Books on The Philippines
Update No: 058 - (31/10/08)
During a month where the economic news from around the world has gone from bad
to worse and with no sign yet that the recent crisis that has affected global
markets is bottoming out, the Philippines Government has shown, for once, a
gritty determinism to avoid signs of panic, despite the worsening situation.
Both Malacañang Palace as well as the Central Bank of the Philippines have
sought to put the best possible gloss on a bad situation by pointing out that
the exposure of the Philippines to souring global assets is minimal and that
there is no need to panic; but many within the local business and investment
community are traumatised by current events none the less.
For much of the past month, the usual diatribe of salacious news relating to the
latest scam to be perpetrated by those in a position to do so, has been set
aside to be replaced by wire service coverage-supported by local analysis of
varying quality-related to the global crisis. Unfortunately much of this
analysis has been of the rhetorical and self-congratulatory kind: isn't it lucky
that the Philippines held back from integrating into the global economy?
Looked at in the short-term, such analysis does have some validity. The
immediate exposure of the Philippines is indeed limited and local companies,
especially those in the property sector are busily buying up the local assets of
Lehmann Brothers and the like at bargain-basement prices. The banking sector too
has gone a long way to cleaning up its books and is not nearly as vulnerable as
it was when the Asian crisis hit ten years ago. The major banks are showing no
signs of faltering liquidity nor of troublesome balance sheets although the
government has, as a precaution, made moves to shore up this sector with
increased funds to the local deposit insurance corporation.
Non-performing loans of the banking sector are at a low 3.88 percent although
this is one number that will need to be watched in coming months as will the
level of credit card debt. However, on the downside the value of mutual funds
has been sliding.
Even so, with the latest Central Bank data showing the Philippines posting its
highest balance of payments deficit last month in more than four years ($482
million in September), the government is taking no chances. The Bankers
Association of the Philippines has recently approved new measures to help
financial regulators contain any possible fallout from a currency flight. These
measures include tighter scrutiny of offshore investments and the opening of a
new inter-bank lending facility using government securities as collateral.
Government debt too is much less exposed now to the vagaries of currency
exchange movements since the Philippine began to source much of its monetary
needs from the local market. Total debt service payments in the first three
quarters reached Php 535 billion (£ 6.7 billion approx.) Of this amount, Php
162 billion (around 30 percent ) was in foreign currency obligations and the
remainder in local currency. Interestingly, Php 301 billion was for principal
repayments and P235 billion for interest payment. From more than 30 percent
eight years ago, interest payments now account for only 23.3 percent of total
debt servicing and are expected to fall below 22 percent by the end of this
year. This is one area where far-sightedness has paid off.
But in spite of this, the past month has seen the peso slide further against the
US dollar and it is now trading again at around 49 to the dollar as compared to
a rate of around 41 at the beginning of the year. This is the same rate as
recorded in January 2007. On the stock exchange, the PSI composite index has
been on a slide for most of the year and is now at levels not seen since 2004.
Indeed, one consequence of the global crisis is the outflow of money from
emerging markets back to global headquarters. In September alone some $312
million in capital was repatriated out of the Philippines.
One item of good news is the roll back of oil prices amid current uncertainties.
Oil prices have plunged to their lowest levels in 17 months as fears of a global
recession (and this is generally taken to a global rate of expansion of less
than three percent per annum) have dampened demand-especially for oil and other
commodity futures-despite news that OPEC would cut oil output by 1.5 million
barrels per day. According to the latest reports, Brent North Sea crude for
December delivery has slumped to US$61 per barrel, its lowest level since March
2007. New York's main contract, light sweet crude for December delivery, tumbled
to US$62.85 a barrel, which was last seen in May last year.
As a consequence, pump prices in the Philippines have fallen dramatically. Top
grade petroleum that was selling at the pump for close to Php65 per litre
earlier this year has fallen back to Php45 per litre. This represents a fall of
around 30 percent. While this will be good for the transport sector and for
consumer inflation as a whole, which has recently entered double digits; it will
also dramatically reduce government windfall tax revenues from the high oil
prices that the government was relying on to pay for many of its poverty
alleviation programmes and reduce its overall budget deficit.
The Philippines Government has not yet solved its own budget deficit problem and
little has been heard of the plan to balance the books by 2010. The present
crisis situation will only compound the problem. This year the budget deficit
for the first nine months reached Php53.4 billion as a result of higher than
anticipated government spending and weaker than expected tax collections. While
Finance Secretary Teves is still claiming that the deficit will come in within
target this year; again this will be achieved, not by enhanced revenue
collection but rather by further sale of assets.
Nevertheless, despite expected revenue shortfalls, the government, with private
sector assistance has mobilized a Php100 billion crisis fund to finance
programmes aimed at boosting the economy, should such be necessary in the
current climate. Half of the funds will be raised by government and the other
half will come in the form of private sector investment. No specific projects
have been announced and reports suggest that the money will be utilized rather
as a form of stand-by facility to fund future pump-priming projects,
particularly in infrastructure.
So far so good, for the short term: But the new environment in which the
Philippines finds itself, is likely to last well beyond the short-term and the
global economy could take several years to rebound. Many leading analysts and
their think-tanks, do not expect a recovery until 2012-2013 at the earliest. As
well as shorter-term tactical measures, the government will need to consider the
broader strategic response. Will remittance income continue to shore up the
local currency and support local consumer spending? Indeed will there continue
to be a demand for overseas Filipino workers, or will demand contract along with
the global economy?
This is surely the time to take a fresh look at overall competitiveness and
productivity of the country as part of any strategic response.