Economic inertia

Ben D. Kritz

Ben D. Kritz

EARLIER this week, Paola Alvarez, who is the spokesperson for Finance Secretary-designate Carlos Dominguez, delivered a triumphant statement to the press, making the claim that “higher net foreign buying on the local bourse over the May 1 to June 10 period is testament to resurgent investor confidence in the Philippines since the peaceful presidential race that was won by Davao City Mayor Rodrigo Duterte.”

Alvarez cited the views of a couple of credible analysts to back her assertion. Justino Calaycay Jr. of A&A Securities opined that Duterte’s apparent plan to keep most of outgoing President Aquino’s economic policies in place is “something which investors and market watchers, businessmen, etc. can hinge their forecasts on.” IGC Securities Chairman Ismael Cruz said that, among other things, “the recent peaceful elections, the election of a new President, the favorable perception of cabinet appointments, and the 8-point economic plan announced by the presumptive Finance Secretary—are all positive factors coming together toward investor confidence.” Alvarez also reported that AB Capital Securities, Inc. equity research analyst Victor Felix said “the biggest source of confidence is the conduct of a clean, honest and efficient election since the conclusion of the election provided clarity on the direction of the Philippines.”

Other analysts, however, were hesitant to ascribe the ‘investor confidence’ indicated by robust stock market performance to the rise of Duterte. For one thing, they pointed out, market movement has been heavily influenced by the significant amount of attention paid to what the US Fed might or might not do with interest rates, and to some extent, the recent steadying of oil prices and growing concerns over the implications of next week’s vote in the UK on whether or not to leave the European Union—which has affected most markets negatively, but seems to have had a positive effect here. Part of that perception of the Philippines as a sort of ‘safe haven’ stems from the strong 6.9 percent first-quarter GDP growth—which Duterte had absolutely nothing to do with—and the recent MSCI rebalancing of the market, which BPI economist Nicholas Mapa pointed out, added some weight to stocks particularly attractive to foreign investors.

There are other signs that the market and the wider economy are experiencing a profound sort of stability, one that may be unprecedented, at least in this part of the world. Also earlier this week, The Economist Intelligence Unit—the research arm of The Economist magazine—released a report written shortly after the results of the presidential election became obvious last month, and assessed the prospects for the economy going forward under Duterte. While EIU offered a somewhat downbeat forecast compared with the analysts’ consensus—“at least” 5 percent GDP growth versus an average forecast of 6.3 percent—the key takeaway from its report is that the most likely thing to happen as far as the economy is concerned, no matter what Duterte does, is nothing; it will continue along its present course, perhaps slowing a bit, but not fundamentally diverging from its current trend.

Another bit of evidence that shows the strength of the economy is the outcome of the BSP’s first two-term deposit facility auctions, which are intended to mop up excess liquidity from the financial system. Each one (the latest was on Wednesday) has totaled P30 billion, divided into 7- and 28-day tenors, and each one has been oversubscribed by five to seven times. Evidently, the economy is awash in cash, much more than can be soaked up by capital investment. That is ultimately not a good situation, because it ‘traps money at the top’ of the economy and aggravates income inequality; what it does not and cannot do, however, is lead to a downturn. An unequal economy can still be a healthy one, in terms that matter on a global scale, and that is exactly where the Philippines is right now: Caught in a sort of economic inertia, fortunately a positive one even if it is imperfect in some ways, that will take a strong force to slow or redirect.

In that context, the aggressively optimistic statement from the new Finance Secretary’s office suggests a certain self-consciousness; a new Department of Finance arriving under the rhetorical theme of “Change is Coming” is not quite as relevant when things don’t really need to be changed that much. At this point, it seems that the best goal for Dominguez and his team is to follow the one that worked for the Aquino regime for most of its term—when it comes to the economy, just don’t screw it up.


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