Superman Meets A Kryptonite Economy
In last week’s column “Sailing through the Perfect Storm”, I mentioned the possibility of the Dow hitting the 10,000 index. A number of readers asked if this is really possible.
With the problems of both Fannie Mae and Freddie Mac, which is in the trillions of dollars, the problems of America are getting worse. The Dow Jones is now below eleven thousand – at 10,900 levels to be exact. Both Bernanke and Paulson are doing their best to calm the markets. America is the biggest borrower. A lot of countries have lent to or invested in America, so their problem becomes the world’s problem.
This time, superman suddenly has kryptonite on his hands, which makes him weak. America has been the “superhero” of the world or safe to say, one of the world’s powerful countries. (Some may not agree with me on this.) For the Philippines, the Americans somehow helped us gain independence from over 300 years of Spanish rule; and have again rescued us during the Japanese war, with General Mac Arthur fulfilling his promise of “I shall return”.
This time, the world needs to save America. The countries that have lent America will be in the same boat if they don’t help out. Many of these countries have bought bonds of Freddie Mac, etc. That to me is the good news for the Philippines. I guess with all the problems we have had, not much reserves are exposed to the financial crisis, unlike other countries that have huge exposures. Nobody really knows how long this crisis will last. All I can say, this is surely one of the most severe crises that I have ever seen, even larger than the Asian crisis.
Will the new President be able to save the American economy? Big question. The problems of America are basically coming from a low saving rate, people who borrowed beyond their means (the dangers of credit card) and easy availability of funds then. Problems were also caused by financial ‘geniuses’ who have created a lot of derivative products that allow people to short the markets. In Asia, especially in the Philippines, markets do not allow shorting of stocks.
How can the Philippines sail away from the perfect storm? I do not believe that the government should adjust the VAT just because oil is going higher. Commodities go up, but they eventually go down.They are cyclical. We see now people starting to adjust as market forces dictates.The higher cost of commodities would naturally cool down the demand levels that would then temper the price levels. We now see more people taking the MRT and other public transportations, carpooling and buying smaller vehicles. People will adjust to consume less. Development of alternative sources of energy, likewise become more feasible at these oil price levels. As the whole world does this, oil consumption will definitely go down.
If we see the American dollars getting stronger towards the end of this year, oil is headed for 100 dollars and probably even lower if economies in America and Europe cool down. We should use the windfall gain coming from the vat on oil, in order to support the people who are most hurt. This can be done perhaps by targeting the poorest of the poor communities and extending subsidies for their basic requirements on food, shelter, utilities and transportation. We can enhance the mass transit systems by adding more MRT and LRT trains and more frequent maintenance with the increase usage of these transport systems. Any effort to alleviate the difficulties of the bottom of the pyramid should be followed through.The bill that was recently signed into a law exempting the minimum wage earners from taxes is a big help.All moves to encourage and provide incentives for the increase in lending to the micro and small entrepreneurs will go a long way in accelerating the growth of the small Negosyos.The recent signing also of the Magna Carta for micro, small and medium enterprises would hopefully fulfill its objective of realizing a bigger allocation of banks loan portfolio to the micro SME, wherein the ratio was increased from 6% to 8% of banks lending activities.
We also support the bill that is being pushed by Cong. Liwayway Vinzons-Chato. Any tax reprieve or support to microfinance institutions is badly needed in these trying times. Her proposed bill would like to exempt the Microfinance NGOs from taxes, at least for the next five years, and ultimately tax the operations like a GRT. The five year moratorium was patterned after what was given to the Rural and Thrift Banks, as well as to the Cooperatives with the application of GRT. This should help a lot in encouraging more lending to microentrepreneurs, which could lead to greater multiplier effects in income and employment opportunities nationwide. We hope the BIR, which is the implementing the rules, would likewise extend their support to these sectors.
The prices of oil and food commodities are not demand driven, but caused by factors beyond our control as world prices push the increase. Instead of pushing for increase in interest rates, we need to push for more growth. WE SHOULD HOLD INTEREST RATES. THIS IS NOT THE TIME TO INCREASE. We need to support a Negosyo climate. For me, growth rates are very important, especially for the Philippines to attract more investors.
I believe that as we are close to a balanced budget, maybe this is also the time for the government to spend more in creating the proper infrastructures to provide greater efficiency. I am glad that we will now see an expansion of our Southern Luzon road systems, and hopefully plans to connect to the north with the Subic superhighway will start. We hope to see more of this development, leading towards Baguio and the Ilocos regions, and eventually the Northeastern areas like the Cagayan Valley. Good roads will allow our farm products to reach the market areas at least possible cost (eliminating as well the unauthorized ‘tolls’). Accessibility will likewise allow tourism to flourish even more.