Bark, action, perceptions and fundamentals

Two unsavory items in the local business news this week brought a jolt of fear to some who firmly believe the Philippine economy, which has been consistently growing in the last years, may not be strong enough to withstand external factors or the possible fallout from a foul-mouthed President.

The first bit of news that broke during the week was the Philippine peso’s performance, when it fell to its lowest level against the dollar in seven years, breaching the P48 to $1 mark. It had closed at P47.99 last Friday, opened on Monday at P48.07, and hit an intra-day low of P48.26.

It was the weakest level the peso had shown since seven years ago, on Sept. 16, 2009, when the US dollar could buy pesos at 48.345. Last Monday’s peso performance represented a four percent decline in just one month, making it the worst performing currency in Asia.

The peso had been steadily dropping during the month, which pundits claim started after President Duterte declared a “state of national emergency on account of lawless violence” after Davao City was subjected to terrorism on Sept. 2, claiming the lives of 15 people and injuring close to 70.

During the month too, the President made global headlines when he used expletives against US President Barack Obama, the United Nations and the European Union on media queries of how he would respond to potential discussions by all on reported human rights abuse issues in the Philippines.

This had prompted credit ratings agency Standard & Poor’s to issue a warning of a possible downgrade arising from uncertainties brought about by the successive and controversial incidents on the political front despite the economy’s fundamentals remaining stable.

Quick rejoinder

In what is turning out to be the standard operating procedure by the President’s men, no less than Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. issued a quick rejoinder.

Tetangco explained the peso’s continued weakness was due to uncertainties created by speculation on what the US Federal Reserve would do. Investors were generally wary the Fed would raise interest rates on key federal funds.

Likewise, Tetangco said there was a strong demand for US dollars that logically weakened currencies like the peso that lean heavily on it. This statement is based on reports of a stronger US economy, despite the fact that its government had just lowered growth projections for the year to 1.8 percent from two percent.

Others aligned with the current administration were also quick to reason that external conditions alone were responsible for the performance of the peso. In defense of the local economy, Finance officials said the country’s macroeconomic fundamentals continued to be strong enough to attract foreign investors.

Other state economic officials similarly chimed in to assure the peso-dollar rate should normalize in the near term, especially since the country has enough reserves to maintain foreign exchange stability.

Clearly, there remains a lot of negative perceptions which is influencing the peso’s slide, and while some (or even most) of them will not matter in the longer term, the causes of jitters must be immediately addressed. After all, perceptions can easily become new realities.

And such negative realities can eventually hurt our fundamentals.

Competitiveness slip

The second bombshell of the week, while definitely not related to the peso’s weakening, is the 10-notch slide of the Philippines in the World Economic Forum’s Global Competitiveness Report 2016-2017, to the rank of 57 (from 47) out of the 138 economies assessed.

This downward movement is the first time since 2007 when the Philippines started its slow, but steady ascent from 72nd place to 47 last year, celebrating a five-notch gain from the previous year.

If it’s any consolation, we are not alone. Other emerging economies like Malaysia, Thailand, and Indonesia had slipped: by seven, two and four notches, respectively, with Malaysia dropping out of the top 20 list.

Clearly, this slide, something the country had not experienced in the last decade, cannot be attributed to the current administration, which is barely entering its three months of duty.

As the WEF notes, developing economies like ours “need to make inroads into the more complex areas of competitiveness related to business sophistication and innovation” to get back on track to improved competitiveness.

Regressions

Of the 12 pillars measured to gauge the Philippines’ economic competitiveness in 2016-2017, seven had showed regressions in performance. These were in institutions, infrastructure, goods market efficiency, labor market efficiency, technological readiness, business sophistication, and innovation.

Particularly, the most problematic areas when doing business in the Philippines were an inefficient government bureaucracy, inadequate infrastructure, corruption, tax rates, and tax regulations. The country’s political instability and restrictive labor regulations were also mentioned.

While the slip is itself a disappointment, and partly a surprise since there have not been any major areas where neglect or drive in improving ranking was noted during the period in review, this should tell us that not enough had really been done to ensure sustainable changes.

Upbeat mood

Business is generally upbeat the Duterte administration will be able to deliver landmark changes within the year, specifically in bringing the bureaucracy up to speed in terms of efficiency.

Infrastructure spending has been ramped up, and while the last year of the previous administration saw several publicprivate partnership projects break ground, more big projects are expected to be in the pipeline within the next couple of years.

Similarly, the Duterte government is working hard to rationalize tax rates in the country, and is firmly supporting a reduction in corporate taxes to make it competitive and comparable to other countries in the region.

Of course, such optimism must be supported by real groundwork, and the next nine months will be critical in demonstrating if the current government is more than just bark. Here, perceptions can change to pessimism — which, again, would hurt the vaunted fundamental strength of the economy.

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