That headline is from Breakout Nations, a book written by Ruchir Sharma, a Morgan Stanley fund manager. We reviewed the book in this column last May after interviewing him by phone. The line was used recently by Wealth Securities to lead in their presentation before their clients. It is a good way to shock skeptical Pinoys that our economy is finally taking off.
Completing that quote from Sharma will likely set the mood of P-Noy’s SONA this Monday. “At long last, the Philippines looks poised to resume a period of strong growth. The new president, Benigno ‘Noynoy’ Aquino III, probably has just enough support, and looks likely to generate just enough reform momentum to get the job done.”
Well… hopefully so. But that new president when Sharma wrote his book is now three years on the job… already halfway through his term. The good news is… those positive reviews seem to have basis in fact.
For example, an analyst report from a foreign bank is bullish about the peso because it “is well supported by a twin BoP surplus. That is, both the current account and the financial account are in surplus. Capital inflows are picking up as investors are attracted by not only the stronger growth conditions in the Philippines but also the improving credit position of the sovereign.”
I am sure P-Noy will proudly talk about how these foreign and local business analysts have been ecstatic about him and the country. Wealth Securities entitled its presentation “From ‘Sick Man of Asia’ to ‘Breakout Nation’.” But then stockbrokers are by nature bullish. Given our track record of aborted take offs, I wonder if it is prudent to share their enthusiasm expressed in present day values of expected (or hoped for) future earnings.
Still, there is no denying that the PSEi is amazingly outperforming at a time when global markets are consolidating. Our domestic oriented economy is benefiting from its insulation to the global economy. No wonder Wealth Securities is predicting a PSEi of as high at 5,800.
There are external risks, of course, like a further deterioration in the European debt crisis. Insular as our economy may be, there is still no such thing as decoupling in today’s world. China is starting to feel the pains of a slowing European economy. Brazil is starting to hurt. And the US economy has been frustratingly immune to every trick in the Fed’s book that had been tried to blow life into it.
As for internal risks, Wealth Securities cited the “re-escalation of Phl-China tensions with regard to Scarborough shoal” and a “too strong peso.” On the China situation, we need to have an intelligent response which has so far eluded our leaders. We can only pray that the current war of words doesn’t escalate to a shooting war because if that happens, all bets on an economic take off are off.
As for the “strong peso” it is both a blessing and a curse. The strong peso has removed pressure on domestic retail oil prices. We used to get a double whammy every time world market price of oil rises and our weak peso exchange rate requires more pesos for every dollar we have to pay the oil importers. The strong peso has also reduced the peso value of our foreign debts and has resulted in an international reserve that is at a record high.
But the strong peso has also reduced the purchasing power of OFW families which affects consumption expenditure that accounts for 75 percent of our GDP. It also squeezes the margins of exporters and BPOs, putting pressure on employment. The contracts of BPOs are in fixed dollar terms and a strong peso cuts their margins and diminishes our competitiveness against India whose currency has depreciated significantly.
Nevertheless, P-Noy can point out in his SONA the reasons why our economy appears to be on a winning streak. Topping the list is trust in the Aquino administration. There are those who refuse to grant him this. But Sharma said it. Pesek of Bloomberg said it. CNN has said it too in a recent article. So has the Wall Street Journal and a number of international bank analysts.
Maybe our good fortune is partly luck. Wealth Securities also cited lower prices for crude oil and major agricultural commodities. But even P-Noy haters can’t deny high GDP growth relative to the rest of the world; robust domestic consumption; booming BPO sector; growing OFW remittances; positive current account balance and shrinking budget deficit and the strong possibility of being upgraded to investment grade by the ratings agencies.
But impressed as I try to be with the early accomplishments of P-Noy, specially in bringing investor confidence back, it would be wrong to start celebrating. There is just so much more to do. Indeed, given what we have failed to do so far in terms of harvesting low hanging fruits, we obviously can do a whole lot better.
That PPP program launched with so much hoopla at the start of P-Noy’s watch needs a serious re-launch. P-Noy said he is re-thinking it. That’s fine but get those infra projects going. Three years after wild promises of massive infrastructure projects, the PPP only has a four kilometer tollway awarded but actual work has yet to begin. In the meantime, the public is ill-served by the MRT/LRT systems creaking from over crowding and inadequate maintenance. We also still have the world’s worse international airport.
P-Noy also still has to show more courage in making policy that breaks new ground. How to deal with the strong peso is a case in point. Unless proactively handled, the time may come soon when what little gains we may have earned in the first half of his term are lost in the second half.
I came across the view of an investment adviser on where the peso will be in the near future that should warm our hearts if we didn’t know any better. Simply put, this foreign adviser puts the peso at “the top recommendation on our currency forecast, so far the currency has impressed us very much. We continue to see the strength of the currency on the back on strong fundamentals. We see the USD/PHP dropping below 40 by 1Q 2013.”
I know there are those who are bursting with pride every time the peso strengthens but as pointed out earlier, every centavo of appreciation adversely affects the spending power of OFW families as well as the competitiveness of our BPO industry. Ironically, the peso’s robustness is partly attributed to our “strong foreign worker remittance inflows that help to keep its current account in surplus despite some trade deterioration…”
This financial adviser sees the peso “to continue outperforming its peers in the region because of its robust fundamentals. One of its robust qualities is that the Philippines is a closed economy and hence is partly sheltered from the current global economic slowdown.” But doesn’t that quality also explain why our economy can’t take off in the best of times?
There are those who say it is time for the national leadership to address the peso’s valuation because it could torpedo this economic take off. Some are even calling for some form of capital controls or managed exchange rate. That is how China did it, observers say as they point out that we don’t need so much foreign capital anymore because our domestic savings exceed our domestic investment.
At the very least, we should probably talk about it. As the peso is now poised to strengthen below P40 to the dollar, a serious conversation on the implications must start.
In the meantime, there are many tools at our government’s disposal to manage the peso’s ascent. Toti Chikiamco, president of the Foundation for Economic Freedon (FEF) thinks “the government should stop borrowing abroad and enriching Wall Street investment bankers. There’s more than enough domestic savings for the government to tap and if government solves the fiscal gap, there wouldn’t even be a need to borrow from abroad.”
In other words, P-Noy must realize there are a lot of things that need fixing to sustain the good news about the economy. He has to take a direct hand to really get the needed infrastructure projects going already, PPP or no PPP. He must make sure the economy has enough thrust for a take off, at last. Otherwise come 2016, the headline would read: The Philippines under P-Noy: a strong hopeful start but still a joke.
Tweet
Here’s a gem of truth I found on Twitter.
While the optimist and pessimist argue over the glass of water, the opportunist sneaks in and drinks it.
Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco