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SPECIAL REPORT

Bullish economy reminiscent of pre-1997 crisis

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(First of three parts)

Fund managers around the world have dubbed the Philippines the newest “tiger economy” of Asia. And for good reason. The latest government data showed the economy roaring ahead at its most vibrant pace in decades.

In fact, the country’s growth—measured by the rise in the gross domestic product (GDP)—is one of the strongest in the region.

Stocks on the local bourse have been rising to dizzying heights, marking record high after record high and making the Philippine Stock Exchange one of the best-performing equities markets in the world.

Meanwhile, fueled by low interest rates and rising confidence, the property market has been booming as well, with condominium and office buildings rising everywhere and construction cranes punctuating the city’s skyline.

The peso stands strong against the dollar and the central bank’s foreign exchange reserves are at record high levels, giving the country a buffer against sudden capital outflows.

But most importantly, the Philippines’ credit rating rests only a notch below the coveted “investment grade” bestowed by international debt watchers like Standard & Poor’s and Moody’s Investor Service—a hair’s breadth away from a level that promises to flood the country with more capital and lift more people out of poverty.

This could very well be the rosy description of the country’s economic situation today. But this was, in fact, the lay of the land in January 1997, less than six months before the East Asian financial crisis laid waste to the entire region and pushed millions of Filipinos into economic hardship for years to come.

Differences

To be sure, a world of difference separates the onset of the Asian crisis in the Philippines in July 11, 1997, from present day conditions.

“Our economy now is much stronger,” said  Governor Amando M. Tetangco Jr. of the Bangko Sentral ng Pilipinas. “Back then, our dollar reserves were limited so it became difficult very quickly once the capital outflows started. But today, our problem is [having] too much dollars coming in.”

Indeed, the country’s economic managers had to face the financial tsunami that swept across the region 15 years ago with only $11 billion in dollar reserves. In less than a week in July 1997—in a vain attempt to keep the peso’s value from collapsing—the BSP used up almost $2 billion of this precious “ammunition” trying to fend off currency speculators.

“Today, we have over $84 billion in reserves,” Tetangco said, noting that the amount was almost 700-percent higher than what the country had in 1997 to fight off the crisis. This amount can pay for more than a year’s worth of imports of goods and services, compared to only three months back then.

The chief of the BSP—the agency at the forefront of protecting the economy from sudden shifts in the economic tide—then proceeded to rattle off statistics to illustrate just how far the Philippines had come over the last decade and a half.

In the five years leading to 1997, the country’s inflation rate averaged 7.6 percent. This was relatively low for a country used to double-digit inflation. But in contrast, the prices of goods and services from 2007 to 2012 averaged only 4.7 percent.

Back in 1997, BSP’s overnight borrowing rate (the interest rate on which banks base their lending rates to the public) averaged 11.2 percent. This was also low then. But in the last five years, the overnight rate was only 4.8 percent, bringing the rates on bank loans for houses, cars or corporate use to their most affordable level in the country’s history.

In fact, all economic indicators showed that the country is better off now—from average bank lending rates (11.2 percent then against 7.7 percent today); money supply growth (20.7 percent versus 10.7 percent); peak property prices in Makati (P425,000 a square meter then versus P280,000 now), to the prices of stocks relative to their earning potential (28 times then against 17 times now).

1997 on his mind

But surprisingly, despite being interviewed by the Inquirer on short notice, Tetangco came fully armed with graphs, tables and slides that juxtaposed 1997 with the present day. His collection of economic data was kept handy in a single file folder for easy reference long before the interview was set. The comparison between 1997 and today—whether it yielded similarities on the surface or differences underneath—was clearly on his mind.

Traditionally, a central banker’s job has been defined as one of being the adult in the room in a big party, ever watchful to keep youngsters from becoming too rowdy and hurting themselves. And the current party is, though most revelers are still having a blast, is clearly on Tetangco’s mind.

“I think about it,” the BSP chief said. “The conditions are different. But we always have to be watchful.”

And he’s not the only one who has looked back at 1997 and cast a cautious eye on the present.

Col Financial Group president Conrado Bate is a grizzled stock market veteran who was in the thick of the previous crisis heading what was then the country’s top stock brokerage, Jardine Fleming Securities.

“People have to temper their expectations a bit,” he said in an interview. “Will there be a collapse? No. But are things in the market sustainable? I say, no.”

