Running out of bullets for economy?

Faced with a double-digit unemployment rate that is not expected to abate any time soon, US President Obama is suffering significant declines in the opinion polls but mercifully nowhere near Ate Glue’s subzero ratings. With 2010 an election year, Democrats are concerned that the sluggish economy will affect their prospects in November.

The White House has constantly reassured the Americans that the country is on the right track but it will take a while to heal the economy. That’s true, as many economists will attest, but that is understandably no comfort to those who lost jobs, can’t get jobs and fearful of losing their jobs.

There is no silver bullet to cure the economy overnight, President Obama points out. But Meredith Whitney, the Wall Street analyst who correctly predicted the mess the big banks got into, thinks the government is simply running out of bullets, silver or otherwise. Whitney told CNBC Washington is running out of ways to help the economy as the US faces major issues regarding credit and employment.

Whitney told CNBC in that interview she is strongly pessimistic about the prospects for recovery. Her primary concern is the lack of credit access for consumers who she said are “getting kicked out of the financial system.” Even credit card issuers are unilaterally reducing credit limits and are being strict with past dues. She said that will be the prevailing trend in 2010.

American banks who benefited a lot from government bailouts and have turned extremely profitable again are still not lending to consumers. The Federal Reserve said that consumer lending dropped 1.7 percent on an annualized basis in October, the ninth straight monthly decline. With no wherewithal to spend and the ever real threat of unemployment looming over their heads, the American consumers are in no position to shop America, and the world, out of this recession.

Consumer spending makes up about 70 percent of America’s gross domestic product. This is why the inability of even credit-worthy consumers to borrow puts a severe crimp in future growth. China’s economy may be the fastest growing in the world today but it still does not have a big enough nor a strong enough consumer base to replace the powerful engine that American consumers had been to the world economy.

As American consumers rediscover the virtues of saving and thrift, the rest of the world economy, including ours, will just have to crawl along next year. I am bothered by some statements from some of our politicians and bureaucrats who often give the impression that we are insulated from the problems of the world economy because of our OFWs.

The financial crisis that hit Dubai over the last month should disabuse our minds that we have nothing to worry about because our workers are earning petro dollars in the Middle East unlike the Latin Americans whose migrants are concentrated in the US. Middle Eastern banks are said to carry as much as 80 percent of Dubai’s debts and that could help spread the problem beyond the borders of this emirate and beyond the financial sector to the real economy in the region.

“If the labor department’s projection is accurate — that as many as 200,000 Filipino workers there might be adversely affected — then we risk losing one-half of all remittances from Dubai on an annual basis,” former Sen. Boy Herrera said. My sources in Dubai already tell me that the Pinoy community is now living in fear because of cutbacks being enforced by cash deficit Dubai companies.

Because of the anemic American economy, even our high flying Business Process Outsourcing (BPO) industry slowed down this year to 15-20 percent growth from the usual 40 percent. While still a seemingly good growth rate, this left many who invested in new buildings specially designed for the BPOs stuck.

Some 600,000 sqm of new supply were completed this year. Industry sources say the take-up for the next two to three years will slow down to 250,000 sqm and the oversupply will probably be eliminated only by 2013. In the meantime, rental rates have plummeted to as low as P300 per sqm making some high end buildings suffer high vacancy rates.

The White House knows what the problem is but is finding it difficult to announce any real solution because of its large fiscal deficit problem. The value of the dollar has plummeted in recent months out of market fears that the American Treasury is borrowing way too much. Even as the economic advisers of President Obama want to put money directly in the hands of consumers to nurture all those so called green shoots struggling to survive, a growing public fear of the deficit problem is a big constraint.

Still, the White House is studying the possibility of using left over funds from the bank bailout program called Tarp to ramp up the economy by creating jobs. A deficit-wary White House has also said that this will not amount to a second stimulus package, implying any price-tag associated with the additional measures will be modest.

Back here at home, Albay Gov. Joey Salceda by way of reacting to our previous column on our own stimulus program and fiscal deficit problem commented that very little in funds from our national government’s stimulus program filtered down to the local government units. He told me, while having dinner at the awards night of BizNews Asia last week, that local governments were waiting for stimulus funds to reach them because they were ready with projects that would produce the loudest bang at the grassroots where such is needed. Since we were within hearing distance of Ate Glue who was at the next table, hopefully she heard his complaint.

One thing seems clear here and abroad: the crisis may have abated somewhat but we are still not out of the woods. The noisy and carnival-like atmosphere of our presidential elections next year may give another impression but we should not ignore the reality that our economy is still in tatters.

The industry sector dipped even more deeply in the third quarter, at -4.4 percent. Manufacturing, which accounts for over two-thirds of the industry sector, continued a deeper downward trend at -7.6 percent. Construction, a job-rich sector, saw growth down to 1.3 percent, despite heavy government spending in this sector.

Investment spending continues its double-digit plunge (-11.3 percent). The same is true with exports (-13.6 percent). Even communication, one of the fastest-growing industries in our text crazy population, is now down to a unbelievably miniscule 1.3 percent growth. The next administration will not have even a few moments to savor its electoral victory before the problems start to overwhelm them.

Banks

I got this reaction to the column on Manny Villar’s criticism of the local banking sector from a Pinoy expat working in the financial sector in New York.

I also find it frustrating that Filipino banks don’t lend more to entrepreneurs than they would to big businesses and ROPs. But using public policy to force banks to lend is wrong. That’s the same logic that Americans used to “encourage” their banks to lend to suburban mega-homebuyers with low interest rates and subtle “guarantees” from the US government. You will only end up creating an asset bubble.

Banks have the dual responsibility to protecting their depositors’ funds, which is why they would rather err on the side of caution (presumably because putting money in the bank is supposed to be as safe as putting money under the mattress).

Instead of forcing banks to lend, a better approach would be to remove artificial barriers to setting up small and medium-sized lending companies whose funds are not guaranteed by the PDIC - make it easy to set up operations, obtain permits and protect their property rights from unscrupulous parties. It is expected that these micro lenders would charge higher interest rates, but at least SMEs that obtain their loans from micro-lenders are more likely to be ones that are up to the task.

The Philippines has a thriving pawnshop industry; let’s make it easier for more entrepreneurial lenders to set up shop.

Just wait

Robin Tong sent me this one.

A little boy pulled down his pants in front of a girl and asked, “Do you have this?”

The little girl lifted her skirt and answered, “No, but my mom says with this, I can have plenty of that!”

Boo Chanco’s e-mail address is [email protected]. This and some past columns can also be viewed at www.boochanco.com