Christopher Lingle: Graft Goes Hand in Hand With Big Government

In the local arena, media brims with dreary news articles spotlighting on widespread and endemic corruption as the major deterrent to the Philippines economy. Yet, for all these self-righteous cavilers, it appears that the only known solution to the current predicament is an outright change of government (Quo Vadis?). In other words, self-styled messiahs preaching motherhood solutions, which practically reinforces corruption's vicious cycle. It is a case of having a 'cure that is worse than the disease'.

This propitious article from Christopher Lingle singles out Big Government as the main culprit to the systemic graft culture…

Graft Goes Hand in Hand With Big Government

By Christopher Lingle*
Bangkok Post

March 22, 2005

Some of the most corrupt governments in the world are in Asia, according to Transparency International. Bangladesh is second from the bottom with Indonesia, Pakistan, Vietnam, Papua New Guinea, India and the Philippines hovering near the abyss. An annual survey of executives by Hong Kong-based Political and Economic Risk Consultancy, or Perc, identifies the most corrupt Asian governments. While Indonesia tops the chart for the region, India is close behind, with oppressive bureaucracies demanding bribes at all levels of government that range from payment for admission to better schools to payment for installation of basic services.

While China is third on the Perc list, it falls in the middle of the Transparency International ranking. In all events, Beijing reports that there are record inflows of foreign direct investment despite costs of corruption estimated at 3-5% of gross domestic product. Official Chinese sources cite cases of more than 4,000 corrupt officials that absconded with a total of at least $600 million (23.2 billion baht). Managers of the Guangdong branch of the Bank of China stole over $483 million (18.6 billion baht) in 2001 before fleeing the country. Other senior managers, including the head of the Bank of China, authorised large loans to friends or family members that became non-performing.

This sort of corruption is also a structural and deep-rooted problem in many emerging market economies outside of Asia. In some countries, illicit payments had a benign beginning that was interpreted as an expression of generosity. This perception probably contributed to a general tolerance of low levels of corrupt and illegal actions. A wide agreement on corruption points to the abuse of authority and misuse of discretionary power in pursuit of personal interests. However, considerable confusion and disagreement exists over the impact of corruption.

One flawed perception of bribery is that it acts as a lubricant to facilitate the management of political affairs. This bizarre view suggests that bribing officials can be beneficial to economic activity and increases the efficiency of the bureaucratic system. But corruption tends to undermine political stability. Japanese prime ministers and other high officials have been forced from office and President Joseph Estrada of the Philippines was jailed for corruption. China executed two top officials for taking bribes, and South Korea has recorded many high-level bribery scandals.

Similarly, corruption pollutes society by lowering the authority of public officers. And it offends a sense of social justice, since a disproportionate burden of corruption falls upon lower income groups that are most vulnerable to rapacious public officials. What is perhaps worse is that corruption can reinforce the survival of dishonest officials or dictators by providing them with illicit funds. And allowing corruption can be a means for despots to control their citizens since those that engage in corrupt activities are less likely to object to abuse of power by rulers.

It is a mistake to characterise the economic effects of bribery as beneficial. This nonsense ignores large economic costs. For example, corruption reduces economic efficiency by destroying the notion of fair competition and by imposing costs on the private sector that include higher costs for international credit. According to officials with the Asian Development Bank, as much as one-third of public investment in some Asia-Pacific nations has been lost to corruption. A UN report estimated that eliminating corruption would boost India's economic growth by 1.5 percentage points a year.

The financial turmoil in Asian emerging markets in 1997-98 can be attributed to a reassessment of risk that resulted in a crisis of confidence and net outflows of capital. Governments unable to provide an environment to protect asset values or with domestic financial institutions seen as non-responsive to market signals were punished.

There is also confusion over how to end corruption. Many observers see corruption as a moral issue and blame greed. This moralistic perspective emphasises the increased moral standards of public servants or the imposition of severe punishment on violators to eliminate graft. But self-righteous pleas to end corrupt practices do not alter flawed incentive structures that arise from legal and cultural institutions. Even moral people may act improperly when facing warped incentive structures. Similarly, immoral and imperfect individuals tend to act more appropriately if the incentive structure rewards them for doing so.

Instead of expanding political power to eradicate corruptive practices, the opposite is needed. An essential problem with corruption is that it most often promotes excessive government power, so reducing political intervention in people's lives is the right direction. A distrust of the private sector and unfettered markets invites regulation by public officials that issue licences and permits. But these monopolistic powers meant to serve citizens create power imbalances that can impose harm on citizens that face incentives to protect themselves through bribery. Instead of moralising to prevent public graft, it is better to undertake legal reform of the institutional infrastructure. A fundamental change in political culture combined with a shift away from granting governments with extensive powers of intrusion can help root out corruption.

Corruption and other abuses of government are more likely to occur when individual rights and freedoms are sacrificed to promote collective goals or collective rights. For example, apartheid excluded blacks from political and economic participation by giving special rights to the South African white community. These abuses could not have occurred if individual rights were protected. Individuals wishing to live in a free and open society with less corruption should promote free and open economies with less government involvement in their lives. Competition in open markets involves legitimate actions and not unlawful means, so that corruption between consumers and suppliers is unlikely with both parties having equal power. When governments are constrained by the rule of law that protects individual rights, there will lead to less corruption and greater freedom of actions for all citizens.

About the Author: Christopher Lingle is global strategist for eConoLytics.

World Bank Press: Support Deal 'Could Become Asian IMF'

World Bank Press: Support Deal 'Could Become Asian IMF'

The currency swap agreements in East Asia providing mutual protection from financial emergencies could develop into an Asian monetary fund (AMF), Masahiro Kawai, a leading Japanese proponent of regional financial integration, said yesterday, The Financial Times reports.

Agreed after the 1997-98 Asian financial crisis, and known as the Chiang Mai Initiative, the $39 billion in bilateral support arrangements between Japan, China, South Korea and 10 south-east Asian countries are expected to double in value and may be transformed into a multilateral system, Asian finance ministers said on Wednesday. "The Chiang Mai Initiative has the potential to become an Asian monetary fund," said Kawai, a former Japanese finance ministry official and World Bank economist who will head a new regional financial integration office at the Asian Development Bank (ADB). He was speaking in Istanbul, where the ADB was holding its annual meeting until Friday. Kawai is an adviser to Haruhiko Kuroda, the ADB president who has made it his mission to promote financial co-operation in Asia.

The suggestion of an AMF is controversial because it was proposed by Japan and others after the Asian crisis but rejected by the US and the International Monetary Fund. Critics argued that a regional fund would duplicate the IMF's work and might be unwilling to impose the harsh financial conditions on Asian governments that could be required in an emergency. Kawai said the idea of a secretariat for the Chiang Mai Initiative - a first step in the creation of a fund - was "clearly on the table", although there would inevitably be arguments about where it should be based.

East Asian governments have already begun loosening their adherence to IMF "conditionality". The finance ministers agreed this week to double the proportion of emergency funds that could be disbursed without the beneficiary implementing an IMF program to 20 percent from 10 percent. Kawai acknowledged that the Chiang Mai states did not yet have the bureaucratic structure to conduct the sort of detailed economic surveillance done by the IMF.

Despite receiving multi-billion dollar bail-outs, some Asian governments criticized the IMF for its handling of the 1997-98 crisis, and Kawai said the IMF's expertise in monitoring national economies could be complemented by a fund with an understanding of the region and how it interacted. "The Asian crisis experience told us that this purely country-focused approach doesn't work, because of contagion (between one crisis-hit country and another)," Kawai said. Among the next steps suggested by Kuroda and Kawai was the creation of a mechanism to link Asian currencies, as the European currencies were in the run-up to European monetary union.

Kyodo (Japan) reports that East Asian countries achieved a major milestone on a long road to a European Union-type regional monetary union at the ADB Annual Meeting. A principal pillar of their agreement is to substantially increase the total amount available for bilateral currency swaps. Ministers said in a joint statement that they agreed on a "significant increase in the size of swaps" and that they "favored an enhancement of up to 100 percent increase of the existing individual arrangements."

"When it comes to expanding the size, we must try to conclude bilateral negotiations as soon as possible, because we need to send a clear message that we will never let a crisis like the Asian crisis, or a liquidity crisis, happen again," Japanese Finance Minister Sadakazu Tanigaki said. Another is to evolve the network of currency swaps into one to be operated multilaterally, rather than bilaterally, so as to prevent any future financial crisis in one country from spreading into a regional one.

****

Prudent Investor says…

It would be natural for the US to oppose any form of regional financial integration, considering that its economy, particularly the consumers which makes up about 70% of the country’s GDP, have been indirectly subsidized by Asian Central Banks. With more than a trillion dollars in cumulative foreign exchange reserves, the purported financial integration means less demand for US dollars which also translates to diminished economic, financial and political hegemony.

On the other hand, Asia stands to benefit from increasing trades and growing capital flows within its borders, which could be accentuated by the proposed integration.

In a nutshell, the denouement of the current wealth redistribution from the US to Asia would take its form via Asia's economic and financial integration.

Reuters: Emerging debt-Market shrugs off GM, Ford downgrades

During the past month or so, while rising interest rates anxieties increased the risk aversion profiles of investors thereby affecting emerging assets values, flagging US corporate debt status as that of General Motors and Ford exacerbated these conditions. However, with the recent downgrade of the debt ratings of GM by S & P 500 the sentiment appears to have shown that investors have learned to distinguish between the fundamental profiles of US corporate debt from emerging market assets as demonstrated by emerging markets holding ground in spite of the downgrades.

Quoting a Reuters report…

"Today encapsulated the scene of the last few months, which is a tug of war," said Mohamed El-Erian, who manages $23 billion in emerging market debt as chief emerging markets portfolio manager at PIMCO, the world's largest bond fund.

"On the one hand you have pressure on the market coming from external factors ... the other side of the tug of war is improving fundamentals and the general maturation of the asset class, which is bringing in more investors."

"The selloff, which was the typical kneejerk to bad credit news, immediately produced buyers," he said. "We snapped right back and we're ending the day stronger."

"The more internal resilience the asset class shows, the less willing hedge funds are to short the asset class," he said. "The roller coaster (rides) are becoming much shorter."

World Bank: Manila Ponders Securitization Of Remittances.

Finally, an innovative way to access unexploited reserves.....

World Bank: Manila Ponders Securitization Of Remittances.

The Philippine government is looking to use securitization to tap into the billions of dollars of foreign currency sent home each year by the 7.5 million Filipinos living or working overseas, The Asian Wall Street Journal reports.

Among the ideas being touted by foreign and local banks, as well as supranational bodies such as the Manila-based Asian Development Bank and the World Bank, is securitization whereby future remittance flows would provide the assets behind a bond issue. The structure has been used successfully in places such as Mexico, Brazil and Turkey, but never before in Asia -- surprising, perhaps, since India and the Philippines are the world's largest recipients of remittances after Mexico.

In February, Filipinos working outside the Philippines sent back $720 million to their families, 19 percent more than a year earlier. The Philippine central bank projects remittances to reach $9 billion this year, compared with a record $8.54 billion set in 2004, as more Filipinos seek work overseas and are increasingly taking higher-paid jobs as nurses, engineers or musicians. Repatriated funds last year accounted for about 10 percent of nominal gross domestic product and 15 percent of total current-account receipts.

For decades, that cash has gone -- through banks, remittance centers or in suitcases -- back to workers' families to be spent on food, education and homebuilding or, if there is any left over, on excess consumption or to idle in the bank. But the government, for one, has been considering a better use for the remittances. Iluminada Sicat, officer-in-charge in the Economic Statistics department at the Finance Ministry, suggested they could be channeled to invest in small businesses. Overseas workers' earnings also could be used to finance the country's foreign-exchange requirements, she said. The ADB also is pushing the Philippines to find ways of harnessing the cash flows to support developmental needs. In 2003, one-quarter of the 86 million Philippine population still lived below the poverty line. National Treasurer Omar Cruz said last month the government was again studying the idea.

Bloomberg's John Berry: U.S. Shows Some Parallels With Argentina of '90s

While the Philippines’ economic and financial landscape may be vulnerable to a cataclysmic debt default ala Argentina, it represents only an iota to the building seismic movements underneath the global financial and economic setting. Bloomberg Federal Reserve analyst John Berry notes that a book ``And the Money Kept Rolling In (And Out)'' (published by Public Affairs) written by his colleague, Washington Post financial reporter Paul Blustein, of the US turning into an Argentina ``It could happen here,'' Blustein writes.

``The words of Miguel Kiguel, Argentina's former finance undersecretary, are apropos: `Once you know the markets are there, and there is financing, you behave as if financing will be there forever.' This is a stark reminder of the current complacency among incumbent political and administrative leaders.

China Signs Trade and Investment Deals With Philippines Worth $1.5 billion

China sealed a $1.5 billion trade and investment deal with the Philippines today. Most of which were centered on the MINING and Energy and OIL exploration industry. Yet if you look at our Phisix these are the main issues being jettisoned and disgorged by local investors as if these industries are condemned to perpetual damnation. I wonder who is accursed? This is the report from BBC...

That includes agreeing investments and loans worth more than $1.5bn, to fund Philippine infrastructure and mining projects.

Mining is a key growth area as President Arroyo tries to cut debt, improve the economy and restore investor confidence.

The government says the Philippines is home to vast reserves of mining wealth, most of it unexploited.

China's state oil firm also agreed to a possible $10m investment to look for oil off the coast of Palawan island in the western Philippines.

As Chinese firms look to fuel an economy that is expected to grow 8.5% this year, the Philippines hopes to benefit from that enormous appetite for resources.

World Bank: Nigeria At Risk Of $33 Billion Default

It has been a de rigueur to brand the Philippine economic setting as having segued into a state of crisis or of concerns of the possibility of ending up in an Argentinean-like morass. While the domestic financial balance sheets do reflect an exigent impasse requiring urgent reforms, it is not time to push on the panic button.

Because most of us are too confined with the domestic perspective this press release from World Bank would show that there are countries that have even more pressing problems than us…take for example Africa’s largest oil producing country, Nigeria…

World Bank: Nigeria At Risk Of $33 Billion Default

Nigeria is heading towards an Argentinean-style default on its $33 billion of overseas debt unless western creditors accept a deal to alleviate the country's financial burden, The Guardian (UK) reports a delegation from west Africa's biggest economy said in London yesterday.

As part of a four-country visit, the senior politicians warned that public unrest was growing over the hard-line approach adopted by the west and that time was running out for negotiations. Farouk Lawan, the chairman of the finance committee in Nigeria's house of representatives, said: "It is unconscionable that Nigeria has paid GBP3.5 billion in debt service over the past two years but our debt burden has risen by GBP3.9 billion - without any new borrowing. We cannot continue. We must repudiate this debt." Lawan, who moved a resolution last month calling on the government of president Olusegun Obasanjo to repudiate the debt, said parliament might trigger a crisis by refusing to sanction the funds to pay creditors.

"We are getting close to saying that we won't pay."

