2009 Global Competitiveness Report And The Philippines

Here is the World Economic Forum's Global Competitiveness Report for 2009-2010

The top 25 ranking based on the interactive chart...
The report has the Switzerland dislodging the US for the top spot while Asia's Singapore has captured the 3rd spot.

Notice that 7 out of the top 20 most competitive countries are from Asia, particularly Singapore (3), Japan (8), Hong Kong (11), Taiwan (12), Australia (15), Korea (19) and New Zealand (20).
And the same Asian countries improved on their year on year rankings while most of the OECD economies has declined. (Hat Tip: News N Economics)

In other words, it can be deemed that Asia has used the crisis as an opportunity to lever up the competitive scales.


Unfortunately, for the Philippines, we still rank a dismal 87th, way below our ASEAN Neighbors.
Areas where we are systemically weak (red ellipses):

1) markets (goods, labor and financial/capital markets)
2) institutions
3) infrastructure
4) innovation

And the probable causes influencing such vulnerabilities...
Let me add that institutional and market weakness are interrelated. Yet innovation is mostly a byproduct of the market forces seeking to please consumers.

Institution/s captured by political related (rent seeking) forces won't likely be open to market reforms or development.

In addition, corruption is a symptom of big government, bureaucratic inefficiencies, political influences, instability of policies and unenforceable or selective implementation of regulations.

Whereas infrastructure weakness can always be resolved by economic openness or secondarily, government spending (not my choice)

Hence, the idea of virtuous leadership won't help unless it adopts more economic freedom and simultaneously act to tether on such dominant structural political forces that forestalls much needed market reforms, that leads to innovation and institutional stability.

Mining Friendly Nations

Interesting charts from Fraser Institute depicting the pecking order of Mining Friendly nations.
Notice that the Philippines ranks near the bottom of the chart, despite the thrust to promote the industry.

Based on mineral potential relative to current regulations and land use restrictions, the Philippines was rated nearly 60%, which means we are far from harnessing our fullest potentials.

However, assuming no land use restrictions and assuming industry “best practices”, the Philippines leaps to the higher echelons. This implies regulatory obstacles have been a key deterrent to the industry's Growth.

The following are anonymous comments by local mining participants on the industry (bold emphasis mine).

``Philippines [has] unclear policies, extremely high level of official corruption, a banana-republic approach to governmental administration, the civil war in the south and fighting elsewhere between government forces and the NPA [New People’s Army] insurgency."—Exploration company, company vice-president

``In Philippines, the law is promoting the development of the mining industry but at the same time strict on environmental and social responsibilities."—Producer company with more than US$50M revenue, company president

All said, the Philippines needs to foster a mining friendly investment environment by easing up on regulations to encourage more growth in the industry.

Update: Global Stock Market Performance

Here is an update of the global stock markets courtesy of Bespoke Invest (as of May 19th).
According to Bespoke, ``After nearly every country was down earlier in the year, 62 out of the 83 are now up in 2009. Peru is up the most at 72.92%, while Costa Rica is down the most at -39.94%. And the BRIC (Brazil, Russia, India, China) countries are significantly outperforming the developed G-7 countries. Russia, India, and China rank 2nd, 3rd, and 4th in terms of year to date performance, and Brazil isn't far behind in 10th place. Canada has been the best performing G-7 country with a gain of 12.62% in 2009, but it ranks 35th out of 83. The rest of the G-7 countries are bunched up in the 0%-5% range, which is closer to the bottom of the list than the top. And the US is the worst of the seven with gains of less than 1%. While the markets here in the states have rallied nicely off of their March lows, most other countries have bounced back even more 2009." (bold highlight mine)

We'd like to add that the top performing benchmarks can be be categorized by region. For instance for the top 10: 4 comes from Asia (India, China, Taiwan and Indonesia), 3 from Latin America (Peru, Argentina and Brazil), 2 for Europe (Russia and Ukraine) and Israel.

The Philippines ranks 23rd.

