A bold forecast

While at the helm of the Philippines' central bank, Amando Tetangco Jr. was able to help boost economic growth to its highest levels in more than three decades.

[Blogger’s note: Here’s another piece — an editorial — written by Arnold Tenorio, the Manila Times’ business editor, for the paper’s February 21, 2011 issue. The piece may be “dated,” he himself told me in an email message, since “it was written before the BSP raised policy rates.” [See: Manila Times]
“But I believe the value of this piece is that it pointed out the structural impact of OFW [Overseas Filipino Workers’] remittances and to a lesser extent of the BPO [business process outsourcing] sector not only on the [Philippines’] external payments position, but also on GDP [Gross Domestic Product], particularly PCE [personal (or private) consumption expenditure],” his email said. “As always, I appreciate a little space in your precious blog. Thanks.” (Yeah, right.) So here you go, another piece by Arnold.]

THE Bangko Sentral ng Pilipinas (BSP) forecast of a seven to eight percent growth in the country’s gross domestic product (GDP) this year is the boldest official pronouncement yet of what’s in store for the domestic economy this year.

Speaking before members of the country’s organization of business journalists, BSP Gov. Amando M. Tetangco Jr. said GDP growth would come in faster than the 34-year record of 7.3 percent last year given the uneven growth trajectories of the advanced economies on the one hand, and their emerging peers on the other.

The BSP chief also pointed to higher interest rate differentials, which have benefited emerging markets in terms of a greater share of capital flows.

In fact, monetary authorities recently raised their forecast for the country’s balance of payments (BOP) to reach $6 billion to $8 billion this year, and our gross international reserves (GIR) to hit a record $70 billion.

Aside from these international developments, Tetangco pointed to the BSP’s macro-prudential measures, which have prevented asset bubbles from emerging in the Philippines.

According to the governor, asset valuations in the country have yet to reach bubble-like proportions because of the strong underlying macro-fundamentals and the BSP’s prudent regulatory framework, which has provided safety valves and has channeled resources to those sectors that most need them.

All these local developments have contributed to the country’s low and stable inflation, in stark contrast to the surge in prices among neighboring emerging markets.

This is why, the BSP insists, they are not behind the curve as far as monetary tightening is concerned.

According to our monetary authorities, the Philippines has been among the few countries that have enjoyed positive real interest rates, thus requiring no policy tightening despite the return of what appears to be the inflation surge of 2008 all over again.

In the Philippines, inflation last year averaged 3.8 percent, at the low end of the central bank’s target of 3.5 to 5.5 percent.

A crucial factor explaining this low inflation environment is the country’s ample GIR, which in turn is a function of the Philippines enjoying BOP surpluses in recent years.

Last year, our GIR grew by 40 percent to $63.608 billion from $45.591 billion in the same period in 2009, reflecting a new record high.

The country also registered a BOP surplus of $14.403 billion, or 124 percent higher than the 2009 surplus of $6.421-billion. The 2010 surplus was more than $6 billion higher than the revised $8.2-billion forecast for the period.

Largely contributing to this whopping performance was the rebound in exports, as global trade flows recovered from the slump of the previous two years.

In the particular case of the Philippines, two other factors that led to the robust external payments position were the resilience of overseas Filipino worker (OFW) remittances and the country’s growing share of the outsourcing and off-shoring market.

Money sent home by OFWs rose to a new record of $18.763 billion, slightly exceeding the BSP’s forecast of $18 billion for 2010.

As for the country’s share in the global outsourcing pie, anecdotal evidence points to the Philippines’ lead as far as employment levels in the call center segment alone are concerned.

What the two phenomena — rising OFW remittances and call center employment — suggest is that the Philippines not only has strong sources of foreign exchange besides the traditional external trade of merchandise goods.

Equally, if not more important, is that the country has a steady and growing source of dispensable income, which fuels personal consumption expenditure (PCE), heretofore the main engine of Philippine economic expansion.

That PCE didn’t contract owed to the steady income of these two demographic groups — OFWs and call center agents.

They are the heroes who helped prop up the Philippine economy amid the worst global financial crisis in decades, and — we suspect — the same groups that would sustain our growth this year and well into the medium term.

Companies are aware of the two groups’ economic influence, and have since deployed their marketing efforts to corner a piece of their incomes.

We hope the government likewise would realize this potent force that has prevented the domestic economy from unraveling during the depths of the recent global crisis.

From where we stand, the OFWs and call-center workers most likely will be responsible for a big chunk of the bold economic growth forecast set by the BSP.