Britain is Nigeria's largest creditor, with 21 percent of its debt, and Gordon Brown has been backing an initiative to use Nigeria's windfall from higher oil prices to pay the creditors a fraction of what they are owed. Treasury sources in the UK said that no figures were at present on the table, although the starting point for negotiation has been a paper from a Washington think-tank suggesting that Nigeria should pay 30 cents for every dollar owed. That would mean Nigeria paying around $9 billion from its $17 billion reserves. The UK believes a strong Nigeria is vital for growth in the whole of west Africa, and has been seeking to broker a deal.

Other creditors have questioned whether Nigeria has really overcome the corruption that has bedeviled the country for decades and have expressed concerns about the lack of an International Monetary Fund economic reform program.

The group said Nigeria's plight was far worse than that of Argentina, which this year presented its creditors with a take it or leave it offer to pay 30 cents for each dollar owed. Lawan said 79,000 children under five were dying every month through a lack of healthcare, clean water, food and shelter. Todd Moss, of the Center for Global Development in Washington which came up with the proposals for the debt write-down, said the creditors should accept an offer. "In 2005 Nigeria has an unusual amount of cash on hand and an opportunity finally to resolve its problem. The creditors also have solid political, strategic and humanitarian reasons to cut a deal. Missing this opportunity will not only lose creditors their best chance to collect this debt but could also threaten the economic and democratic reforms in one of Africa's largest and most pivotal countries."

Meanwhile, in a special report on Nigeria, The Financial Times writes that the stakes have been rising in Nigeria's bid for relief on its foreign debt which, at almost $36 billion, is the largest in Africa. The government wants a deal from the Paris Club of bilateral government creditors, which holds the bulk of the debt, for a two-thirds reduction.

But arguing the case for debt forgiveness has been hard at a time when Nigeria has been using high oil export prices to build record foreign exchange reserves, now equivalent to abut 60 percent of its outstanding external debt. But Ngozi Okonjo-Iweala, finance minister, insists: "We don't want to wait until oil prices crash." Britain, the leading creditor with about $8 billion outstanding, has been Nigeria's chief supporter.

Nigerian negotiators say the US has also been sympathetic, with the strongest reservations coming from the Netherlands, Germany and Japan. Paris Club negotiators, however, want first to see proven results of Nigeria's reforms, especially in tackling corruption.

The Financial Times also writes in a separate piece that Nigeria has been growing in real terms at an annual rate of six percent or more but is still searching for a more diversified economy that would create jobs and make a decisive impact on poverty. The counterweight to Nigeria's position as Africa's largest oil producer is its growing population of more than 130 million. Oil revenue per head is less than any of the other top exporters. Last year's, after deduction of its share of production costs, worked out at $0.53 per day for each Nigerian. The windfall from oil prices last year brought savings of $5.9 billion from revenues above the budgeted price level of $25 a barrel. Half of this is earmarked for priority spending areas this year, such as education, health and vital infrastructure facilities, the remainder kept as a buffer against future oil price volatility, in an effort to avoid the zigzag growth pattern Nigeria has suffered in the past.

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.

The Economist: Unrest that riles Tokyo and worries Beijing

Growing tensions between China and Japan underscores emerging geopolitical risks...According to the Economist…

China’s government worries that if it is seen as too weak towards Japan, or cracks down too hard, the protesters could turn against the party. In the last century, pro-democracy unrest in China was often closely linked with patriotic demonstrations. Many participants in the recent protests have been university students, a group kept under particularly close watch by the authorities since the student-led protests in Tiananmen Square in 1989. The internet and mobile phones have enabled rapid mobilisation (organisers say more than 20m people have signed an electronic petition against Japan’s UN bid). The nationalist genie, once unbottled, could prove hard for China to restrain.

Is China showing signs of losing grip?

A Whiff of Stagflation?

Too much rate hikes pricks the bubble, a slowdown would probably compel the US Fed to ease; the probable consequence…stagflation. Discerning excerpts from Mr. Paul Krugman published on the New York Times entitled “A Whiff of Stagflation”

``What's driving inflation? Not wages: labor costs have been falling, because wages are growing less than productivity. Oil prices are a big part of the story, but not all of it. Other commodity prices are also rising; health care costs are once again on the march. And a combination of capacity shortages, rising Asian demand and a weakening dollar has given industries like cement and steel new "pricing power."

``It all adds up to a mild case of stagflation: inflation is leading the Fed to tap on the brakes, even though this doesn't look or feel like a full-employment economy…Can the Fed stop raising interest rates and go back to rate cuts without causing the dollar to plunge and inflation to soar?

``Or suppose that there's some kind of oil supply disruption - or that warnings about declining production from Saudi oil fields turn out to be right. Suppose that Asian central banks decide that they already have too many dollars. Suppose that the housing bubble bursts. Any of these events could easily turn our mild case of stagflation into something much more serious.”

How serious, hyperinflation or deflation?

Newsday's James Pinkerton: 3 signs of impending 'Asian Century'

James Pinkerton: 3 signs of impending 'Asian Century'

James Pinkerton writes in the Newsday that geopolitics have been shaping into `three wheels’, ``First, China gets closer to India, as the two nations seek a New Asian Order. Second, China grows more hostile to the United States and Japan. Third, China bolsters nuke-crazy North Korea.

In Favor of A National ID System?

In Favor of A National ID System?

