DON'T HOLD YOUR BREATH IN 2009

The Philippine Star
01/09/09

If there was one thing that 2008 taught all of us is that anything can happen. The world's largest banks can collapse, the world's biggest carmakers can go bankrupt, and the world's biggest economies can sink into a recession faster than even a gazillion-dollar bailout can take effect.

We also learned last year that if a commodity as basic as oil can more than double in less than a semester, it could also plunge to a third of its value at an even faster rate.

And in economics, the most basic principle of interest rates just got flushed down the toilets as benchmark rates in the U.S. and Japan were slashed to practically zero.

It is under the framework of these global events that we start 2009. We also greeted the New Year under a cloud of gloom and caution, laying aside the usual optimism that comes with the holiday revelry, replaced mostly by fear that the worst is yet to come.

Our economic growth in 2008 is expected to have slowed to a seven-year low of about 4.6 percent while inflation probably averaged close to around 9 percent. The peso fell 13 percent, its biggest decline since 2000 when Edsa II was just a few weeks away. The main stock index plunged 48 percent, its worst year in two decades.

President Gloria Arroyo's approval rating remained low, with corruption in government perceived to be worsening and the quality of politicians not getting any better.

The good news

Against such backdrop, what then is in store for the economy this year? Sadly, more uncertain and bad news than good.

Let us humor ourselves and rattle off the good things first. We now have lower fuel prices, definitely much lower than the $147 per barrel price of crude in July last year.

Rice prices seem to have stabilized too, which should translate to some loosening in the food budget. Interest rates are also on the decline. Inflation, on the other hand, is expected to continue decelerating, which should give the central bank more room to cut overnight borrowing rates used by banks in pricing loans.

All these should translate in a decline in commodity prices and even transport fares, which could only mean that Filipinos would have more money to spend on travel, clothing, the Internet, and yes, even for text messaging and mobile calls.

In theory, lower central bank rates should translate to lower rates for borrowers, either to buy a home or a new car or start a business. But then, if there's another lesson we learned in 2008, textbook economics do not always apply under the current global order.

Now, the bad news

And so, here’s where the bad news begins. While the BSP's key interest rate may be at 5.5 percent, banks have become paranoid about lending. This simply means that banks will continue to charging high double-digit rates on loans as they continue to be risk-averse.

The government will also see a growing budget deficit. This is going to be one sure reason for the state to borrow more, which could mean that benchmark bond yields, or the interest on government borrowing, will be higher.

Expect also a contraction in government tax collections by the BIR and Customs. Without saying, this will cause the budget gap to further swell. This time around, it's not just corruption that’s to blame because corporate profits are likely to be lower with the general economic malaise.

Uncertainties

While still on the surplus side, we’re seeing the country’s balance of payments dramatically dropping from $8.6 billion in 2007 to an estimated $500 million in 2008. BSP has assured that the BOP would remain in surplus when the full-year 2008 figures come in even if exports contracted in the fourth quarter.

With global demand, especially for electronics, nearly grinding to a halt, earnings from exports are dimming. And imports in the last quarter of 2008 also shrunk, another signal of a slowing down economy.

Decreasing remittance levels

Remittances, as of October, remained above $1 billion each month, although this has been dropping. From an estimated 13 percent growth in cash transfers in 2008, the central bank, however, is optimistic that remittances will still rise 6 to 10 percent this year.

Monetary authorities are hanging on to the logic that many Filipinos are already in high-skilled jobs, so much so that deployment – at least to the Middle East – will continue increasing.

But with crude oil price losing as much as 70 percent from its July peak, the Middle East is feeling the pinch. Hiring in Dubai, according to anecdotal evidence, is slowing down dramatically.

Employment opportunities in Singapore are practically nil, now that the city-state has declared it is in a recession. Expect the same from Japan, which is also now experiencing negative growth.

The government is projecting the local economy to continue growing this year from an estimated 3 percent in 2008. At the very least, the trade deficit this year will likely narrow as raw material importers will limit buying in anticipation of waning demand.

Peso resiliency

The lower remittance inflow, dropping exports and anemic investments levels will definitely put pressure on the exchange rate. Traders aren't ruling out the peso’s return to the 50 level in the first quarter as the economy starts absorbing the effects of the global recession.

Two factors though may delay the peso’s depreciation, at least for a few months. The national government is expected to increase its dollar-denominated borrowings early this year, in part to boost the central bank's reserves. During the first half, the government is also scheduled to receive about $1 billion representing the 25-percent down payment of Monte Oro Grid Resources Corp. for winning the long-term contract to manage the nation's power transmission company.

Indeed, 2009 will be paved with challenges that could put us through a wringer. But if there's one thing we Filipinos are sure at this point, it is that we've been through difficult times and yet we've somehow always managed to overcome them. It’s amazing how much discomfort we are able to take in.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, SalcedoVillage, 1227 MakatiCity. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.