US recovery slowing, FDIs falling

As P-Noy’s economic team starts the process of crafting the medium-term development plan, new wrinkles on an already jagged economic terrain have emerged: the US economy is slowing and foreign direct investments (FDIs) in the Philippines is falling. As pundits used to say: when the US sneezes, the rest of the world catches cold; the impact on the Philippines, of course, is much more serious. Equally worrisome, the size of FDIs in the Philippines has contracted, suggesting modest, rather than strong, growth in the years ahead.

The US Federal Reserve and specifically Chairman Ben Bernanke are increasing worried about the slow pace of US recovery.

In January, the Fed’s Open Market Committee said: “Although the pace of economic recovery is likely to be moderate for a time, the committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.”

In June, it noted: “The pace of economic recovery is likely to be moderate for a time.” On Monday, it said: “the pace of recovery is likely to be more modest in the near term than had been anticipated.”

To go by the three recent statements, the latest one represents a downgrade from previous expectations. It is not difficult to understand why the Fed is worried. Consumer spending is weak, constrained by high unemployment; the housing market is still in disarray; and credit remains tight.

Quoted below is the most recent Fed statement:

“Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract.

“Nonetheless, the committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

“Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

“The committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

What’s the likelihood that the US Congress will approve another fiscal stimulus package to offset the seemingly ineffective monetary easing? Highly unlikely. President Obama has used up most of his political capital, sensibly I would say, by pushing for bold reforms starting with the first fiscal stimulus, followed by the medical reform law and, more recently, the financial reform law.

It’s political partisanship once more. Coming close to the November mid-term elections, Congress is in no mood to pass another fiscal stimulus bill. In a recent vote, and despite the worrying Fed report, House Republicans, voting along party line, rejected the very modest stimulus bill that the House Democrats passed on Monday.

The implication of a slower US economy on the Philippine economy is serious. The United States remains our biggest export destination — if both direct and indirect exports are considered. When the Philippines exports intermediate goods (say, electronics and auto parts) to Japan, China, Germany, Singapore, a big chunk of those exports end up in the US.

Filipino overseas remittances from the US remain large. With US unemployment stubbornly high, many Filipino-Americans continue to be jobless. Many more are poorer because of the negative wealth effect owing to the slumping housing prices. Both factors point to slowing Filipino remittances from the US.

Now, throw in the weak dollar and, its converse, a strong peso. A peso that’s approaching P40:US$1 means slower exports; in turn, this means more layoffs in the export-oriented firms. A strong peso is also upsetting for the families of overseas Filipino workers who are forced to stretch their limited budgets. And for the economy as a whole, it means lower consumer spending and hence lower gross national product (GNP).

A slower US economy means a slower global economy. This will generate another rippling effect on the Philippine economy through lower exports and remittances. For families of OFWs working in the Middle East and Europe, this second-round effect could be more overwhelming.

Bad news come in bunches, unfortunately. FDIs for the first five months of 2010, already low by ASEAN-5 standard, plummeted by 68.0% compared to the same period last year.

BSP authorities blame the eurozone’s sovereign credit problems. That may explain part of the decline. But the harsh fact is that the Philippines continues to be the least preferred destination of foreign investors among ASEAN-5 countries. FDIs in the Philippines continue to lag behind Thailand despite the political unrest in Bangkok early this year.

FDIs in the Philippines from January to May 2010 are worse than what they were even during the height of the global economic crisis (2008).

Of course, the results of the May elections have yet to enter the decision-making calculus of foreign investors. The area for foreign investment is wide open — mining, power, agriculture, transport, tourism, medical care, and others. But foreign investors are waiting for clearer signals as to where the young Aquino administration would bring the Philippines and its people.

Aquino’s favored approach — public-private partnership — provides an opportunity for foreign investors if the field of investment is made wide open. But foreign investors would be turned off if the approach were tailor-made for a few, favored Filipino businessmen.

The idea of public-private partnership is good, but its translation into concrete jobs and outputs is still many months, if not years, away. Hiring workers, digging holes, pouring cement, laying bricks — these are the activities that really count in official statistics and make a difference in many Filipinos lives.

In any event, much more needs to be done before FDIs could be expected to come to the Philippines in a big way. The new leadership has to address seriously the looming fiscal crisis, problems of corruption, political stability, lawlessness, and bureaucratic red tape. Once a clear, credible, and doable road map to address each of these problems is in place, combined with few cases to demonstrate success, foreign direct investments may start coming in.

There’s no guarantee that fixing all these problems would bring in FDIs to the country, because there’s stiff competition out there. But these are the things that a reform-minded government is expected to do anyway. –businessworld