The following presentation of a fictional pizza ordering scenario demonstrates of how GOVERNMENTS intends to run our lives. Turn on your speaker and click on link:

http://georgetoft.com/presentations/information_privacy/pizza_order.swf

Christopher Lingle: Excessive Asian Reserves?

Excessive Asian Reserves

Christopher Lingle argues that excessive Asian reserve currencies risks can pose distress in the financial monetary system as he argues that ``This untenable condition can lead to the sort of turmoil in foreign currency markets last seen in 1997-98. Massive currency realignments and high volatility devastates balance sheets, especially in those countries with weak financial sectors and poor corporate governance.”

Further he suggests that instead of the uneconomical allocation of capital in accumulating US dollar assets by central banks, this be diverted into financing private entrepreneurs ``They would lower unexpected currency risks by divesting US assets that already have low interest rates. And the costs of holding foreign reserves can be reduced if lent to private entrepreneurs since private investors always seek the highest returns for a given risk while governments do not.”

Ex- US Federal Reserve Chairman Paul Volker: "We are skating on increasingly thin ice."

Former Fed Chairman Paul Volker, as a keynote speaker in Stanford for Economic Policy Research last February 11^th, goes on the record to lambaste his successor’s policies, and highlighted the growing risk that may that may turnout to be catastrophic to the financial markets and global economy…

"Below the favourable surface [of the economy], there are as dangerous and intractable circumstances as I can remember.... Nothing in our experience is comparable…But no one is willing to understand [this] and do anything about it…"

"We are consuming… about six per cent more than we are producing. What holds the world together is a massive flow of capital from abroad… it’s what feeds our consumption binge... the United States economy is growing on the savings of the poor… A big adjustment will inevitably become necessary, long before the social security surpluses disappear and the deficit explodes."

"We are skating on increasingly thin ice."

Prudent Investor: Possibly ABN AMRO's downgrade triggered the Exodus

If you’d ask me, I think that today’s excruciating selloffs was an outlier, we took the biggest loss in the region where most of the bourses were up.

What would have caused this? Certainly for one, today’s activities manifested a huge foreign outflow, some P 364.404 million. Further the liquidations had been broad based meaning more issues encountered foreign selling than buying. So what would have prompted a selloff? Has there been any fundamental deterioration in the economic and political sphere that merited today’s carnage? Some say looming interest rate hike, I would argue that these had been floated for during the past weeks, and the latest rise in Philippine Treasuries would have had the market factored this in. In fact, according to a Businessworld report last month, it was foreign funds pressuring the BSP to raise interest rates. So how can foreign funds be selling when they themselves were asking for the rate increase?

Methinks that it is NOT the looming interest rate hike responsible for the bloodletting but yesterday’s disclosure on YAHOO news that ABN AMRO Holdings ``downgraded its rating on the Philippines to “neutral” from “overweight” citing the country's vulnerability to an outflow of foreign funds” (click on link). Apparently this “downgrade” on stockholdings came as a surprise and foreign money reacted violently to the susceptibility of the market to the whims of foreign funds. What is ironic about this is that ABN AMRO knows that the Philippine Market has been driven largely by foreign buying since June 2003, and because of the recent dollar squeeze it issued what is called as ``stating the obvious”. A Knee Jerk reaction.

Bloomberg's William Pesek: In Manila, Downgrades Are Good for Bonds

Bloomberg Asian Analyst William Pesek, finds it ironic that after two recent credit rating downgrades investment bank ING sees the Philippine debt as the “most attractive” in Asia. Citing economic growth, stabilizing politics, opportunities to fiscal reform, outsourcing opportunities, and tourism as strong selling points, Mr Pesek thinks that this administration has the window of opportunity to prove these bullish outlook right `` Like all windows of opportunity, this one may not stay open for very long. If the Philippines uses it wisely, its bondholders could be a happy bunch.”

The Philippines is into energy conservation mode

The Philippines is into energy conservation mode. Aside from the 4 day work week, the private sector is enticed to shift working hours to the evening via the price of time formula which according to energycentral, “time-of-use pricing formula which offers cheaper rates for electricity purchased at night until early morning when electricity demand is at its lowest.” Aside, to promote the use of alternative energy some 200 buses will be on the road using compressed natural gas. There are also reports that the government will be employing new traffic management scheme as well as a possible increases on vehicle taxes.

Commodities' Q1 rally puts other assets at risk in Q2

Commodities greatly outperformed stocks and bonds after the CRB Index hit a 25-year high in March, and it seems that the trend is likely to continue, according to a Reuters report by Nick Edwards, ``…their strength could intensify the downside risks for stocks and the global economy in the months ahead, money managers say… If similar patterns are repeated in the second quarter, the inflation risks that rampant rises in commodity markets stoke up in the broad economy could bring big trouble -- especially as they coincide with slowing company earnings and shrinking productivity gains.” Is this the beginning of the unfolding divergence???

DR Barton of Trader's U: What Investors Can Learn From Traders

I'd like to share with you an insightful article by DR Barton of Traders U...

What Investors Can Learn From Traders
by D.R. Barton, Jr.
President, Trader’s U

Investors and traders really aren't that different, deep down inside. In general, traders think a little more highly of themselves. And they tend to buy and sell a bit more frequently.

