After a rather soft opening the Philippine benchmark index, the Phisix, firmed during late trading to end the day higher by 1.02 points or .06%.
PLDT resumed its upbeat momentum up .4% but this time aided by gains from the banking heavyweights Metrobank up 1.85% and Bank of the Philippine Islands higher 1.19%. San Miguel shares moved in opposite directions as its Foreign and Local shares slumped by a nasty 2.73% while its local shares strengthened by .86%. In short the big drop of San Miguel B shares were offset by the gains of its local or ‘A’ shares combined with the gains of BPI, Metrobank and PLDT which resulted to the slight gain of the major composite index. In the 30-company (listed as 33 due to the B shares) composite index 11 advanced, 7 declined while 15 were unchanged.
Market breadth remained cautiously bullish as advancers beat decliners by 35 to 29, while among the industry sub indices, three recorded gains (Banking and Finance, Phi-ALL and Mining) against three decliners (Commercial and Industrial, Oil and Property Index).
Foreign money posted a slim net inflow of P 13.134 million on selective buying. Once again the meat of these money flows were directed to PLDT while moderate inflows were seen in First Philippine Holdings, Ayala Land and Megaworld Corp. However, in the broader market overseas money sold more issues than they acquired, hence the phrase ‘selective buying’. Foreign trades accounted for 53% of the accrued turnover.
This has been the 13th straight session that the Philippine bourse traded more than the 100-issue threshold, beating the June and July 2003 levels, which if you recall was the period whence the 2003 rally commenced. Considering the premise that most investors are likely to hold on to a losing stock rather than to sell them, trading the broader market means more buying than selling. Well in support of this thesis, during the said period June 18 to date, the market has climbed 3.31%. Advancers beat decliners 472 to 322 with an average trade of 108 issues a day. Moreover, foreign inflow was a paltry P 183.201 million with foreign trades accounting for a slight majority 53.54% of total output. Remember the propulsion to last year’s run had been foreign moolah, today we are seeing local investors anteing up and substituting the palpable declines from foreign capital. No, the issue of declining foreign investments are not due to internal concerns as cynics would like to put but it on global monetary and fiscal developments. (Read more on the supplemental posting below).
Finally, the general sentiment seen in today's market activities could probably be in line with that of our neighbors, most of the region’s bourses are up with sharp advances seen in Indonesia (post election), Taiwan and Singapore. The only decliners in the region, as of this writing, are New Zealand, SRI Lanka and Japan.
Tuesday, July 06, 2004
ANATOLE KALETSKY: The only way is up for interest rates and inflation
The only way is up for interest rates and inflation
ANATOLE KALETSKY
business.timesonline.co.uk
MIGHTY rivers begin from the tiny trickle of a single source. In this spirit, we can identify the minuscule quarter-point increase in interest rates announced yesterday evening by the US Federal Reserve Board as the start of a new economic era and the end of a trend that has lasted a generation, dominating global finance and economics for the past 23 years.
Starting in June 1981, when the US interest rates fell from a 20th-century high 19 per cent, each successive cyclical peak in interest rates was lower than one before, as was each cyclical trough.
This declining trend in interest rates has continued through three recessions and two economic expansions, through stock market crashes and bubbles, through property booms and busts. But yesterday, this 23-year sequence of declining highs and lows came to an end.
The Fed’s decision to increase its rate to 1.25 per cent marked the symbolic start of a new era, since the chances that interest rates will fall back to 1 per cent rates or below must be very small.
And this change in trend is not just a symbolic or theoretical matter. Its impact will be felt across the world. The global financial markets are more integrated than ever and even for British businesses and borrowers the imminent change in US financial conditions could be more significant than any decision that the Bank of England takes. US monetary policy still largely determines global inflation and liquidity conditions, has a major influence on currency valuations, stock market and oil prices, as well as setting the psychological background for the decisions of the Bank of England and the European Central Bank.
Its most important effects will be to focus attention on disconcerting issues which finance ministers, central bankers and investors have recently done their best to downplay or ignore: the likelihood of much higher interest rates in the near future; and the deteriorating outlook for global inflation in the long term.
Now that the Fed has started raising interest rates, investors will have to acknowledge that this upward trend has a long way to go. Given that the powerful surge of growth in the American economy after the Iraq war has ended and inflation’s slow but steady increase in the past few months, it is clear with the benefit of hindsight that US interest rates should never have fallen as low as they did. And having cut interest rates to 1 per cent last June — at a time when the economy was already booming — the Fed should have raised them much faster than it did. But what is even clearer is that US interest rates are now far below the appropriate level for this stage of the economic cycle and will need to rise much farther and faster than financial markets currently assume.
