ANALYSIS

Financial Storm Brewing

The most recent calls by the country’s business elites for President Gloria Macapagal-Arroyo to step down only underscore her far-reaching failures as an economist. Coming on top of mounting popular unrest because of the people’s worsening condition over the last 4½ years, they herald a looming financial meltdown if Ms. Arroyo does not resign.

BY SANDRA NICOLAS
Bulatlat

President Gloria-Macapagal Arroyo is clearly not only an illegitimate president but a failed economist. More than ever, the Philippine economy isn’t producing the goods and services needed by the people nor creating the productive livelihoods they need to afford these.

The people’s situation has unambiguously worsened since Ms. Arroyo assumed the presidency in 2001.

People’s plight

Unemployment has risen to unprecedented levels. The 11.4 percent average rate from 2001-2004 is the worst sustained unemployment in the country’s history. Indeed, the annual 11.8 percent unemployment rate last year is – apart from a brief spike to 12.8 percent in 1985 - the highest in the last half-century of official unemployment data. As it is, in April 2005 there were 13.2 million Filipinos either out of work or working but still looking for additional jobs because they still weren’t earning enough.

Inflation rates have been rising since 2002 and, since late-2004, are already at the highest levels in the last decade. The average monthly inflation rate in the first half of the year of over 8 percent is already nearly three times the 3 percent rate in 2002. Consumers feel this in rising transport fares and soaring prices of such basic goods as rice, pork, chicken, galunggong (round scad), cooking oil and instant noodles. Prices of oil products have increased 22 percent, of power by up to 19 percent, and of water by up to 52 percent just since the start of the year.

And even for those lucky enough to have jobs, incomes continue to fail to keep up with these rising prices. The daily cost of living for a family of six in the National Capital Region (NCR) is estimated at PhP620 in May 2005 yet the daily nominal minimum wage in the NCR is only a little over half of this at just PhP325.

The Arroyo administration meanwhile has embarked on a fiscal austerity program that lays off government workers and drastically cuts back on social services spending. In just the past year, some 126,000 public sector jobs have been lost according to the latest Labor Force Survey (LFS).

The four years of Ms. Arroyo’s watch has also seen the real value of education spending fall 3.2 percent, of health spending fall 24.5 percent and of housing spending fall 61.0 percent from the four years before her. These real budget cuts are even worse if population growth is factored in. Eroding public support not only denies people’s social services but also makes these more expensive.

All these have shown up in the economic indicators more usually reported by the government. Growth in gross domestic product (GDP) slowed to 4.6 percent in the first quarter of 2005 compared to the 6.1 percent whole-year rate in 2004. Growth has been severely depressed by dropping consumer demand (inevitable, given rising joblessness and falling real incomes), government austerity and domestic productive sectors hollowed out by two decades of increasing “globalization.”

Business’ bane

Ultimately it’s the degradation of domestic agriculture and industry that is making the economy more and more vulnerable. In the absence of a solid domestic economic base, the economy is unduly reliant on external sources of growth and resources. It’s this dependence that is bringing the country to the verge of a financial meltdown.

A US$887 million balance of payments (BoP) surplus was recorded in the first five months of the year. Unfortunately this was a hollow surplus and due wholly to external sources: overseas Filipino worker (OFW) remittances, increased “hot money” and greater foreign borrowing.

OFWs remitted US$2.3 billion in the first quarter of 2005 or 17 percent more than in the same period last year. In terms of the BoP, OFW compensation inflows grew at a faster rate of 4.1 percent compared to 2.4 percent last year. Yet notwithstanding that OFW remittances are the most important economic lifeline for millions of Filipino households, this is essentially a source of resources external to the economy and beyond its control that, as a fundamental surrender of economic sovereignty, should not be made a long-run pillar of the economy. There are moreover the very serious social costs involved for OFW families.

It’s the other two sources that will be the source of problems for the Arroyo administration. Portfolio inflows accumulated to US$1.913 billion as of the third week of June or some 14 times the amount posted in the corresponding period last year. The government meanwhile has so far for the year been able to issue US$2.3 billion in sovereign bonds.

With foreign direct investment (FDI) dropping steeply – Bangko Sentral ng Pilipinas (BSP)-registered FDI shrank by 73 percent in the first quarter compared to the same period last year – “hot money” and public foreign borrowing have been crucial sources of foreign exchange. Yet these two sources are also the most dependent on investor and creditor perceptions and so most vulnerable to suddenly reversing depending on how the overall political and economic situation plays out.

Arroyo’s financial storm

Ms. Arroyo apparently is opting to ride out the storm battering her administration. Unfortunately the concrete economic and political conditions are working strongly against her.

Although the government plays up improving national government (NG) budget deficits, at the end of the day the consolidated public sector deficit (CPSD) is still high and rising. In the first quarter the CPSD was 10 percent higher than in the same period last year. As long as there is a deficit, borrowing will continue and debt will increase.

By April, total NG debt was still 11 percent higher than a year before. End-2004 outstanding public sector debt was still at PhP5.3 trillion or 118 percent of GDP (although this figure is questionable). Total NG debt payments in the first four months of the year were 20 percent higher than the year before and total 2005 debt payments are projected to eat up 94 percent of total revenues.

Compounding the administration’s troubles is the expanded value-added tax law that basically translates into a great additional burden on the already so overburdened populace. Ms. Arroyo’s attempt at fiscal adjustment by placing the burden on the people can only backfire against her and bring the economy into greater crisis.

The Arroyo administration’s grave crisis of legitimacy dovetails with all of these weaknesses – a backward domestic economy, absence of any popular support, reliance on external sources of finance and high levels of debt and debt payments – to lay the conditions for a financial storm.

As the political tumult grows, opportunistic foreign investors and creditors will increasingly realize that the “economic stability” they yearn for will not be possible under a beleaguered Arroyo administration. Interruptions in foreign lending to the government and in “hot money” inflows will precipitate a foreign exchange crisis.

An export-dependent and import-oriented economy is deeply vulnerable to such an arbitrary external shock and interruptions in foreign payments flows will cascade across the entire domestic economy. Especially with a government unwilling to take the radical economic reforms needed to get the support of the people and build a strong domestic economic, the economy could be plunged into turmoil.

Ms. Arroyo’s stubborn attempts to cling to power and ride out the storm may, on the contrary, bring about a much greater storm. Bulatlat

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