And while I know a few traders who believe that they can leap tall buildings in a single bound, I have yet to see one of them actually demonstrate this particular attribute...

There are some generalities that we could use to distinguish traders and investors:

Traders tend to have shorter time horizons; investors have longer ones.

Investors lean more toward fundamental analysis, while traders concentrate more on technical analysis.

Traders have sharper wits and tend to be snappier dressers (okay - I just made that one up).

A trader's tendencies toward shorter time frames and technically based analysis can actually prove beneficial for investors as they apply fundamental analysis over longer time frames. Let's look at a few ways that a trader's mindset can help an investor.

Teaching Old Investors New Tricks

Traders, as a group, tend to be very open to learning new and better ways to do things. This is one characteristic that investors could profitably adopt. What are some concepts that traders apply that investors could use? Here are three that could help you in both your trading and investing portfolios:

Keep a healthy detachment. Investors, by the nature of their typically fundamental research, tend to get attached to their investment ideas. This is easy to understand. After doing copious amounts of digging into the balance sheet, management team and new-product stream of a prospective company, it's easy to buy into the story you've created about how good the company is. The problem is that many investors have trouble "letting go " when their pet stock doesn't work out and heads into the tank.

People will make all sorts of rationalizations to keep from selling a stock that they have spent so much time researching. You fall in love with the stock that you spent so much time and energy selling yourself on in the first place. Some might call it getting drunk on your own wine. But such attachment can be costly if it means holding onto a loser too long (or holding onto a stock that has had a great run for you and is now taking back most of those profits).

In contrast, traders must learn to give up the losers so they can go and concentrate on something more productive. The stock or commodity isn't personified; it either acts like it's expected to, or it's cut loose.

Take real responsibility for your results. It's easy to blame outside forces when an investment goes bad. Corporate insiders messed up. Short sellers knocked your stock down. Foreign (or domestic) oil barons played with the market. Your broker gave a bad fill. This list could be endless.

The problem is that until we take responsibility for the performance of our portfolio, we are destined to keep repeating old mistakes. If our most recent loss (or string of losses) was someone else's fault, why should we change anything? In order to make useful changes to our investing process, we have to take responsibility for losers and winners.

Are traders naturally more responsible people? Goodness, no! BUT traders have to learn to take responsibility early in their careers. We have a very descriptive word for traders who fail to take responsibility for their results - we call them "broke."

Manage trade-by-trade and portfolio risk. When investing, it is sometimes easy to get caught up in one good idea - like a company that could skyrocket 10 or 100 times its current price if it makes it through clinical trials or lands that critical contract. Even savvy investors who would never "risk it all" can catch themselves putting too many eggs in one basket when a particularly compelling idea comes along.

Because of the frequency of trading opportunities, traders are forced to manage trade-by-trade risk or face quick extinction. This is a hard lesson that many an aspiring trader has learned the hard way. Risking too much, too often, can rapidly knock a trader's equity below the point of no return.

A good rule of thumb for both traders and investors is to risk no more than 1% of your equity on any trade. This insures that you'll always be able to come back another day if your investment or trade doesn't work out.

As for your whole portfolio, lots of people don't even consider what could happen if a major event happened that affected a broad range of holdings in their portfolio. This is such an important topic, that we'll dedicate a whole article to it in the near future. For now, ask yourself this question: "How bad a hit would I take if all my stops were triggered in one day?" If the answer is not cataclysmic, you are probably on the right track.

Traders and investors are definitely similar in one aspect: Both are trying to profitably navigate the ebbs and flows of the market. Looking at the markets from another point of view may provide some valuable insight for you as pick your next trade or investment.

Hedge Funds Dominated the Selling of Emerging Market Assets

According to Turkish Daily News Asia, hedge funds were mostly responsible for the recent emerging asset selloffs, “Hedge fund accounts were behind the bulk of the sell-off in emerging market external debt, a JP Morgan survey showed on Wednesday, noting that these accounts now have big short positions in the market.”

And the Philippines was one of the major losers, "At the country level we have seen a broad, but small reduction in exposure. The biggest reductions have been in Russia and the Philippines. Smaller reductions have come from Brazil, Turkey, Ukraine, Uruguay, Mexico and Ecuador. Argentina and Venezuela are little changed," the survey said.

So, the non passage of VAT, Abu-Sayyaf and suspected IPO rotations were clearly not the triggers or the causal factors and have a scintilla of relevance to the latest market carnage.

Bloomberg: Philippines Expects $7 Billion in Mining Investment

Philippines Expects $7 Billion in Mining Investment (Update3)

March 23 (Bloomberg) -- Anglo American Plc and China's Shanghai Baosteel Group are among overseas companies that may spend $7 billion on mines in the Philippines after a Supreme Court ruling eased investment rules, Mining Secretary Michael Defensor said.

``There has been tremendous interest from investors,'' Defensor said today in an interview in Singapore. ``We will be able to get $7 billion in foreign direct investment,'' he said, without giving a timeframe.

The Philippines is reviewing regulations on the ownership of mines in an effort to boost investment in the industry, which accounted for 1.6 percent of gross domestic product in 2003. Mining may account for as much as 15 percent of GDP in five years, Defensor said, after the Supreme Court in December ruled foreign companies could invest in the ``large-scale exploration, development and utilization'' of mining and energy resources.