We'd like to also take note of the underperformance of several Emerging Market bellwethers relative to the developed counterparts can be distinguished regionally-many are from Middle East and Africa and are considered frontier markets (smallest EM bourses).

It is important to emphasize that 62 gainers out of 83 has been a gradual broadening of gains or a "rising tide lifts all boats" phenomenon. This implies that markets appear to be responding to collective governments inflationary measures.


Nonetheless, global equity benchmarks have been outperforming the US.

From Bespoke, Since March 9th, major US stock indices are up 25%, but since other countries are outperforming, the US' market cap as a percentage of world market cap has actually fallen about 75 basis points. It initially spiked in the early days of the rally, implying that the US sparked the global rebound, but as the rally progressed, investors have spread their sights elsewhere."

The US underperformance should be expected considering it has been the epicenter of today's crisis and where its banking system has been impaired and has been operating under government support.

Moreover, deflationary pressures still poses a threat which means more inflationary activities by the US government.

31 Best Cities for Business Process Outsourcing Expansion

KPMG in a recent report, recommends 31 cities in key emerging markets that are most suited for IT and Business Process Outsourcing (BPO) expansions or in researchrecap.com's words, "leading pretenders to the BPO crown held by Bangalore, Chennai or Shanghai". Once the leading BPO centers reach a saturation point, these cities are likely to benefit from the opportunities of investment spillover.

The full list of highlighted destinations includes 10 locations in the Americas (Buenos Aires, Campinas, Curitiba, Calgary, Winnipeg, Santiago, Guadalajara, Queretaro, Boise, Indianapolis); 10 in Asia-Pacific (Brisbane, Changsha, Hangzhou, Ahmedabad, Jaipur, Nagpur, Penang, Davao City, Iloilo City, Ho Chi Minh City); and 11 in Europe, the Middle East and Africa (Sofia, Zagreb, Cairo, Port Louis, Belfast, Gdansk, Cluj-Napoca, Rostov-on-Don, Belgrade, Tunis and Lviv).

KPMG provides the best suited services for each city below.

In Europe Middle East and Africa...

North and South America...

In ASPAC or Asia, India, Japan and Australia...

In the Philippines, we are glad to know that two cities are in the list -Iloilo and Davao.

Nevertheless, there are other service aspects, such as research and development and engineering services, where investment coverage can be tapped or expanded.

Personally, I'm interested with or open to the research and development angle.

Global Property Prices: More Downside

Property prices in many countries seem to be priced dearly still despite the recent financial crisis.

According to the Economist, ``HOME to the super-rich, Monte Carlo is the most expensive property market in the world, according to an annual report by Global Property Guide, a research firm. An apartment of 120 square metres cost an average of $47,600 for each square metre in 2008, over double the rate in Moscow, the next most expensive city. Prime property in the Russian capital fetched a shade more than in London, where prices fell for most of the year. Cairo is not only the cheapest for buyers, but it may even be a good prospect for buy-to-let investors. Property in Cairo and Jakarta saw gross rental yields of over 11% last year, bettered only by the 14.2% returns in Chisinau, Moldova. By contrast most European cities offered feeble returns of under 5%.

However, the recent market turmoil should continue weigh on global property prices. According to Global Property Guide, there are three influences that entrenches these trends, namely...

``1. Economic growth. The deep recession now beginning will have strongly negative effects on house prices. Not only do people have less disposable income, but the uncertainties are pushing them to raise their saving rates – leaving less money available for spending on houses.

``2. Expectations and price momentum are strongly down in many major markets. People tend to derive their impression of what is likely to happen to house prices, from neighbours and from the news, and the news is bad. This increases the likelihood that things will, actually, get worse, on the (well-established) basis that one of the strongest predictors of property price movements in Period T, is what happened to property prices in Period T-1.

``3. Interest rates. Base rates have been reduced, but mortgage lending rates have not fallen. The UK is typical here. Banks and building societies are refusing to lower mortgage interest rates, despite the Bank of England’s base rate cuts.