In Britain, the Bank of England assumes that interest rates will have to rise to 5 per cent to get to a neutral level, which neither stimulates nor restrains the economy. If so, then US rates will have to rise well above 5 per cent before they start to rein-in growth and inflation. American consumers are less indebted than their British counterparts, US house prices are lower and the US economy has a higher rate of population growth — all of which implies that America should be less sensitive to rising interest rates than Britain and that controlling the economy should require higher rates.
At present the American markets are expecting only a modest increase in rates — from 1 per cent yesterday to 2.25 per cent by the end of the year and around 3.5 per cent in mid-2005. If interest rates next year rise instead to be 5 per cent or higher, investors, politicians and central bankers will be in for some shocks.
The exceptionally low US rates of the past two years have contributed to the extreme weakness of the dollar and the unwelcome strength of the euro and the pound. They have also encouraged a tremendous amount of debt-financed speculation. Investors have borrowed dollars to invest in anything from euros and yen to rand and shares in China and Brazilian bonds.
As interest rates rise, these leveraged speculations will be unwound, with potentially disruptive effects on many economies and financial markets. More fundamentally, the low level of US interest rates has aggravated the biggest long-term danger facing the world economy: a revival of inflation. In fact, the combination of an ultra-lax monetary policy with a rapidly falling dollar has created a situation which is more and more reminiscent of the great inflation which started with the US Government pursuing an expansionary Keynesian guns-and-butter and easy money policy in the mid-1960s, as the Vietnam War gathered pace.
In America today there are seven separate trends all pointing to higher prices and excess leverage in ominous ways reminiscent of the 1960s: first and foremost, a lax monetary policy, with a central bank dedicated to creating jobs, rather than stabilising prices; second, ballooning budget deficits; third, a falling currency; fourth, a hugely expensive war, financed by printing money; fifth, protectionism; sixth, a soaring oil price; seventh, a spendthrift President, who may be a right-wing Republican, but is spending money like a left-wing Democrat. In normal times, any one of these “seven deadly sins” might be sufficient to push up inflation. All seven operating together would be a sure-fire recipe for prices to take off.
This does not mean that the US will return to the rapid inflation of the 1970s and 1980s — 10 per cent or even 5 per cent inflation is unlikely, partly because markets and central bankers have not completely forgotten the lessons of the 1960s and 1970s, but mainly because there is so much more competition and global trade. But even a modest increase — say from 2 per cent inflation to 3 or 4 per cent — would have a major impact on the world economy.
For a start it would damage the credibility of the Fed, and by association, of other central banks around the word. Under Alan Greenspan, the Fed has become the most powerful and respected financial institution of all time. But this reputation will suffer as investors and politicians realise that they have been misled by it. Only four months ago Mr Greenspan declared in his annual report to Congress that the Fed expected US inflation this year to average between 1 and 1.25 per cent and that the risks to this forecast were mostly in a downward direction. Instead, inflation is now running at 2.5 per cent, with higher figures probably ahead. The Fed should be quickly raising interest rates to at least the neutral level of 5 per cent. Yet all indications are that Mr Greenspan will tighten only gently, at least until after the November presidential election is out of the way. Mr Greenspan will soon stand accused not only of misjudging the inflation outlook, but also of delaying remedial treatment to protect President Bush.
Moreover, the cyclical pressures for rising inflation will soon be aggravated by an even more powerful long-term trend: the growing demand for social spending. In the coming decades huge additional demands for non-productive expenditures will be imposed on the US and global economies. While the war against terrorism is the obvious one which attracts the most attention (just as the Vietnam War did in the 1960s and 1970s), the far more important pressures will come in the long-term from demographic ageing and the growing power of the grey lobby to demand public financing of unfounded pensions and healthcare. This is in many ways analogous to the growth of the welfare state and the Great Society in the 1960s. The ever-growing demands of ageing populations will impose a greater burden on the US economy, as well as the economies of Europe and Japan, than any previous social programme or war.
If history is any guide, politicians and voters will decide that inflation is the only way to spread the burden of these ever-growing social costs. If so, then the trend of interest rates and inflation will continue to point upwards for years, or even decades, to come.
ANATOLE KALETSKY
business.timesonline.co.uk
MIGHTY rivers begin from the tiny trickle of a single source. In this spirit, we can identify the minuscule quarter-point increase in interest rates announced yesterday evening by the US Federal Reserve Board as the start of a new economic era and the end of a trend that has lasted a generation, dominating global finance and economics for the past 23 years.
