local businesses with large forex borrowings are able to lower their cost of money and this translates to lower prices to consumers. And if they have a lot of imported components, the cost of manufacturing is lower too.

Meralco’s recent announcement of plans to do away with the currency adjustment portion of our electric bills was made possible by the strong peso. The critical oil industry also now needs fewer pesos to fund their usual volume of imports. This has translated to the series of price cuts for gasoline and diesel and as we all know, the price of fuel has a significant impact on the prices of many other products and services.

Another factor mentioned to me by BSP sources is what they call the China factor. The inflow of China-made products to the country, legally or not, has put pressure on prices... something like the Wal-Mart effect in the US and the 1-6-8 effect here. That might be terrible for local manufacturers but beneficial to consumers by keeping inflation down. You hear the same thing going on in America. There may be other factors that are keeping inflation down but these few examples should give us an idea of what’s going on.

With low inflation, there is more money in the hands of people and so the problem of all that money floating around. The BSP thinks the banks will be forced to lend more aggressively and not just to the real estate sector. I am told that the basis of the BSP’s assessment is a business expectations survey they made which indicates that manufacturers are fast using up whatever spare capacities they have. They will soon have to consider borrowing from banks to finance expansion.

The BSP is also hoping that those with excess funds would discover the agricultural sector. This is a very important sector of our economy and had always been hungry for investments. I guess Art Yap should be more aggressive in making his projects that are ready for private sector investment known. I had been writing about his impressive plans to set up storage facilities and buy refrigerated trucks in a highly organized food supply chain system, and this should be a prime candidate for investors.

Then again, ordinary people with some excess funds intended for retirement or college education of their children will always tend to be conservative and even scared in a financial environment like ours. This is why the late BSP Governor Paeng Buenaventura had been keen to develop a domestic capital market. Paeng’s dream was the creation of a fixed income exchange where bonds and commercial paper can be transparently traded. If we had this fully operational now, all that scared money floating around would have somewhere to go.

In the meantime, ordinary folks who do not have the time nor the expertise to manage their excess funds should get in touch with the trust departments of major banks on how best to maximize gains for their money in the absence of the no-brainer 90-day T-bills. Manulife, SunLife, PhilAmLife and Ayala Life all have investment options for the non-rich who want to do better than a passbook savings account.

Ultimately, if we had a more credible government and a more sophisticated financial system, there is no real reason to have all that money floating around, scared perhaps, but looking for good options nevertheless on how to participate in the benefits of an economy seemingly on the way up.

As for the optimists who told Grant Thornton they are bullish on the Philippine economy, talk is cheap. Put your money where your mouths are!

Gift of light

I am only now starting to open the Christmas gifts that came while I was abroad. I must say I am most perplexed by the gift Ate Glue sent me... two plain scentless wax candles in a clear glass (with the Presidential seal) of the type you light in Churches when you make a novena. What could be the symbolism of this gift? Is she telling me to pray for the country? I’m doing that already.

One of my associates, Carla Sison thinks that maybe because I had been such a consistent critic, it symbolizes what in the vernacular comes out as "nagsolian ng kandila." But that can only be valid if I returned the gift.

Pinky Diokno, a good friend, thinks that because I am such a pessimist about the country under Ate Glue’s reign, the gift of candles is a way of giving me the message that it is better to light two candles than to curse the darkness (of the regime).

The native herbal teas of two years ago and the kapeng barako last year were pretty straightforward promotion of native products. But two candles?

Anyway, thanks and Happy New Year, Ate Glue!

How to

Here are some pre-Valentine tips from Dr. Ernie E.

How to treat a Woman: Wine her. Dine her. Call her. Hold her. Surprise her. Compliment her. Smile at her. Listen to her. Laugh with her. Cry with her. Romance her. Encourage her. Believe in her. Pray with her. Pray for her. Cuddle with her. Shop with her. Give her jewelry. Buy her flowers. Hold her hand. Write love letters to her. Go to the ends of the earth and back again for her.

How To Treat a Man: Show up naked. Bring chicken wings. Don’t block the TV.

Boo Chanco ‘s e-mail address is [email protected]