(To be continued)


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Tags: Asia , Business , economic crisis , economy , tiger economy

  • http://pulse.yahoo.com/_VL4O6U5XQJS2V6O5RYE3FDYV5I JX

    Currency collapses are born from oil/automobiles, investors move on.   Only extremely aggressive investment in urban rail lines in Manila can keep the oil bill down enough to keep pulling in cash to avoid stalling, this is how China does it, i.e. 5 or more lines under construction at a time per major city, no pausing, no delays.   Trusting people to spend their own money will bankrupt Ph, the state has to provide the most efficient means (urban rail) by pooling the entire nations savings, otherwise people will choose cars, EDSA will be clogged, people will have ill health, people will lose faith and riot. Without insane urban rail commitment the boom will be short lived, investors will lose faith Ph can balance its import bill.

  • Joseph20112012

    The Philippines needs to have a further structural macroeconomic, cultural, and especially political reforms in order to maintain the recent economic stability of our country in a LONG-RUN basis not in a short-run.

    Our current economic growth is unsustainable if we continue to rely too much on OFW remittances instead of encouraging more investments in our domestic economic like more job opportunities for millions of unemployed Filipinos, improving our infrastructure, and strengthening our national defense.

    To encourage more investments in our economic instead of relying on OFW remittances and BPO revenues, we need to amend the 1987 constitution and allow 100% foreign direct investment (FDI) participation at all economic sectors in our domestic economy instead of limiting them to 40% and find a local partner who is rich enough to front the 60% (only few locals can afford to front 60% of a large-scale foreign investment project that’s the reason most large-scale foreign investment in Southeast Asia goes to Singapore, Thailand, Malaysia, Indonesia, and Cambodia where foreign investors can invest 100% from their own capital and control what they invested).

    To spread our economic gains not just in Metro Manila, we need to decentralize our form of governance like shifting from unitary to federal form of governance where that provinces or regions are the one who will manage the economic, cultural, and political policies of a specific province or region.

    To assure an efficient governance from the top and to fasten the implementation of laws, we need to shift from the current presidential to parliamentary form of government where Head of State (the President I mean) should have only the ceremonial position while the real duty of governing the nation should be vested to the Parliament led by the Prime Minister and his/her Ministries as the current system ensures conflict between the executive and the legislative branches.

  • tilney

    Govt should fix the USD Peso exchange rate. This has been done by Malaysia and this will avoid exchange rate speculations now being undertaken by foreign investors and local banks who are the  one getting windfall on the exchange rate. Just check how much foreign currency the country is recieving annully,USD Biilion 80 from exporters, USD Billion 24 from OFW’s and USD Billion 12 from BPO . Total -USD Billion 116., meaning the USD going in daily is around  USD Million 310 which less than the more than USD Billion 1.0  daily being transacted with the Philippine Exchange. It is not the exporters, OFW’s or BPO companies that getting windfall profit but banks and foreign investors. Govt should stop this because exporters will lose money and companies  will reduce their operations or close to the detriment to workers who find themselves without an employment , BPO companies will not be competitive and there will be a time that they  will transfer their operations to other countries such as India or China if the peso will get stronger..If the peso can be fixed , companies can make a concrete plan in their expansion which we cannot see at this time because at this time they are more doing some contingencies such hedging on exchange rates. This is like airline companies  putting money to hedging  on  fuel because of volality in Oil proces. .Malaysia success where they have more foreign companies setting up business is because of fix exchange rates. Losses in exchange rates were avoided

  • TagaMlang

    The primary problem with an improving economy is how its benefits be filtered down to the masses as soon as possible.  It is the rich who always benefit mostly from this improvement.  As the saying goes, “money begets money”.  That’s why those who do not have money, or less money do not or benefit less from the economic growth.  How do we solve such a problem?

    Some possible solutions are:

    1.  By (Government) pump priming the economy, more people get employed in infra/service projects.  More poor people  working in construction/infra and service projects get immediate benefits.

    2.  Government financial institutions (GFIs) should implement micro-lending to small businesses. Private banks don’t lend to people without money.  It is the “irony” of our banking systems where they only lend money to those with lots of money already.  GFIs should take the lead in micro-financing.  There are a lot of deserving people and very viable small projects that need financing.  Only GFIs can do this.