Mining companies are holding talks about investing in 60 projects, and a further 30 projects are at an ``exploratory stage,'' Defensor said. Overseas mining companies in talks include London-based Anglo American, the world's second-largest mining company, Shanghai-based Baosteel, China's largest steelmaker by output, and Canada's Ivanhoe Mines Ltd., he said.

``Many private companies in Manila were able to negotiate and have some commitments from companies from Australia, Canada and all over the world,'' Defensor said.

Nickel Project

Shanghai Baosteel is considering building a $1 billion nickel project in the Philippines with China's Jinchuan Group, Yu Zhonghai, director of the international business development department at Shanghai Baosteel, said in an interview this month. The company hasn't completed a feasibility study on the Philippine project, Yu said.

Shanghai Baosteel and Jinchuan plan to buy a nickel mine in the Philippines that halted operations in 1986, China Business News reported in February. The mine halted output because of technical problems and high energy costs, and would need production upgrades costing as much as $1 billion before resuming operations, the report said.

Ivanhoe Mines may invest in projects operated by Lepanto Consolidated Mining Co., the Philippines' biggest mining company, the Philippine Daily Inquirer reported in December.

Bloomberg: Emerging Market Bonds, Currencies and Stocks Extend Declines

Prudent Investor Comments…

Evidences are mounting that the Phisix sell-offs are of class related and has little to do with domestic developments. This report from Bloomberg accentuates that currencies, bonds and stocks in emerging markets have ALL been thrashed.

I would consider this though, an evanescent sell-off considering that, one, emerging assets have been streaking red hot and requires some cooling off or profit taking, and two, commodity prices in general remain buoyant which means that the primary revenue drivers of most emerging markets are still bustling.

Further, this queasiness has also been due to speculations on the US Fed’s move tonight, if it would drop its ‘measured pace’ of hiking rates and open its doors to a more aggressive stance which is currently boosting the US dollar at the expense of emerging market assets.

Emerging Market Bonds, Currencies and Stocks Extend Declines

March 21 (Bloomberg) -- Emerging market bonds, stocks and currencies fell, extending last week's declines, as investors shunned riskier assets amid expectations rising oil prices will stoke inflation, pushing U.S. interest rates higher.

Brazil's benchmark bond maturing in 2040, the most traded emerging-market security, fell to a four-month low. Among stock markets, Pakistan's declined the most, losing 4.2 percent. Shares also dropped in Turkey, Russia and Argentina, while the currencies of Slovakia, Poland, the Czech Republic and Romania also weakened.

Surging oil prices and rising government bond yields in the U.S., the world's biggest economy, are curbing investor appetite for higher-risk assets, which were among the best performers in 2004. Concern deepened after General Motors Corp., the world's third-biggest corporate borrower, on March 16 forecast its biggest quarterly loss since 1992.

``Risk appetite is fading fast,'' said Jean-Dominique Butikofer, who manages $850 million of emerging-market debt at Julius Baer & Co. in Zurich. General Motors' announcement last week had a ``negative psychological impact. Emerging markets are coming under pressure.''

Average spreads on emerging-market debt widened today, rising 5 basis points to 368 basis points, or 3.68 percentage points, according to JPMorgan Chase & Co.'s EMBI Plus Index.

Brazil's 11 percent bond due 2040 fell as much as 1.4 cents on the dollar and was down 0.1 cent to 112.3 at 2:50 p.m. in New York. Its yield rose 1 basis point to 9.76 percent. Brazil's 8 percent bond due 2014 fell 0.4 cent to 99.69.

Venezuela's benchmark 9.25 percent bond that matures in 2027 dropped to its lowest level since October while Mexico's 8.125 percent bond maturing in 2019 slipped to a two-month low.

Emerging market assets are being hurt by speculation the Federal Reserve may signal that it plans to boost the pace of interest-rate increases. By June, the Fed will stop using the term ``measured'' to describe the pace of its interest-rate increases, according to 13 of the 22 firms that trade with the Fed.

Fed Concern

The Fed will raise its benchmark overnight rate by a quarter- point tomorrow to 2.75 percent, the seventh increase since June, according to 93 of 101 economists in a separate poll.

``Everything in Brazil and Latin America right now is about U.S. rates,'' said Pedro Tuesta, senior Latin America economist for London-based 4Cast Inc. in Washington D.C. ``With the possibility that the Fed may change the tone and speed of rate increases, there is less appetite for emerging-market risk.''

Morgan Stanley Capital International Inc.'s Emerging Markets Index of stocks in Eastern Europe, the Middle East, Asia and Latin America fell 0.7 percent today, extending its losing streak to six consecutive days. That's the longest run of declines since May.

Pakistan, Russia, Argentina

Pakistan's Karachi Stock Exchange 100 Index dropped 4.2 percent, Russia's Moscow Interbank Currency Exchange Index fell 1.8 percent and the Argentina Merval Index slipped 2.5 percent.

U.S. 10-year Treasury yields are near a seven-month high on concern rising energy costs will fuel inflation. Crude oil for April delivery fell 10 cents today to $56.62 a barrel on the New York Mercantile Exchange. Oil touched $57.60 a barrel on March 17, the highest for a contract closest to expiration since trading began in 1983. Prices are up 49 percent in the past year.

