The market knows

Many, many years ago when I was still rather new to the Philippines, a Filipino said to me if the Philippines was a centipede it would shoot itself in every foot—well, there aren’t many feet left, but here we go again.

Last year, foreign investment was a miserable US$1.5 billion, the lowest (did you get that, the lowest) in Asia. No one is interested in the Philippines.

No wonder here we are in the midst of the worst financial crisis anyone has ever seen and the government wants to control the oil industry all over again after a failed effort in Marcos’ time. Then, Congress wants to dictate the cost of texts. This after the Supreme Court ruled the Pandacan oil depot must be re-located despite the oil companies could prove they posed no danger, but far more importantly: they were there first. What a precedent that sets. Invest hundreds of millions of dollars and maybe later on we’ll come and kick you out.

No wonder investment is so low. Malaysia was $12.9 billion last year.

Back to oil prices, the ostensible reason to control the industry again. Just look at the figures

Country                             Gas                Diesel
                                                   (in US$/li)

Japan                                 1.31               1.19
Singapore                         1.14              0.80
Hong Kong                       1.03              0.90
Thailand                            0.84             0.67
Philippines                       0.81             0.64
Vietnam                            0.72             0.69
*Indonesia                       0.71             0.66
*Malaysia                         0.54             0.48

In Indonesia and Malaysia, gas and diesel are subsidized.

Or look at their profits over the past few years.

Average for 2003-2007
(in million pesos)

                       Net income                   Equity                    Roe
                        after tax                                                           (%)

Shell             2,455                                31,775                   7.7

Petron          1,861                               50,116                    4.6

Chevron’s figures are distorted by large losses in 2003 and 2004.

The average for industries listed on the stock exchange is 15 percent for ROE. Does that suggest the oil companies are gouging the Philippine public?

The President should put her foot down and stop this nonsense. You want jobs for 10.2 million people (the unemployed, underemployed, and those working for nothing) you entice investment in every way you can. You don’t scare them away with arbitrary controls that change the rules of the game you accepted when you joined the game.

If we allow government officials to set or limit prices, we all know what will happen in an area as politically sensitive as oil—they’ll fall all over themselves to win kudos (and later, votes) from consumers. The companies can go to hell. And they’ll go all right, not to hell but to other countries where the regime better understands business economics.

Chevron already partly has; its refinery has gone. Shell must decide what it too will do soon. I think they’d be crazy to invest in this environment. Who’s to say someone won’t decide the refinery site should just be confiscated because it would be better as a theme park for kids or re-forested for the environment? Am I over-reacting? Probably yes, it is unlikely to happen. But it’s not impossible to happen as should be the case. The precedents have been set.

Do those advocating government control seriously believe government can do a fairer job? Look at the mess the Oil Price Stabilization Fund (OPSF) got into. The Fund was created in response to the oil crisis of 1973-74 to protect consumers from high and volatile oil prices by subsidizing lower-than-market prices during periods of sharply rising world oil prices, with the subsidy coming from funds collected from oil companies from higher-than-market prices during periods of low world oil prices. Instead, the OPSF was politically controlled so that it was in such a serious deficit at the time it was abolished in 1997 that it contributed to debilitating weakening of government finances.

Economic decisions based on political considerations are never a way to succeed.

Have those who so foolishly argue to mandate to reduce text costs bothered to look at what the telcos have done?

The Philippines is one of, if not the most advanced countries in the world in the use of cell phones. It’s the ONLY area where the country leads. It does so because your one peso text message times 25 texts/day (the world’s largest number) has given them the funds to provide 98 percent coverage of the country with 13,000 cellular base stations (a country that is all split up into islands, so no easy task). It has given them the funds to provide broadband coverage that is the biggest in Southeast Asia, and interconnected it to the world (and those 8 or 9 million OFWs wanting to keep in touch with their families) with a broadband capability that even lets you see the newlyborn baby.

Just look at their annual income statements. Their profits are good, but not excessive. They’ve plowed their money back into providing better service. Do you really want to stop that by populist pandering?

Mahar Mangahas sent me the following as a suggestion to solve the US crisis: “There are about 40 million people over 50 in the work force—pay them $1 million apiece severance with the following stipulations:

1) They leave their jobs. Forty million job openings—unemployment fixed.

2) They buy NEW American cars. Forty million cars ordered—auto industry fixed.

3) They either buy a house or pay off their mortgage—housing crisis fixed. It can’t get any easier than that!

P.S. If more money is needed, have all members in Congress and their constituents pay their taxes.”

I thought it was brilliant and the more I thought about it the more I wish I had been the one to have thought of it. But, more seriously, I seriously wondered if it actually could work here. Certainly it’s something dramatically different, like this, that’s needed.

The biggest risk I see is many would just squander all the money and end up being a bigger burden on society a few years from now. So maybe part of the deal is that 50 percent must be invested in financial instruments that provide a regular monthly income. This would re-stimulate the financial sector, too. The risk here is a few more Cesar de los Angeleses preying on the people for all this wealth. Perhaps the government issues an accredited list—but can we trust the government? Perhaps in conjunction with the Bankers Association of the Philippines, both jointly vetting the list. The association, I trust.

Of course it can’t be $1 million, and doesn’t need to be. Probably something like P5 to P10 million.

And the spending can’t be the same. Things Filipinos would more need or like to have are a house (if they have one already, a second one could go to a relative), a TV and DVD (or other electronic products), household electrical equipment (refs, stoves, airpots), and, of course, furniture from our many fine furniture export companies now closing down as their overseas markets collapse.

But maybe you don’t need to define what to spend on, just spend. It will all add to the economy, although how to maximize that add to the domestic economy without introducing any protectionist measures must be carefully thought about. Maybe the government can reduce the corporate income tax on locally manufactured goods for 12 months.

What I particularly like about this idea is that there’s far less room for corruption than there is in the many projects being considered now. About the only way I can see is to create fake oldies. After all, if we can fake the electoral roles this should be possible, too. But maybe not, because the retirees must come from a company, there’s a cross-check that can be done here—by a reputable auditing firm, of course.

It may be a hare-brained idea, but that’s a very reason it should be seriously investigated and considered in the world’s worst crisis in our lifetime. –Peter Wallace, Manila Standard Today

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