    3.  Peg the exchange rate to P45/$1.  This will immediately benefit the OFWs, BPO workers, and spur exports.  More peso value for every US dollar.  It is a myth that the Central Bank cannot peg the exchange rate.  Yes they can.  It is a unilateral decision.

    4.  This is medium to long term, but will have a more lasting effect.  Create more jobs by putting up manufacturing plants that will cater to both domestic and export markets.

    5.  The government should “plug all holes” that are causes of graft and corruption.  With our P2 Trillion annual budget, if we can save 10% from graft and corruption, that is already P200 Billion.  This is a lot of money that can be used for Conditional Cash Transfer (CCT) program to help the deserving masses.  This indeed will definitely create immediate benefits to the masses.

    • Handiong

      Some of your suggestions are already being done:

      1.  Pump-priming the economy through government spending on infrastructure. Since these are necessarily gigantic undertakings, it takes time to get the projects out of the pipeline. But the benefits will be felt down the road.

      2.  The plugging of loopholes that create opportunities for graft and corruption is a primary objective of the present Administration. The result is that we are seeing more government funds going into actual projects and services. We should expect this anti-corruption campaign to continue under PNoy. The appropriation for CCT has been increased in the new national budget.

      On micro-lending, the DBP should take the lead. Instead of funding mega-projects of the rich, the bank must focus on the small and medium business sector.

      I don’t favor fixing the exchange rate. The CB can influence the rate through open-market operations, but it should not impose foreign exchange controls. 

      • tilney

        Govt should fix the USD Peso exchange rate. This has been done by Malaysia and this will avoid exchange rate speculations now being undertaken by foreign investors and local banks who are the  one getting windfall on the exchange rate. Just check how much foreign currency the country is recieving annully,USD Biilion 80 from exporters, USD Billion 24 from OFW’s and USD Billion 12 from BPO . Total -USD Billion 116., meaning the USD going in daily is around  USD Million 310 which less than the more than USD Billion 1.0  daily being transacted with the Philippine Exchange. It is not the exporters, OFW’s or BPO companies that getting windfall profit but banks and foreign investors. Govt should stop this because exporters will lose money and companies  will reduce their operations or close to the detriment to workers who find themselves without an employment , BPO companies will not be competitive and there will be a time that they  will transfer their operations to other countries such as India or China if the peso will get stronger..

        If the peso can be fixed , companies can make a concrete plan in their expansion which we cannot see at this time because at this time they are more doing some contingencies such hedging on exchange rates. This is like airline companies  putting money to hedging  on  fuel because of volality in Oil proces. .

        Malaysia success where they have more foreign companies setting up business is because of fix exchange rates. Losses in exchange rates were avoided.

  • kilawin

     how about an inclusive growth?the only thing that’s benefiting  the economic growth are the rich oligarch Filipinos, while, the poor still remains poor!….basic services from the government still crap,infrastructures,education are worst among the world etc….there is nothing wrong with dreaming but sometimes we need to see and wake up from reality!

  • Gerald Abueva

    Daxim L. Lucas, this is subversive report. Have your editors check the title first, before publishing. Baka ma-hot seat ka.

    In your next installment, what happens to Asia when the US Fed and ECB raises interest rates in 2014 or 2015?

  • pilipino

    Tuloy-tuloy na ang paglago ng ekonomiya at kabuhayan sa ating Bayan. Patuloy Nyo pong pagpalain O Diyos ang aming Bayang Pilipinas – ang bayang magiliw at perlas ng silanganan, ang lupang hinirang ng Makapangyarihang Diyos dito sa dakong Asya, ang kaisaisahang Bayan na sumasampalataya at nananalig sa tunay na Diyos sa dakong ito ng daigdig.

    God bless the Philippines and increase our financial capacity to help our people out of miserable poverty and into prosperity and well being of their body, mind and soul.

    • http://pulse.yahoo.com/_D3LDMMAKC6UDQLDVFP2DGSJBXY Jezzrel

      AMEN!!!

  • rickysgreyes

    Education, manufacturing and microfinance are the keys to providing jobs to the non-college degree or less educated Filipinos. If we can give jobsto th less educated Filipinos, we will make a big dent on poverty.

  • Count du Fount de Cakes

    looks like the Crabs are still celebrating Christmas



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