We'd like to add another two: the continued unraveling of unserviceable debt and reduced access to credit should also serve as major headwinds.

Nonetheless based on 3rd quarter 2008 data from Global Property Prices, much of the damaged have been seen in the economies that joined the property bubble shindig.

And much to our surprise, property prices in the Philippines was not spared from the global rout (as measured from Makati CBD), even if the country missed the real estate party.

Although the optimistic angle is that the degree of decline or the damage wasn't as hefty (1.4% quarter on quarter and .16% year on year).

Meanwhile, a "spectacular" investment rating had been provided for by Global Property Guide on Metro Manila which had a Gross rental yield of 10.99% per annum. This should be supportive of the domestic property prices.

Does Mexico’s Falling Remittance Trend Bode Ill For The Philippines?

Mexico’s remittances suffered its first decline since remittance trends have been recorded. From Bespoke Invest, ``According to Mexico's central bank, remittances during 2008 to Mexico by Mexican workers in the US had their first ever annual decrease since the central bank began tracking these statistics in 1995.”

Courtesy of Bespoke

Why? Possibly because a big chunk of the Mexico’s migrant workers have been exposed to heavily affected industries. According to the Wall Street Journal, ``Mexico's Central Bank in October revealed just 5% of migrants today work on U.S. farms, while 38% are in construction and manufacturing, and another 57% in services.” (bold highlight mine)

Many of the economies in the emerging markets depend on remittances for growth, according anew to the Wall Street Journal, ``In the past two decades, workers in poor countries have grown increasingly dependent on job opportunities in countries experiencing sustained growth -- the U.S. for Latin American and Caribbean migrants; Western Europe for Africans and Eastern Europeans; the Gulf Emirates for Pakistanis and Filipinos…Remittances are the single largest source of national income in many countries. The Inter-American Development Bank reports high levels of dependence in Haiti (26%), Guyana (24%), Jamaica (18.5%) and El Salvador (18%).”

Nonetheless, rate of change on Mexico’s remittances has been on decline for a string of months, again from Bespoke, ``thirteen months where remittances have been negative, nine of them occurred during 2008.”

As for the Philippines, remittance trends continue to manifest robust growth: 14.1% during fourth quarter and 15% in first 11 months (Bloomberg) even as the government projects growth figures to moderate to 6-9% for 2009. We aren't confident with the optimistic forecasts.

Courtesy of DBS

Albeit the rate of growth underpinning the local remittance trends, despite the near nominal record levels, seems to be already tapering off.

While it is safe to lean on the camp that says remittance trends should decline similar to that of Mexico, especially based on the assumption that global economic growth seems likely to materially slow, or at worst, deteriorate sharply, one must be reminded that the composition of labor exports is distinct among emerging market economies, aside from the share of remittance to the national income. This implies that the sensitivity of remittances to the global slowdown could vary among EM economies.

Next, we aren’t fully convinced with the mainstream view that last quarter’s world merchandise trade crash portends of a worsening of the global trade trends. While we agree that world trade will definitely slow, the Lehman inspired October crash could account for as a banking induced credit trade finance “shock”, and may somewhat recover gradually than an outright slump. The evidence of economies resorting to go barter [see Does Growing World Barter Trade Suggests Of Bigger Cracks In Today's Monetary Order?] as alternative means of trade suggest of these.

Broken Window Fallacy: The Vicious Hidden Costs of "Holiday Economics"

``There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

``Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”- Bastiat, Frédéric (1801-1850)

In the tradition of Frédéric Bastiat’s Parable of the Broken Window or the precept of “That Which is Seen and that Which is Unseen”, we apply this analytical methodology to the so-called “Holiday Economics”.

That Which is Seen

Public Holidays are declared to commemorate dates of historical, religious or cultural significance.