The yield on the benchmark 4 percent U.S. note due February 2015 was at 4.52 percent today, within 6 basis points of its highest since July.

``Investors' appetite for risk, which has been huge, is on the wane,'' Morgan Stanley's London-based chief fixed-income strategist Joachim Fels wrote in a report published on March 18. ``The bull-run in all the major fixed-income asset classes appears to be over.''

Currencies

The Slovak koruna dropped 2 percent against the dollar today, the biggest decline among 61 currencies tracked by Bloomberg. The Turkish lira lost 1.7 percent, the Czech koruna 1.9 percent and the Romanian leu 1.6 percent.

``This isn't a rout but there's more risk adjustment going on,'' said Jon Harrison, a currency strategist at Dresdner Kleinwort Wasserstein in London. ``The market clearly thinks there's more to come.''

Emerging Europe, Middle East and Africa stock mutual funds last week had their first weekly outflow of money in three months, according to EmergingPortfolio.com. The funds lost a net $4.4 million the week to March 16, the Boston-based fund tracker said in an e-mail. The funds have taken in $2.85 billion in new money this year, more than the $2.18 billion inflow for all of 2004, the data showed.

Phisix Sell-Off Is A Class Action

Finding a correlation for the declining Phisix? Here it is....The Phisix has moved in tandem with the JP Morgan Emerging Market Debts.

The sell-off in the emerging bonds has filtered into domestic equities with tightening global liquidity conditions as the pronounced catalyst.

Mineweb.com: A kind of contagion

The Prudent Investor says, my observations on the decline of the local market as being a contagion among emerging market classes is shared by Barry Sergeant of Mineweb.com, read his article...

A kind of contagion?
By: Barry Sergeant
Posted: '18-MAR-05 15:13' GMT © Mineweb 1997-2004

JOHANNESBURG (Mineweb.com) -- Investors have been piling out of global emerging market (GEM) stocks over the past week, and switching proceeds mainly into the dollar. The greenback is back in favour for the meantime, with record crude oil prices seen as re-igniting inflation fears, and thus an acceleration in the tightening of interest rates in the US.

So far, the carnage in emerging markets has been relatively mild, led by sell-offs originating in Latin America and developing Europe. Measured in dollar terms, the Brazilian stock market has fallen by just over 9% between its all time high on March 7, and March 16. Hungary fell 11%, again from an all-time high, between March 9 and March 17. Egyptian stocks were whacked down an average of 7.4% in the two trading days to March 17. Poland slumped 11.5% in just six trading sessions, to March 17.

The sell-off in South Africa has been relatively mild, with the market falling 5.6%, in just five trading sessions, from an all time high on March 11, to March 17. On Thursday, March 17, foreign investors were net sellers of R583-m of South African equities, according to statistics from the JSE Securities Exchange. The switch in trend from net purchases to net sellers has been evident for much of this year; for the year-to-date, foreigners have bought a net R8.5 billion worth of domestic equities, compared to R32.9 billion for the comparative year-ago period.

All told, the past week has seen the dollar-denominated Morgan Stanley Capital International (MSCI) emerging markets stock index record its longest losing streak since December 7 to December 10. The index comprises 733 companies with a combined market value of about $2.4 trillion.

This week’s sharp correction in GEM stocks sees a retreat from recent all-time highs in most markets, and may possibly signal the peak of major bull markets. However, the past week or so has also been characterised by a relatively sharp sell off in emerging market currencies. The rand, which is also classified as a commodity currency, on Monday was the biggest loser against the dollar among 16 major currencies monitored by Bloomberg. The domestic currency fell by 2.8% on the day.

Not one of the 16 currencies gained on the dollar on the day, mainly on sentiment that the Federal Reserve, the US central bank, would continue increasing interest rates. On Tuesday, the rand was again the single biggest loser against the dollar, with a slip on the day of 2.2%. The currency then recovered 0.2% against the greenback on Wednesday, before surrendering another 0.25% on Thursday, when the currency traded at five-week lows against the dollar, at R6.18.

Recent investor concerns over emerging markets can be traced to March 9, when the JP Morgan EMBI+ index, comprising emerging market bonds, mainly government debt, saw its sharpest sell off since late November last year. South African and Brazilian bonds were at the forefront of the sharp sell-off of GEM debt.

The action was triggered by frail sentiment in global markets, and more specifically by concerns that higher bond yields in the US would diminish the attractiveness of GEM debt. The widely followed JP Morgan EMBI+ emerging-market debt index had gained 26% from an eight-month low seen on May 10, 2004; over the same period the benchmark 10-year US Treasury note has lost 7%.

In examining the significant pressure experienced by GEM equities over the past week, the Bank Credit Analyst states: “We have repeatedly warned that the recent run-up in emerging market stocks has been too steep and too fast.” Some returns have been stupendous; this year alone, even after this week’s corrections, the average Egyptian stock is up by 63%; in Pakistan, the gain has been 42%.

BCA Research concludes: “A corrective phase in this asset class may now be developing.

Bottom line: A more substantial drop in prices may be needed before the correction is over.”