Tremors In The Economy

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By Al Labita

 

  • Foreign funds are dumping local stocks and shifting them to other emerging markets abroad
  • Unabated capital flight raises questions about the BSP’s role as the state’s financial watchdog
  • Fleeing capital signals loss of investors’ trust in government and economy
  • Foreign credit rating agencies stall investment upgrade due to perceptions of corruption plaguing the Aquino government

 

Monetary authorities may not admit it, but unmistakable signs point to what could be financial tremors shaking the country’s economy.

At the stock market, share prices are plummeting, dragging down prices of listed companies — and profits of investors.

Now trading at precariously below 7,000 points, the Phisix – the stock market’s barometer – has come under siege as more foreign funds dump local counters and shift them to other emerging markets abroad.

Also referred to as “hot money,” the funds come and go anytime as investors deem fit. Usually interest-bearing, they are parked in stocks, government securities and money market.

Bangko Sentral ng Pilipinas (BSP) data showed that in this year’s first quarter alone, investors pulled out a whopping US$2.1 billion from the market, sending stock prices tumbling to new lows.

The seemingly unabated capital flight only showed how foreign traders had exploited to the hilt the

BSP’s foreign exchange liberalization policy at the expense of a sagging economy.

Loss Of Trust

Amid surging constraints hounding the financial market, the BSP may have to reassess its policy and attune it to the imperatives of the times.

Interestingly, the outflow of foreign currencies surpassed their inflow in the first quarter as portfolio investors offloaded peso-denominated assets.

At any given trading day, foreign funds account for over 60 percent of market liquidity, thus their adverse impact on stock prices when withdrawn.

The withdrawal, an alarming indication of loss of confidence in the economy, meant that the Philippines has lost its luster as an investment haven.

It came on the heels of reports that foreign credit rating agencies – Fitch, Moody’s and Standard & Poor  — had become discriminating in backing sovereign debt issues, including those of the Philippines.

But in the past and in exchange for the Aquino government’s three billion pesos service fee, they would readily upgrade the nation’s credit standing.

Investment Grade

A favorable rating affords the debt issuer low interest rates and other concessions from creditors.

Previously, the Philippines was kept two notches below investment grade, despite reforms

in the economy. This prompted the BSP to call the attention of the rating agencies to discrepancies between methodologies used by the agencies and the actual grades the country got.

Last year, the Philippines earned an investment grade, an indication of the government’s capability to pay its loans.

This was because the Philippine economy grew by 7.2 percent—the second fastest in Asia next to China. It was also better than 2012’s 6.8 percent growth rate.

Though behind the curve in upgrading the Philippines, Moody’s is the only rating firm that has a “positive outlook” for the country. This implies possible upgrade in the next 12 to 18 months.

Credit Outlook

Fitch and Standard & Poor’s currently have “stable” outlooks for the Philippines, indicating that their ratings would stay the same for the next year and a half.

Other upsides going for the Philippines are a sound banking system and a balance of payments surplus, leading to a continuous decline in the debt to GDP ratio — from 68.5 percent in 2005 to 49.2 percent in 2013.

For BSP, it feels confident that the three credit watchers would once again extend a favorable rating of the country’s planned slew of IOUs this year to plug any budgetary deficit, given a track record of 60 consecutive quarters of positive growth.

This time, however, it’s a different story as the three credit watchdogs are overly cautious in stamping their seal of good housekeeping on sovereign debt issues, including those issued by the Aquino government.

One underlying reason is the perception of corruption weighing down on the Aquino government in the wake of the pork barrel scandal.

Another is the deteriorating finances – the national government incurred a fiscal gap of P84.1 billion from January to March this year.

The deficit, despite the government’s belt-tightening policy, was 27 percent more than the P66.5 billion in the same three months of last year.

A Department of Finance report blamed the deficit on expenditures which climbed 12 percent year-on-year, faster than the nine percent increase in revenues.

The multi-billion pesos rehab of typhoon-devastated Eastern Visayas proved costly.

Deficit

The government incurred nearly half of the first-quarter deficit in March when the fiscal gap reached P40.2 billion, 14 percent more than the P35.1 billion a year ago.

Spending and revenue grew at the same pace last month, but the government raised only P129.3 billion whereas expenditures were higher at P169.5 billion, thus the deficit in March.

Also in the red is the country’s balance of payments position (BOP) which, as of last February, showed a gaping deficit of US$4.14 billion, a far cry from the US $1.08 billion surplus booked in the same period last year.

Contrary to expectations, two revenue-raising agencies – bureaus of customs and internal revenue – had miserably failed to improve their  collections due to unabated smuggling and tax evasion, in cahoots with corrupt officials.

The Poor

Government data showed the country’s budget shortfall in the first two months of the year rose 40 percent to P43.9 billion as the government increased spending for the highly politicized reconstruction efforts in disaster-stricken Visayas region.

Another gray area of the economy is that investment pledges approved by the Board of Investments slumped by 52 percent to P47 billion in this year’s first quarter, year-on-year.

Amid signs that the days of cheap money are over, market talk is that not too soon, banks will likely raise lending rates, currently ranging from 16 to 22 percent per annum. Expected to get hurt are small businesses.

The move, largely viewed as anti-poor and pro-rich, forms part of BSP’s policy tools requiring banks to tighten their lending windows to stave off any inflation rate uptick.

What also alarmed foreign credit watchers is the banking sector’s runaway loans to real estate companies amid fears of a property bubble.

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