Starting in June 1981, when the US interest rates fell from a 20th-century high 19 per cent, each successive cyclical peak in interest rates was lower than one before, as was each cyclical trough.
This declining trend in interest rates has continued through three recessions and two economic expansions, through stock market crashes and bubbles, through property booms and busts. But yesterday, this 23-year sequence of declining highs and lows came to an end.
The Fed’s decision to increase its rate to 1.25 per cent marked the symbolic start of a new era, since the chances that interest rates will fall back to 1 per cent rates or below must be very small.
And this change in trend is not just a symbolic or theoretical matter. Its impact will be felt across the world. The global financial markets are more integrated than ever and even for British businesses and borrowers the imminent change in US financial conditions could be more significant than any decision that the Bank of England takes. US monetary policy still largely determines global inflation and liquidity conditions, has a major influence on currency valuations, stock market and oil prices, as well as setting the psychological background for the decisions of the Bank of England and the European Central Bank.
Its most important effects will be to focus attention on disconcerting issues which finance ministers, central bankers and investors have recently done their best to downplay or ignore: the likelihood of much higher interest rates in the near future; and the deteriorating outlook for global inflation in the long term.
Now that the Fed has started raising interest rates, investors will have to acknowledge that this upward trend has a long way to go. Given that the powerful surge of growth in the American economy after the Iraq war has ended and inflation’s slow but steady increase in the past few months, it is clear with the benefit of hindsight that US interest rates should never have fallen as low as they did. And having cut interest rates to 1 per cent last June — at a time when the economy was already booming — the Fed should have raised them much faster than it did. But what is even clearer is that US interest rates are now far below the appropriate level for this stage of the economic cycle and will need to rise much farther and faster than financial markets currently assume.
In Britain, the Bank of England assumes that interest rates will have to rise to 5 per cent to get to a neutral level, which neither stimulates nor restrains the economy. If so, then US rates will have to rise well above 5 per cent before they start to rein-in growth and inflation. American consumers are less indebted than their British counterparts, US house prices are lower and the US economy has a higher rate of population growth — all of which implies that America should be less sensitive to rising interest rates than Britain and that controlling the economy should require higher rates.
At present the American markets are expecting only a modest increase in rates — from 1 per cent yesterday to 2.25 per cent by the end of the year and around 3.5 per cent in mid-2005. If interest rates next year rise instead to be 5 per cent or higher, investors, politicians and central bankers will be in for some shocks.
The exceptionally low US rates of the past two years have contributed to the extreme weakness of the dollar and the unwelcome strength of the euro and the pound. They have also encouraged a tremendous amount of debt-financed speculation. Investors have borrowed dollars to invest in anything from euros and yen to rand and shares in China and Brazilian bonds.
As interest rates rise, these leveraged speculations will be unwound, with potentially disruptive effects on many economies and financial markets. More fundamentally, the low level of US interest rates has aggravated the biggest long-term danger facing the world economy: a revival of inflation. In fact, the combination of an ultra-lax monetary policy with a rapidly falling dollar has created a situation which is more and more reminiscent of the great inflation which started with the US Government pursuing an expansionary Keynesian guns-and-butter and easy money policy in the mid-1960s, as the Vietnam War gathered pace.
In America today there are seven separate trends all pointing to higher prices and excess leverage in ominous ways reminiscent of the 1960s: first and foremost, a lax monetary policy, with a central bank dedicated to creating jobs, rather than stabilising prices; second, ballooning budget deficits; third, a falling currency; fourth, a hugely expensive war, financed by printing money; fifth, protectionism; sixth, a soaring oil price; seventh, a spendthrift President, who may be a right-wing Republican, but is spending money like a left-wing Democrat. In normal times, any one of these “seven deadly sins” might be sufficient to push up inflation. All seven operating together would be a sure-fire recipe for prices to take off.
This does not mean that the US will return to the rapid inflation of the 1970s and 1980s — 10 per cent or even 5 per cent inflation is unlikely, partly because markets and central bankers have not completely forgotten the lessons of the 1960s and 1970s, but mainly because there is so much more competition and global trade. But even a modest increase — say from 2 per cent inflation to 3 or 4 per cent — would have a major impact on the world economy.
