International factors affecting economic performance this year

The thing certain with international factors affecting this year’s economic performance is that they are uncertain. Hence, we expect, as in the past, economic volatility. Economic and business expectations definitely have to factor in these uncertain events to manage the year right.

“The major international factors.” The two big questions are the euro debt crisis and the state of US economic recovery. The Middle East situation is potentially a source of crude oil price uncertainties. Iran’s intent concerning its nuclear ambitions is an issue with explosive consequences for that region’s politics.

In the Asian region, the big question is to what level the Chinese growth machine would sputter? Japan’s adjustments from its tsunami destruction and its nuclear power aftermath could have wide implications on Philippine development. Bangkok’s flooding which has hurt the industrial sector in that country, could cause some migration of some manufacturing within ASEAN.

The Philippines has trade and investment relations with all these countries, some to a significant extent – as in the case of Europe, China, Japan and the US. In the Middle East, we import our crude oil and many of our workers have remittances coming from that region.

“The euro dollar and debt crisis.” The sovereign debt downgrades meted out by Standard and Poor’s on nine countries in the Euro zone, with the exception of Germany, was the heavy news of the hour last week. The European economic scene is just unfolding.

The Greek debt drama is not over and now the Italian drama is playing itself out. Italy and Spain are in the midst of their debt woes and some Eastern European members, notably Hungary, have made the problems even more intricate. Germany is trying to hold the euro together, but as things stand, there are weak euro dollar member countries whose problems weigh totally on themselves and the survival of the euro.

As Kenneth Rogoff, the former chief economist of IMF, had said, the euro zone region has at least two members that are in such uncompetitive setup that it would pay for them to take a sabbatical from the zone. He further said: The euro zone is like a joint checking account in which a lot of different cousins sign the checks for expenses, but there is only one signatory with the ability to underwrite the overdraws on the account.

Such a framework is not sustainable until growth is restored within the region and those that are uncompetitive are made to accept the inevitable lowering of their standard of living. That is very hard to do.

“American recovery and who wins the White House to guide it?” The huge size of the US economy is an engine for world economic growth. The road to the American economic recovery could be led by a new driver: Will it be the same Democratic donkey or a Republican elephant? Each driver has economic philosophies distinct from the other. It is becoming clearer that Barack Obama’s second term bid for president will be challenged by Republican Mitt Romney.

Actually, the American economic recovery was partly stifled by a change in economic philosophy when Obama’s government failed to convince the Republicans to adopt a more expansive short term fiscal spending program in exchange for a tighter control of the budgetary situation in the longer term.

As fiscal expenditures tightened, the opportunities for demand-induced growth have receded. But a modest economic recovery has been evident with the revival of American exports and some reduction of high unemployment that has become part of the American economic landscape.

“The Arab spring faces hard transitional changes.” Many countries have changed government in the Middle East as a result of the Arab resurgence, beginning with Tunisia’s revolution. Egypt, Libya are notable revolutionary changes involving the toppling of their dictatorial leaders. Yemen, Bahrain have had political convulsions awaiting settlement.

The monarchies of Saudi Arabia, Jordan and Morocco – as well as the smaller sultanates – of the region are confronting sea changes in their relations outside of their close borders. This is likely to bring changes in the behavior of their subjects. Syria’s simmering unrest seems to burst wide open. The Iran nuclear program is bringing in tensions that are of frightening dimensions involving all the major players in the Middle East situation.

The US has ended the Iraq military occupation and a new era of uncertainty begins there. Moreover, the US is now presently negotiating with the Taliban on the fate of Afghanistan.

All these have an impact on the price of oil. These uncertainties put a cost premium to the price of oil to consumers. Despite the fact that low demand for crude oil is happening because of the bad world economic situation, the price of oil has surged beyond the $100 per barrel level.

“China and the BRIC engines are stalling?” BRIC countries – Brazil, Russia, India and, especially, China – are in an uncertain position although their growth rates will continue to be positive. The question is by how much will the fall in those growth rates be?

These countries are also held back by the same factors that put off the world economy since their trade partners include the economies in trouble. Usually, the surge of China has provided insurance that part of the world is growing. Though the BRIC countries will grow, they face a drag that originates from the poor economic conditions elsewhere.

Moreover, signs of political turmoil are evident in Russia – with recent demonstrations possibly auguring a turbulent economic and political year in that country. India’s growth is also held suspect, since it exhibited some economic policy reversals.

China’s shift of policy toward more internal growth is an indication that its old dependence on the world as an economic engine of its own growth is sputtering and it needs new sources of growth from within itself. But this pattern also changes her demand from other trading partners, the Philippines included.

“Japan’s twin adjustment: post-tsunami restructuring and reconfiguring its production structure.” The problems of Japan after the disaster of the tsunami and the nuclear power problem that followed require a reconfiguring of its international production sites.

This has major implications on the Philippines. Japanese companies might increase their capacities in the country. Other companies not yet in the country might want to migrate to our export processing zones.

The implications for government economic policy on foreign direct investments are clear. The country cannot forever argue on the basis of old arguments that have made us lose the opportunities to our ASEAN neighbors.

Moreover, the rethinking going on has been aggravated by the lost manufacturing operations arising from the serious floods in Bangkok. Calculating that flood damage is a major danger in their future there, many of these companies could rethink their investment strategies ,possibly increasing production capacities in other Asian production capitals, the Philippines included.

“Awaiting constitutional amendment reforms.” Unless President Aquino realizes the importance of action on this front is essential, we will miss another opportunity for massive direct foreign investments inflows as we have done in the past. The preoccupation with “improving governance” is good only up to a point. –Gerardo P. Sicat (The Philippine Star)

My email is: gpsicat@gmail.com. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/