 |
 |
| Reference Material |
| This article first appeared in BusinessWorld and was emailed to us by Ben Sanchez. Musings on the year of the (she) dog: no Garci crisis, but no cigars either By Romeo L. Bernardo, former Undersecretary of Finance Coming into the new year last year, one of the foremost concerns of analysts in business and academic circles was the prospect of a debt crisis as continued poor revenue effort constrained government's ability to rein in its rising debt ratio. While there remained a lot of hope given remittance-driven domestic economic growth, the fear then was of an event-triggered fiscal blowup, with government unable to re-finance its maturing obligations and forced to default on its foreign currency-denominated debt, a large chunk of which was held by domestic banks. 2005 came and went and thanks to excellent fiscal, debt and monetary management and passage at last of the EVAT Law, there was no debt crisis; but as expected, the economy just muddled through. A welcome development was that despite the "Hello Garci" political storm and "Hyatt 10" resignations, yields on government dollar debt papers, a.k.a. "ROPs", remained steady. In fact, even before the EVAT was finally implemented in November, some investment houses were giving an "overweight" recommendation on Philippine government credit. A lot of the interest in ROPs (and other emerging market debt for that matter) was attributed to "liquidity" in global financial markets. What was not evident however was who these investors were. Apparently, as discussed in the latest issue of the IMF's Global Financial Stability Report and reported in a recent issue of The Economist, there has been an increase in the size and importance of institutional investors such as pension funds (according to The Economist, these institutional investors invested some $7.3 billion in emerging markets in the first half of 2005, 74% more than the comparable period in 2004). As pointed out in the IMF report, what is significant about this development is that given these funds' long-term orientation, they are less likely to just up and leave on market noise and thus, may have a stabilizing effect on the market. Moreover, with a more sophisticated investor base able to distinguish between idiosyncratic and systemic events, there is less risk of contagion similar to the 1997 Asian crisis. This development, coupled with the earlier observation that domestic investors, who have greater appetite for Philippine risk, hold some 2/5s of Philippine government securities through the banking system, makes the prospect of an abrupt market shutdown unlikely over the short-term. Still, there is nothing to stop these institutional investors from gradually reducing their exposure to the Philippines if economic fundamentals fail to improve materially over time and especially when compared with progress in other emerging markets. Entering 2006, the fact that global financial markets remain liquid, or that government is expecting to improve its tax collection with EVAT, or that local financial markets appear bullish as seen in gains in local stock and bond markets and strengthening of the peso, should not be taken to mean that "the runway is clear and takeoff is at hand" ("GMA: Economy off to flying start", Philippine Star, 01/04/06). Behind these headlines are stories of doctors turning to nursing to better provide for their families, of weak dollar demand because of declining fixed investments (due in turn to the political problems and high oil prices), of the rise in portfolio investments (encouraged by the passage of the EVAT) which, nonetheless can flow the other way anytime. In the end, all we're seeing may just be a break from the endless battles that this Presidency has had to engage in and will likely continue to have to face if it is not able to get its act together and plan out steps to quickly revive investments. In this regard, well thought-out pro-poor spending, say on education, water and key infrastructure would certainly make more sense than doling out government "savings" in food subsidies ("GMA announces P35-B subsidy for food", PDI, 01/03/06) � witness the short-lived Kadiwa program in the 80s. After all, risks to global growth remain (e.g., from oil prices, interest rate hikes) and the Philippines needs to work on strengthening its economic fundamentals to have enough cushion against any negative shocks. The year of the dog is expected to bring good fortune. Lady Fortune however is known for her fickle moods.***** |