There is this perception that the stock market is the barometer of economic health. If the market is the “bull” position, the economy must also be doing well and vice versa. But this is not always the case.
I’m not saying the Philippine Stock Exchange’s (PSE) price index rally in the last few years has not been buoyed at all by the growth of the country’s GDP. I believe, however, that the connection of stock prices with economic health or its future forecast is at best fragile in the short to medium term. Why stock prices are high could be because these earnings reflect the faintness of the economy rather than its assets.
I don’t buy that PSE index is the barometer of the economy as a whole, despite the popular view. That there is a strong association between prices of shares and real investment that augments the productive size of the economy is doubtful.
Share prices mirror profits and not incomes in its entirety. They only echo a slice of general income that is reflected as profit. Had the profits’ share in incomes been stable then it would not have been a problem. But that is not what happens. The gains made by some listed companies in the past have risen even without corresponding growth in GDP and a wider base of better incomes, giving doubts to the connections between profits and economic health.
When you buy a share in a publicly listed firm, you’re effectively buying a portion of its future profits. The investment value to an investor depends on its returns on other funds in terms of money parked today for revenue that you will get tomorrow. If you buy a share at a premium, it means that you are prepared to pay higher, hoping to earn more than what you invested, either in the form of dividends or capital gains.
Finance Secretary Carlos G. Dominguez III points to the country’s booming equities market as a proof that investors are unfazed by the political noise brought about by the perception of human rights and due process being trampled upon by the administration of President Duterte. On Tuesday the local barometer hovered at the 8,300 level, up 113.29 points, or 1.39 percent, to close at a new high of 8,291.14.
But this is in stark contrast to what is actually happening to our investment climate. According to the Philippine Statistics Authority (PSA), foreign investments approved by seven investment promotion agencies (IPAs) from April to June this year slumped by 55 percent to P18.2 billion, from P40.4 billion in the same three-month period last year.
The PSA data comprised of approvals made by the Authority of the Freeport Area of Bataan, Board of Investments (BOI), BOI-Autonomous Region in Muslim Mindanao, Cagayan Economic Zone Authority, Clark Development Corp., Philippine Economic Zone Authority and Subic Bay Metropolitan Authority. These IPAs give away fiscal and non-fiscal incentives to investors.
As of the end of the first six months, IPA-approved foreign investments totalled P41 billion, down 38.4 percent from P66.6 billion a year ago. To recall, foreign investment pledges fell 12.8 percent year-on-year to P22.9 billion in the first quarter.
Also, approved foreign investments declined 9.3 percent year-on-year to P125.7 billion in the fourth quarter of last year after commitments dropped by a faster 45 percent to P26.7 billion in the third quarter of 2016.
What this means is that investors’ pledges decreased in the first four quarters of the Duterte administration.
I have no doubt about the abilities of some in Duterte’s economic team, particularly Domiguez and Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. But their effectiveness is virtually drowned out by the abrasive action of Duterte himself, the rogue police and insensitive legislature.
The almost daily killings brought about by the President’s war on drugs and the seeming bias of the majority coalition in Congress against the Commission on Human Rights (CHR) are cited by analysts as factors shaking investors’ confidence in the country. They certainly are sending the wrong signal to foreign investors, which reinforces fears of political uncertainty.
The situation has already caused the Philippines to lose thousands of local jobs to Vietnam since late last year. Hundreds more are set to follow in the coming months as the number of Korean manufacturing companies leaving the Philippines for Vietnam continues to rise.
In an interview with the Philippine Daily Star, Korean Chamber of Commerce of the Philippines President Ho Ik Lee said three big garments firms have already shut down operations in the country from late last year to early this year with each company employing at least a thousand workers.
The departure of Korean manufacturing firms is expected to continue. Another electronic firm is shutting down its operations this year, adding 250 more employees to the unemployment rate. “Some of them are already planning and some have already closed down,” Lee said in the same interview.
Duterte’s war on drugs, according to Amnesty International, has created incentives to kill and “an economy of murder”. There is no reprieve in sight.
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