Business World, 17 July 2013


Stock markets from Brazil to China have recovered partly what was lost when markets plunge in June when US Federal Chairman Ben Bernanke hinted that the Fed is preparing to end its $85 billion in monthly bond purchases. Markets have calmed down a bit since then after the European Central Bank announced its policy to keep interest rates low for much longer and when Mr. Bernanke backed down, on July 11th, with a more reassuring statement that a more accommodative monetary policy will continue until the US unemployment situation improves.

Still, it would be a mistake to assume that the equity markets and currency markets will be sailing smoothly from hereon. I see the present situation as more of a lull before the storm. I expect more volatility in the next few months.

When the Fed starts to tighten, and the tightening will surely come, the tapering process will be sustained for a few months. When that happens, the risk of major corrections will increase.

In fact, some “hot money” may have returned to emerging economies lately, trying to squeeze as much higher profit as possible. But these new inflows to emerging economies are expected to be even more temporary, much more selective, and are constantly watchful of the best time for the exit.

Meanwhile, the International Monetary Fund (IMF) is advising emerging markets, the Philippines included, to prepare for the inevitable capital outflows.

“In emerging market economies, the focus should be on boosting potential growth while dealing with the capital outflows, which may follow from the exit of the US from quantitative easing (QE),” IMF chief economist Olivier Blanchard said.

“We have to accept the fact that as monetary policy normalizes in the US some of the investors which had gone to emerging market countries in particular will want to repatriate [their funds],” Blanchard added.

How much of the capital which went to emerging economies will return to the US? The answer is it depends. In a world economy running on “three-speed mode” — the developing world running on full speed, the US economy starting to pick up, and Europe still on reverse — the bulk of the portfolio investments will flow back to the US.

But some hot money might stay in emerging economies, though portfolio investors will be more careful and selective. They will stay in economies with solid growth prospects and move out of economies which have begun to dim.

The challenge for Philippine authorities is to convince foreign portfolio investors that economic growth would continue to be strong and sustainable, and that profit prospects would be much better than those in advanced economies. If they succeed in making a credible case, some “hot money” might stay; if not, portfolio investment might flow out massively.

The President and his economic managers should be happy where we are right now. The peso is weaker than where it was before, and it benefits the families of overseas Filipino workers, workers in the export sector, the import-substituting industries and the BPO firms. It also favors the Bangko Sentral ng Pilipinas as the peso weakness reverses it huge red ink.

How can the Philippines sustain growth in the face of a still weak and uncertain world. The US is recovering but its unemployment remains high. Europe is mired in recession. ASEAN growth will slow according to the Asian Development Bank. China had two consecutive quarters of weak growth which may continue to decelerate. Japan is recovering but sustaining its growth is still uncertain.

In order to sustain growth under such an environment, the Philippines has to look inward. It has to invest more heavily in public infrastructure. One hopes that the large projects, including the public-private partnership projects, will finally take off.

While waiting for the ground-breaking of the mega projects, the focus should be on quick-disbursing, small projects in both urban communities and rural hinterland. Such projects might include farm-to-market roads, irrigation systems, rural electrification, and post-harvest facilities that will help boost agricultural production; major repairs and layering of existing roads in Metro Manila (including EDSA) and other primary and secondary cities; cleaning and fortification of rivers and canals; and construction of school buildings all over the archipelago. All these don’t require right-of-way acquisitions that constant bedevil large government projects.

Massive investment in public infrastructure is a necessary but not sufficient condition for attracting foreign direct investments (FDIs) into the country. Some of the “hot money” may willingly convert into more permanent FDIs if the cost of doing business in the Philippines is drastically reduced (Philippines ranks 138 out of 185 countries in 2013, down two notches from 136 in 2012) and if Mr. Aquino is willing to relax some restrictive economic provisions in the Philippine Constitution.

Halfway through his presidency, Mr. Aquino has to demonstrate his willingness to tackle the more difficult challenges ahead. Enough of the low-hanging fruit. It’s time for hard decisions.