The Central Bank and You

VERY few people pay attention to the activities of the Bangko Sentral ng Pilipinas (BSP).
Which is a pity.
After all, it is arguably the most powerful institution in the Philippines.
While the Philippine presidency reigns supreme over the country’s armed forces-or at least theoretically-and all the agencies which control our public lives, the BSP does a far more important job. Not only does it help regulate the economy, the BSP can also print Philippine currency; currency that is no longer backed by gold or any other physical asset which can be bought or sold in world markets; currency that is honored only because of governmental fiat (which means that it is legal tender because the Philippine government says so. This explains why a P500 peso bill, although just a piece of paper with the face of Kris Aquino’s father on it, can be used to buy goods and services of the same amount).
This also means that theoretically, if it wanted to, it can go on printing money. Not that it will because it won’t. Doing so would only introduce more cash into the country’s financial system, causing demand for goods and services to increase, thereby making prices of commodities rise faster than expected. (Incidentally, the hike in prices is also one of the things it keeps tabs on.)
No thanks to our obsession with politics, celebrities, starlets, and the failure of media to further clarify economic issues, many of us-including this fairly irregular blogger-have failed to appreciate the crucial role that the BSP plays in our lives.
Take the banking industry’s interest rates, which is set by the BSP’s Monetary Board, perhaps the most powerful set of people in the Philippines.
Depending on its inclinations and perceptions, the MB by its say-so alone, can encourage or discourage local business activity.
If it decides to cut interest rates, making loans cheaper, it encourages investors, both foreign and local, to expand their businesses. After all, they can easily raise cash for their ventures since banks will be less stringent about lending money.
However, if the MB takes the opposite view, it can stunt the country’s growth. Businesses will be discouraged from borrowing money at higher rates and banks will be stricter issuing loans.
Unfortunately, whether the BSP decides to cut or raise rates at its regular meetings, the Filipino public-from whom taxes are collected and in whose name foreign debt is incurred, among others-has always been kept in the dark about how policies are formulated and implemented.
Why?
Easy.
Being an agency considered as a cut above all the rest, the country’s central monetary authority is beyond the reach of a number of laws, the most important of which are those relating to the freedom of information.
Since it occasionally discusses the country’s cash position-a national secret and therefore a component of national security-the BSP can conveniently ignore a law say, covering the conduct of public officials.
According to the said law (Republic Act 6713), any government employee is duty-bound to reply to letters addressed to them within 15 days. They are also required to disclose copies of government documents within the same time frame upon request.
But then again, like most Philippine laws, these are all theoretical. Requesting copies of documents-especially sensitive ones-from government agencies are more difficult than slicing a piece of Jollibee’s Chickenjoy with Jollibee’s signature plastic knife.
Meanwhile, should you commit the mistake of requesting a copy of a document from the BSP, think again even before typing that request letter.
After all, the powerful body is allowed-perhaps even duty-bound-to ignore you legally.
Which explains why very little headway has been made about making the central bank’s decision making processes more transparent.
And it’s not just about interest rates.
This is about virtually every financial transaction that it undertakes, ranging from the amount of debt to be borrowed (whether it should be sourced from local banks or international lenders), the amount of loans to be paid (both foreign and domestic), the amount of foreign exchange to buy and sell (to defend the value of the peso from currency speculators), and, more importantly, the amount of dollar-denominated debts that Philippine companies can be allowed to borrow for their business expansion.
Since equipment used by local firms to produce goods and services are usually imported (i. e. transmitters which allow cellphone users to send and receive voice calls and text messages), businesses incur loans in US dollars-one of the generally accepted currencies around the world-to pay for these pieces of equipment.
Everytime Globe Telecoms or Smart Communications or any other local company announces intentions to borrow in dollars to buy equipment from abroad, they usually ask approval from the BSP. After all, since the equipment they require run into millions of dollars, these companies, for better or for worse, will use the country’s foreign exchange reserves.
In turn, the transaction increases the demand for dollars,
which may reduce the demand for the Philippine peso and in effect, lower its value.
The same principle goes for the country’s oil requirements.
Since the Philippines imports more than 90 percent of its crude needs, dollars are used to pay for them; the same dollars that nearly 10 million Filipino workers abroad send to their families at home.
So the next time you see a stereotypical Pinoy OFW, who may be garbed in what may well be the tackiest apparel ever since Kuya Germs donned an orange suit, think twice about calling up the fashion police.
After all, they literally help keep the Philippine economy afloat.
But this is just one of the moral lessons we need to learn about the story of the Philippine economy.
As a people, we need to realize that the dollars sent home by Filipinos abroad-many of whom are insulted, discriminated, oppressed, and even raped and tortured-are used to pay for fraudulent obligations; debts that were incurred to put up projects that never benefitted the Filipino people.
Take the Bataan Nuclear Power Plant.
Unsafe, unnecessary, and tainted with fraud, the P26 billion project, built in the mid-1970s, was paid for by the government, thanks to the endorsement what is arguably the Philippines’ most powerful institution, the Bangko Sentral ng Pilipinas.
It’s about time we take our economy and our country’s spending habits seriously.
Our money and by extension, our financial lives, are far too important to be left to officials of the BSP.