But by virtue of the current administration’s “Rationalizing the Celebration of National Holidays (R.A. 9492), public holidays have been made adjustable. The promulgated reason behind this law is to “to reduce disruption to business and production schedules, encourage domestic tourism and give employees long weekends.” (inq7.net)

In addition, the administration using moral justification, says the law would “encourage quality time” among members of Filipino families.

That Which is Not Seen

The zeitgeist of this law has been primarily economics, hence called as “holiday economics”. Weekends juxtaposed with holidays have been alleged as encouraging domestic tourism.

If one goes by the contribution share of the tourism industry to the Philippine economy we note of the following data from World Travel and Tourism Council:

In terms of GDP share, `` Philippines's T&T Direct Industry is expected to contribute 3.9% to Gross Domestic Product (GDP) in 2008 (PHP285.2 bn or US$6.8 bn), rising in nominal terms to PHP646.6 bn or US$10.9 bn (3.7% of total) by 2018. The T&T Economy contribution (% of total) should decline from 8.8% (PHP636.4 bn or US$15.1 bn) to 8.7% (PHP1,522.1 bn or US$25.7 bn) in this same period.”

In terms of employment, ``Philippines's 1,377,000 T&T Direct Industry jobs account for 4% of total employment in 2008 and are forecast to total 1,564,000 jobs or 3.7% of the total by 2018.The contribution of the Travel & Tourism Economy to employment is expected to fall to 3,541,000 jobs in 2008, 10.3% of total employment, or 1 in every 9.7 jobs to 4,119,000 jobs, 9.7% of total employment or 1 in every 10.4 jobs by 2018.”

Additionally, the Philippine government economic agency, the National Statistical Coordination Board (NSCB) further says that in 1994-1998, ``The share of internal tourism consumption to GDP was 5% and 7% in 1994 and 1998, respectively.”

In short, Holiday Economics arbitrarily promotes an industry which contributes to only about 9% of country’s GDP (5-7% of domestic tourism) and 10.3% (direct and indirect) to total employment coming at the expense of the OTHER industries with larger contribution to the domestic economy!!!

Inflationary Impact

Moreover, such distortive law is obviously inflationary or can contribute to higher prices of goods and services to the society and the further impoverishment of the society.

How?

In a non-working holiday, if a business decides to operate, it would have to absorb increases in labor wages as mandated by law. On the other hand, forced vacations mean suspensions of business activities in compliance to the fiat.

In other words, the said policy affects the production structure of the Philippine economy by

1) skewing capital investment incentives heavily to one industry,

2) increasing the costs of doing business,

3) lowering profit margins,

4) diminishing labor productivity and

5) reducing relative output.

The obvious economic implication is that of higher risk premium for the economy and stiff hurdle rates which diminishes the attraction of capital investments thereby raising the prospects of unemployment levels. Moreover, the policy induced economic imbalances will reduce production output which means pressures of HIGHER prices of goods and services.

Worst of all, the accrued negative impacts would suggest for GREATER government spending and MORE future interventions, as media will focus on the effects than the cause which will generate popular demand and pressure policymakers to oblige, and from which, politicians will willfully administer. But, beyond public knowledge, this should translate to the prospects of higher taxes, lower purchasing power of the Peso and lower standards of living.

On the government side, more intervention and more government budget for “welfare or entitlement” spending means more opportunities for corruption and the never-ending farcical investigations (turned into soap operas) aside from the economic dislocations emanating from such skewed political policy.

Moreover, the truth is that domestic tourism will be limited to the income capacity of Filipinos. Lengthening of vacations do not automatically translate to hefty progress in the domestic tourism industry if the citizenry's incomes remain marginalized. And any advances of the industry based on credit instead of genuine wealth creation will only lead to temporary booms followed by a nasty bust. Profligacy isn’t a sound way to enrich a country. Besides, the squeezing of other industries will only put a kibosh to Filipino incomes.

