IMF Declares: Philippines Insulated to the Fed's Taper-Exit

The demigod known as the IMF declares that the Philippines will be insulated from the FED’s taper and exit.

Reports the Wall Street Real Economics Blog

The Fed’s eventual exit from easy-money policies will separate the emerging market wheat from the chaff.

One country that can handle the Fed exit is the Philippines, says the International Monetary Fund.

Reason? This time is different

But Ms. van Elkan says the country’s strong current account receipts, net creditor status, steady reductions in public debt and low foreign participation in government debt markets have helped insulate the economy against more capital flight. Manila’s own Fed, Bangko Sentral ng Pilipinas, can also release funds from its Special Deposit Account to provide a cushion to growth, she said.

Upside risks instead?

In fact, Ms. van Elkin says risks to the country’s growth are to upside.

“Absorbing the ample liquidity into productive sectors may prove challenging,” she says, after an annual review of the country’s economy.  “Part of the liquidity could finance credit that is used to fuel demand for real estate, potentially with a strong procyclical effect on the economy,” she added.

The IMF Philippine representative seem to suggest that the recent ruckus in the domestic financial markets have been one of the seller’s imagination.

The Philippine Phisix got slammed not once but TWICE within a span of three months.

That’s because perhaps, from the IMF perspective, foreign investors may have been spooked by some imaginary hobgoblin who stampeded out of local assets during the same period (table from the BSP).

The domestic currency, the peso,  has likewise been whipped.

The IMF seems to contradicting US Fed chair Ben Bernanke who has been terrified by the tightening conditions

I don't think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low. If we were to tighten policy, the economy would tank

Should the taper hit the US economy, the IMF assumes away all economic, financial and political linkages between the US and the Philippines, such that the latter can simply ride off to the sunset because of the reliance on backward looking data. Yet such event defies what occurred in 2008.

And with companies like San Miguel Corporation already been in a debt shindig (total debt Php 424 billion or about 5% of total banking assets-universal, thrift and rural), insatiably gorging on “finance credit”  that has a “procyclical effect on the economy”, it is a wonder how sustained rise foreign interest rates and a fall in the domestic currency, as the IMF assumes, will hardly have an impact to foreign denominated loans, as well as, how a rise in domestic rates will hardly affect credit quality of peso denominated loans. 

Yet what will likely be the ramifications to the broader economy once high geared companies will be exposed to them? Such risks have been dismissed as irrelevant. And the IMF demigods says these the Philippines should continue to borrow like mad and inflate more bubbles.

The reality is that there is no free pass to systemic imbalances molded via debt financed bubbles. Once tightening occurs, the law economics will prevail and delusions will be exposed.

But sorry for ad hominem, but the IMF has been devastatingly wrong in so many times. 

The IMF revised their flawed outlook on Greece’s growth several times, as Keep Talking Greece points out: (bold mine)

The IMF’s review on its Greek program was released late last night. The 51-pages document on Greece’s fiscal adjustment program 2010-2013 is more than clear: The IMF screwed Greeks for three consecutive years. The IMF failed to realize the damage  austerity would do. The IMF failed to predict the real recession. The IMF applied wrong multipliers. The list in which the IMF officially admits its mistakes and failures in the case of Greece is long and despicable, if one takes into consideration the thousands of impoverished Greeks, the 1.3 million unemployed, the crash of the health care and the social welfare, the practical collapse of the public administration and inhuman austerity measures like taxing the verified poor. - 

How they were wrong in Jordan, from the Jordan Times (bold mine)

The estimates made by the staff of the International Monetary Fund, for example, are absolutely undependable. They have no real value, not only in the long run i.e., after several years, but also in the short run i.e., in the same year, as I shall demonstrate.

IMF delegates visited Jordan recently. They examined all figures and statistics, listened to officials at the Ministry of Finance and the Central Bank and came up with a set of economic and financial predictions for the current year 2012.

They published those predictions on the IMF Internet site dated in April, i.e., after an important part of the year had passed and the trends had become clear.

Unfortunately, those predictions were way far from reality.

And how they failed to see the 2008 crisis

From the Foreign Policy.com (bold mine)

The IEO has just released its report—and it's a very tough critique of the IMF's performance and internal culture:

"The IMF’s ability to detect important vulnerabilities and risks and alert the membership was undermined by a complex interaction of factors, many of which had been flagged before but had not been fully addressed. The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches. Weak internal governance, lack of incentives to work across units and raise contrarian views, and a review process that did not “connect the dots” or ensure follow-up also played an important role, while political constraints may have also had some impact.

One key assertion is that the IMF's staff was intellectually and psychologically unprepared to challenge the regulatory authorities in the most advanced economies.

"IMF staff felt uncomfortable challenging the views of authorities in advanced economies on monetary and regulatory issues, given the authorities’ greater access to banking data and knowledge of their financial markets, and the large numbers of highly qualified economists working in their central banks. The IMF was overly influenced by (and sometimes in awe of) the authorities’ reputation and expertise; this is perhaps a case of intellectual capture.

In short, the IMF’s Achilles Heels is one of “pretense of knowledge”.

As the great Austrian economist F. A. Hayek noted

this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the "scientistic" attitude — an attitude which, as I defined it some thirty years ago, "is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed." I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.

Oh by the way, if the IMF remains “overly influenced by (and sometimes in awe of) the authorities’ reputation and expertise”, then this should be a source of MORE concern.

One reason why the Philippines occurred portfolio outflows in August according to the Bangko Sentral ng Pilipinas has been due to “hesitancy to invest during the “ghost” month of August (believed to be unlucky for business)”  

You can’t make this up. Local officials experts attribute Chinese superstitions as economic analysis. Incredible.

And who were the biggest selling investors in August. 

Again the BSP

The United Kingdom, the United States, Singapore, Luxembourg and Hong Kong were the top five (5) investor countries for the month, with combined share of 76.4 percent.  The United States continued to be the main beneficiary of outflows from investments, receiving US$1.1 billion (or 77.6 percent of total).

I didn’t know that US-UK investors subscribed heavily to the Chinese tradition.

But that’s expert analysis for you.