More telltale signs

Have you ever experienced falling on your butt and feeling the ache only the next day after you’ve slept on it? There’s a parallel here, I swear, with what’s happening now in the Philippines in relation to the world financial markets that can’t seem to stop crashing.

The biggest economies in the world – the United States, Europe and Japan – are sinking into recession, the textbook definition for which would be two quarters of negative growth. Singapore had jumped the gun on everybody else when it reported that its economy contracted 6.3 percent in the third quarter after dropping 5.7 percent in the previous three-month period.

Problems of falling job opportunities and declining retail sales are taking their toll on the US economy that’s just burdened the entire world with the worst financial crisis since the Great Depression. Anecdotes abound as to the many shops in the US with huge SALE billboards and yet nobody’s rushing in to buy, and how Starbucks became one of the first casualties with their $4-lattes being sacrificed in favor of a gallon of gasoline.

The job cuts and reluctance of American consumers to spend follows the upwards spiraling of gasoline prices a few months back that aggravated an already unsettled economy still coming to terms with the backlash of what most people thought was simply a subprime crisis that would eventually sort itself out.

Then came US mortgage giants Freddie Mac and Frannie Mae running for government support, and followed by Lehman Brothers in the middle of September declaring the biggest bankruptcy in history. These events have started a global rout that has forced governments to approve mammoth bailout packages and use taxpayer money to buy banks and rescue insurance companies in their attempts to stave off a financial market crash.

Markets continue to crash

And yet, a month-and-a-half later, markets continued their plunge. Last Friday, the Standard & Poor’s Futures Index fell more than their daily limit, leading to suspension of trades. Stocks in Europe and in Asia continued to drop.

More than $10 trillion have been erased from the market value of equities so far this month, wiping out about one-third of total value. MSCI’s index of developed and emerging stock markets have fallen about 50 percent this year, set for its worst performance ever.

Our own stock market had lost 46 percent this year, headed for its worst showing since the time of the Estrada impeachment.

New York University Professor Nouriel Roubini, the day before the S&P Futures suspended trading, said policy makers may need to close financial markets for a week or more to stem the sell-off in assets and restore some calm. This is the same guy who in July 2006, even before the subprime mortgages started unraveling, said the US would fall into a recession.

Last February, when at least half of the market thought, or at least hoped that the home loan crisis could no longer worsen, Roubini predicted a “catastrophic” market meltdown that authorities couldn’t arrest with large banks collapsing and stocks plummeting.

The modern-day version of Nostradamus didn’t stop there. After the S&P Futures hit the warning button, Roubini said the chances of a prolonged “economic stagnation” in the U.S. are increasing and that things are actually getting worse, not better.

Resiliency, a delusion?

Now, what does these all mean for a small economy like ours?

Let us not, for one second, believe that the Philippine economy is “resilient” as what our seemingly clueless economic managers in government keep on saying. True, we are not as badly hit as the others in the region, like perhaps Hong Kong or even Singapore, after Lehman’s collapse.

So the banking sector’s exposure to Lehman is just 0.04 percent of total assets, and the total investment to CDOs (collaterized debt obligation), CLNs (credit linked note) and CDSs (credit default swap) is less than one percent.

But then, our banks hold more than 40 percent of the Philippine government’s dollar-denominated bonds or the so-called ROPs. And as the value of these dollar bonds drop, especially after emerging markets like Argentina and Pakistan signaled possibility of defaults, banks are forced to book either or both capital and profit-eroding losses.

The central bank on Oct. 23 relaxed rules on mark-to-market accounting to stop the hemorrhage among the country’s biggest lenders. Banks have to be in good shape to lend, and at their current condition, some of them aren’t in the pink of health.

At this point, the real economy, which is made up of people like you and me, are still just reacting to the inflation problems that descended on us in the second quarter. Like monetary policy, which takes effect after three to six months, the impact of catastrophes also tend to have a lag just like the butt ache analogy.

Our major trading partners like the US, which most of the time, still ends up as the biggest buyer of our exports and from where the bulk of remittances come from, are only starting to go into a recession.

Prepare and stop being delusional

The impact of that to us isn’t going to be instantaneous. It won’t readily show in either remittance or exports numbers. So don’t take comfort in the hope that the money our heroes overseas are sending will continue to grow or that exports, although slowing, would still be positive.

Let us be watchful of some of these telltale signs. Growth in remittances in August, even before the Lehman collapse, slowed dramatically to a little over 10 percent from a year-on-year growth of almost 25 percent in July.

Imports in August, a seasonally peak month, cooled to 1.1 percent from a year earlier, the slowest in 15 months. Purchases of electronic parts, which are raw materials for laptops and phone chips we export and that make up the bulk of our overseas sales, contracted for a sixth month.

We don’t need to be rocket scientists to know that with imports of materials behaving as such, the slack in exports – making up 40 percent of our gross domestic product – won’t be far behind as global demand for electronics wane.

Declining exports would mean less inflow of foreign exchange, which is bad for a peso that’s chalking up its worst performance in eight years. There too looms the specter of job cuts, adding to an already rising problem in unemployment.

And we aren’t talking yet about our overseas workers who may also be in danger of losing their jobs.

Definitely, you don’t have to be a Roubini to know that the Philippine economy won’t be doing so well in the coming months and years. So best to prepare for the storm, and stop being delusional.

Collegiate Champions League update

Here’s a treat for students and collegiate basketball aficionados. You may watch the zonal championship games for free at the Makati Coliseum starting Nov. 3 to Nov. 6, 2008. The games will feature three regional champions and nine qualifiers from Metro Manila leagues competing for two slots in the “Sweet 16” Final Challenge of the 2008 Philippine Collegiate Championship.

The teams from provincial leagues are: St. Louis University, champion-Region 1 (Ilocos/Baguio); Luzon University Golden Tigers, champion-Region 2 (Pangasinan/Pampanga); and University of Nueva Caceres Greyhounds, champion-Region 3 (Quezon/Bicol).

Those coming from Metro Manila are: UE Warriors, Mapua Cardinals, UST Growling Tigers, Arellano University Chiefs, Lyceum-Batangas, Don Bosco-Mandaluyong, EAC Generals, St. Clare Saints and Lyceum Philippines Pirates.

Students are also invited to log in at www.CollegiateChampionsLeague.net and submit your choices of teams that will advance to the FilOil Flying V “Sweet 16” Final Challenge. Those with most number of correct choices will receive surprise gifts from the sponsors.

For more details about the biggest collegiate basketball event for the year presented by SMART, PLDT, FilOil Flying V and KFC visit the official website, www.CollegiateChampionsLeague.net and www.gameface.ph, Internet media partner of PCCL.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.