Think of it, instead of promoting education, Filipino children with reduced school hours will be cultured towards indolence, intellectual inertia and hedonistic lifestyles, which runs contrary to the avowed objective of attaining quality family time. The derivative value formation from such policies doesn’t signify as sound economics or translate to better economic prospects over the long run.

Fatal Conceit

Besides, “quality time” accounts for as a fallacious argument of “begging the question”. More vacations do not automatically guarantee more quality time for the family. Quality time stems from personal virtues of responsibility and time management than from government’s controlling of people’s action. If a person insists on staying with a paramour than with the legal or connubial partner and or the family, no amount of “vacation” will change the person’s preference or priorities. More vacation may, on the other hand, even further such an immoral lifestyle.

And it goes the same with business, the idea that government knows the interest of business more than the industry itself is a concrete example of the Hayekian “Fatal Conceit”. The law’s stated aim of reducing “disruption to business and production schedules” runs contrary to its goals. Raising the cost of business disrupts production schedules instead of facilitating them. And some business groups as the American Chamber of Commerce have raised this issue.

Finally there is also a cultural dimension for the “holiday economics” debate. The major reason for such holidays is mainly for the celebration of the historical significance of the particular dates. By moving these, with the aim of attaining tenuous economic goals, vastly erodes the meaning of such rites. What good is it to remember history, if we only opt to look beyond its very essence?

Holiday Economics is representative of the inflationary, distortive and bad economics which is what Frédéric Bastiat admonished against. At worst, it is prejudicial to the Filipino heritage. The unseen costs look patently greater than its superficial and immediate benefits. The law deserves to be repealed or revoked.

CDS Market/Default Risk Ranking: Philippines Maintains 12th Place, Europe Dominates Monthly Laggards

Bespoke Investment gives us a colorful snapshot of the pecking order of the cost of insuring debts of various nations, as measured by changes in Credit Default Swaps.

Based on month to month changes, according to Bespoke, ``Ireland, Austria, Greece, and the UK have seen default risk rise the most over the last month. All have risen close to or more than 100%. US default risk has risen the 8th most at 68%.”

Among the 10 worst monthly performers, notice that except for the US which ranks 8^th, European countries have dominated the field.

While we may not have the sufficient explanation on why the markets have priced in serious jitters to many European sovereign debts, we suspect that this has been related to

1) credit risks concerns via banking exposures to the Balkan States, which had overheated and whose internal bubbles has imploded, and possibly combined with

2) the recent deleveraging which has heightened liquidity strains in economies with accentuated budget deficits as below courtesy of Danske …

We also understand that Europe’s economy has been more dependent on the banking sector than the capital markets relative to the US. And when the cardiac arrest engulfed the global banking industry last October, the region’s banks, which carried substantial toxic instruments, saw its lending flows to the real economy critically impaired.

Thus, credit driven economic slowdown plus accentuated budget deficits compounded with credit risk exposure to the Balkans may have raised the market’s concern over many of the European nation’s default risk.

National CDS Ranking according to prices.

More from Bespoke, ``Since then, default risk has risen for all but two of these countries (Lebanon and Argentina). Below we provide the current credit default swap prices for these countries, along with where they were trading one month ago and at the start of the year. As shown, Argentina, Venezuela, and Iceland have the highest default risk, with Russia not far behind. Germany, Japan, and France all have lower default risk than the US at the moment. It now costs $60 per year to insure against US default for the next five years. While this may not seem high, it was at $8 earlier in the year, and $36 one month ago.”

Nonetheless, the CDS market shows how exposures to toxic papers, credit bubbles or failed government policies have largely impacted national credit ratings.

Hence, to engage in the narrative generalization that emerging markets reflect a similar state to toxic waste papers that prompted this crisis is to engage in a fallacy of division.

What we should watch is how the markets will price US CDS, as the world's reserve currency, to reflect on the market's approval or disapproval of present policy actions. A continued march upward could signify strains in its privileged status.

Meanwhile, the Philippines maintained its 12^th ranking with minor changes relative to the rest, on a month to month basis. That should be a relief.