Philippine Crisis Pales in Comparison to Exploding Global Imbalances

Philippine Crisis Pales in Comparison to Exploding Global Imbalances

Yes, the Philippines does look as if it is in a perennial state of quagmire. However if one would compare the current global imbalances with that of the Philippines, our so called ‘crisis’ pales in comparison to whatever we are facing internationally. In a strongly worded article ex-Fed Chairman Paul Volker warns that “We (US) are skating on THIN ICE” which I strongly suggest that you read.

Moreover, if Argentina, which we are unjustifiably lumped with (according to diverse views of various renowned economists-pegged exchange rate, raising taxes during economic slowdown, rigid IMF conditionalities as possible culprits for its default-totally dissimilar to our economic landscape), is the paragon of the economic turmoil that we are currently faced with, then Buenos Aires’ successful renegotiation of its debt default, the largest ever in the world of more than $100 billion, makes one wonder if this default option would also present to be viable for the Philippines. For your information about 76% of the total sovereign creditors accepted a haircut of about 30 cents to a US dollar. This means that creditors took in about 70 cents loss!

And to think that this should lead Argentina to an economic pariah is certainly a misconception! Well, the debt negotiation resulted to IMF infusing $3billion, post negotiations we note that China, South Korea and several regional private firms have been investing, and remittance from its overseas workers are ballooning, it looks as if Argentina, despite its economic woes has progressed a lot and beyond any expert’s expectations!

Let me quote Larry Rohter of New York Times, ``The Brazilian oil company Petrobras bought a stake in a leading energy company. Another Brazilian company, AmBev, has acquired a large interest in Quilmes, Argentina's leading beer brand, and a Mexican company has bought up control of a leading bread and cake maker…Asian countries, with China and South Korea in the lead, have begun to move in. During a state visit last month, the Chinese president, Hu Jintao, announced that his country plans to invest $20 billion in Argentina over the next decade…But the bulk of the new investment comes from Argentines who are beginning to spend their money at home, either bringing their savings back from abroad or from under their mattresses. For the first time in three years, more money is coming into the country than is leaving it.”

Just look below at Argentina’s key benchmark index, does it manifest of a crisis after its debt default in December 2001?

Argentina Merval Index

In fact Argentina has been bouncing back strongly on strong commodity prices and investments from foreign private and state firms, and local overseas remittance money as stated above.

So if you guys really want to consider the Argentine option then I would suggest that you read an article by Grant Nülle of the Ludwig Von Mises institute who advocates debt repudiation for the Philippines in ``Raiders of the Taxpayer’s Money”, although I do not support such moves because it is fraught with risks, especially in a global monetary environment which appears to be slowing in liquidity growth.

Finally, the appreciating peso should help alleviate our debt burdens. (Haven’t you noticed the paradox, despite the worrisome debt burdens the peso continues to appreciate?)

Again global macro developments call for Asian currencies to adjust relative to the overvalued US dollar to be able to mitigate the growing current account imbalances and bubbly credit markets worldwide, and thus the Peso should benefit from the regional flows despite being by plagued by its domestic debt burden.

Vital fiscal and governance reforms are thus required. However, worst comes to worse there is always an option for some kind of settlement (restructuring) and we must not to be hoodwinked by spooky headlines.