ASSUME for a moment that the following analysis is correct and we are about to enter at the end of this month into a new phase of the Economic Confidence cycle.
The price of debt—bonds—will peak and interest rates will begin rising regardless of any action or inaction by the US Federal Reserve. The “safe haven” of government debt will come to an end as the potential of sovereign debt default, such as Greece has committed, will rise significantly, with Brazil being on the brink. Investors will lose confidence that the government and the central banks have everything under control and will shift funds back to the private sector as they will no longer accept zero or negative interest rates from loaning money to governments.
The global economy will turn down as more economies fall into recession or near recession as seen in the performance of China, Canada, Brazil, and others. Global trade data shows deep trouble as evidenced by the latest export figures out of India. India’s exports fell for the ninth month in a row in August by a somewhat unbelievable dip of 20.66 percent from 2014.
In tandem with the fall in the global economy is a large depreciation against the US dollar for many important currencies. The Malaysian ringgit is at a 17-year low. Turkey’s lira is one of the world’s worst-performing currencies since China’s devaluation. Russia, Thailand, and even Singapore, Taiwan and South Korea are all feeling the effects of dollar appreciation. The euro and the Japanese yen are holding relatively firm against the dollar as the central banks of these countries want stability at least for now.
However, the US is the only major economy that has the capacity to weather a global economic storm due to its size and, more important, because the US dollar is unquestionably the global reserve or benchmark currency.
If this cycle change, which will create this global economic reversal, does happen (and there is no question in my mind that it will), where does the Philippines fit in the big picture?
National economies are as interconnected as people are through the Internet. But it is not all equal or the same. The most popular Google search to complete the phrase “How much does a [blank] cost” in Canada is the word “passport.” In Germany, the word is “BMW.” In the United Arab Emirates (UAE), it is “Ferrari.” Japan wants to know about “watermelon” and the Philippines is concerned about “to retire.” All economies are different and will not be affected the same way by the same set of external circumstances.
Imagine this silly scenario: A strong rain hits Metro Manila. The “seniors” are in front of the television watching news reports and telenovela. The “middle aged” are fighting the traffic and the rain coming home from work. The “twentysomething” group has decided to wait out the weather and is sitting in a bar with beer and pulutan. Children are out playing in the rain.
A nation’s individual situation and condition will determine what happens during and after this cycle change as age and circumstances might determine how you behave during a rainstorm.
The Philippine economy does not make much income from its merchandise exports although these export companies are an important employer. India sends 25 percent of its exports equally to the US and the UAE. However, its major export is refined petroleum products, the price of which has collapsed.
The Philippines’s major money-making export is outsourcing services that go primarily to the US and Australia, two economies that have probably bottomed out in comparison to most of the other nations’. Overseas Filipino remittances come mainly from workers in the Middle East. The latest number shows a decline in growth but this is due to the appreciation of the dollar against host-country currencies.
All this speculation about how the Philippines will handle this cycle change is just that—speculation. However, we can monitor it on a real-time basis by looking at the exchange rate of the Philippine peso. A nation’s currency-exchange rate is like your blood pressure. A reading that is too high or too low can reveal a wide variety of health problems that might not show other symptoms. If we start seeing the peso falling more rapidly or the Bangko Sentral ng Pilipinas (BSP) spending foreign currency reserves to keep the peso up, then we know we have a problem.
Currently, the peso is gently reacting to a stronger dollar and the BSP is not in the market in any significant way.
As the global rains come, the Philippines is more like the group of twentysomethings holding a few extra bucks and comfortably sitting in a warm bar to ride out the storm.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.
