Wobbly tall tales of Gloria

EDITORIAL

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08/17/2007

The recent turmoil in the international markets as a result of fears on the extent of the run from soured sub-prime lendings in the United States has exposed the vulnerability of the local economy.

This is the kind of external pressure that financial institutions such as the International Monetary Fund and the Asian Development Bank have long warned against the country.

The sub-prime credit problem in the US is similar to the source of the 1997 Asian financial crisis blown up on a global scale.

The Asian turmoil was primarily triggered by bank lendings that suddenly went bad for the real estate sector.

The US crisis is the result of lendings that have become uncollectible from house buyers in the United States who have poor credit histories.

Due to the extent of the funds that went into the US housing boom since the early part of the decade, investment banks and private financing outfits worldwide were believed to have been sucked into the maelstrom.

Suddenly, the stock market and the peso, which Gloria has been using as her supposed showcase for the gains in economic development under her administration, are all now sliding downhill.

The peso was back to the 46 per dollar level while the stock market is down to lower than 3000 levels.

Foreign funds which are all in the market because of the prospects of bigger gains are suddenly packing up and leaving, some fearing the inherent risks in the local market, which was ramped up to critical levels with the credit crisis in the US.

With foreign funds retreating to safe havens, the focus on the economy has returned to the fundamental indicators in the economy, which all look uninspiring.

The local manufacturing sector is in its longest slump in the country’s history spanning one-year-and-a-half since December 2005, based on National Statistics Office data.

More foreign money is fleeing than money coming in, according to the latest data from the Bangko Sentral ng Pilipinas (BSP).

This is particularly disappointing since the government has invested heavily on bringing foreign capital into the country through the provision of fiscal incentives.

Even the much-bruited remittances from Filipinos working overseas are tapering off as remittances in June grew a mere one percent from a year ago, the slowest growth since April last year.

BSP data showed transfers in June reached $1.1 billion against $1.2 billion remittances in May.

The vulnerability of the economy comes mainly as a result of poor fiscal management of the Arroyo administration.

Gloria relied and is still relying heavily on borrowings to keep the government running. The ever-increasing debt level is taking away an even higher proportion of the budget from services and development spending.

Small investments mean low returns and thus, despite the decent six to seven percent growth in the economy recently, Filipinos hardly feel the expanding economy by way of government services.

The compulsion or the drive to pay the right taxes among Filipinos, thus, is low. Tax collection targets, in turn, are regularly missed resulting in Gloria’s need to borrow more.

More domestic borrowings by government crowd out private businesses since banks would prefer to lend to the state, which is practically risk-free.

Policies are biased in keeping the stock market vibrant and the peso strong which are good for image buildup since it is the most visible among the country’s trade each day.

With the peso and stock market both on the downpath, Gloria’s tall stories about a vibrant economy starts to wobble.

Gloria may soon find out how reality bites.

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