For a start it would damage the credibility of the Fed, and by association, of other central banks around the word. Under Alan Greenspan, the Fed has become the most powerful and respected financial institution of all time. But this reputation will suffer as investors and politicians realise that they have been misled by it. Only four months ago Mr Greenspan declared in his annual report to Congress that the Fed expected US inflation this year to average between 1 and 1.25 per cent and that the risks to this forecast were mostly in a downward direction. Instead, inflation is now running at 2.5 per cent, with higher figures probably ahead. The Fed should be quickly raising interest rates to at least the neutral level of 5 per cent. Yet all indications are that Mr Greenspan will tighten only gently, at least until after the November presidential election is out of the way. Mr Greenspan will soon stand accused not only of misjudging the inflation outlook, but also of delaying remedial treatment to protect President Bush.
Moreover, the cyclical pressures for rising inflation will soon be aggravated by an even more powerful long-term trend: the growing demand for social spending. In the coming decades huge additional demands for non-productive expenditures will be imposed on the US and global economies. While the war against terrorism is the obvious one which attracts the most attention (just as the Vietnam War did in the 1960s and 1970s), the far more important pressures will come in the long-term from demographic ageing and the growing power of the grey lobby to demand public financing of unfounded pensions and healthcare. This is in many ways analogous to the growth of the welfare state and the Great Society in the 1960s. The ever-growing demands of ageing populations will impose a greater burden on the US economy, as well as the economies of Europe and Japan, than any previous social programme or war.
If history is any guide, politicians and voters will decide that inflation is the only way to spread the burden of these ever-growing social costs. If so, then the trend of interest rates and inflation will continue to point upwards for years, or even decades, to come.
Monday, July 05, 2004
New York Times: China Is Filtering Phone Text Messages to Regulate Criticism
China Is Filtering Phone Text Messages to Regulate Criticism
By JOSEPH KAHN
BEIJING, July 2 - China has begun filtering billions of telephone text messages to ensure that people do not use the popular communication tool to undermine one-party rule.
The campaign, announced on Friday by the official New China News Agency, comes after text messages sent between China's nearly 300 million mobile phone users helped to expose the national cover-up of the SARS epidemic last year. Text messages have also generated popular outrage about corruption and abuse cases that had received little attention in the state-controlled media.
It is a sign that while China has embraced Internet and mobile phone technology, the government has also substantially increased its surveillance of digital communications and adopted new methods of preventing people from getting unauthorized information about sensitive subjects.
This week, government officials began making daily inspections of short-message service providers, including Web sites and the leading mobile phone companies. They had already fined 10 providers and forced 20 others to shut down for not properly policing messages passing through their communication systems, the news agency said.
The dispatch said the purpose was to stop the spread of pornographic messages and false or deceptive advertising as well as to block illicit news and information.
All such companies are being required to install filtering equipment that can monitor and delete messages that contain key words, phrases or numbers that authorities consider suspicious before they reach customers. The companies must contact the relevant authorities, including the Communist Party's propaganda department, to make sure they stay in touch with the latest lists of banned topics, executives in the industry said.
Although text messaging is still in its infancy in the United States, it has become a primary means of communication in China. Chinese mobile phone users sent 220 billion text messages in 2003, or an average of 7,000 every second, more than the rest of the world combined, China Telecom data shows.
Many people with mobile phones like text messaging because it is quieter and less expensive than making phone calls. Messages can also be sent to multiple people at once and, at least until recently, were considered too unimportant or technologically difficult to monitor.
The authorities have become increasingly attuned to the threat posed by mobile messaging, as it has become not only a convenient way to talk and gossip, but also a competitor in the news business.
Phone messaging is faster and easier than using chat sites on the Web, which have also become forums to disseminate information and opinions. China had already taken steps to monitor Web sites more carefully and had arrested several dozen "cyberdissidents" for posting articles or expressing views on the Internet that the authorities deemed unacceptable.
New regulations on messaging appear to have been phased in during recent weeks. Some mobile phone users said they had had trouble sending ordinary text messages around the 15th anniversary of the June 4, 1989, crackdown on democracy demonstrations in Beijing, perhaps because of tighter policing of the service.
One user said that messages he sent that included the numbers 6 and 4 close together were never delivered, perhaps because they were screened as a possible reference to the date of the crackdown.
Wang Hongwei, a 25-year-old air-conditioning technician in Beijing, said he got up to 100 text messages every day - from friends, colleagues and news sites. He said he had found the service slower and less reliable recently, although he had not heard of the new monitoring orders.
"I don't think there's any justification for filtering every single message," he said. "The government should not be deciding what people say to each other."
Industry experts say message filtering technology is relatively straightforward, much like programs to block junk e-mail. The challenge is to provide robust software that can process enormous volumes of text messages without reducing their efficiency.
"You can filter as much as you like, just like a list of words," said Wang Yuanyuan, a sales manager at Venus Info Tech, which sells filtering software to Chinese messaging service providers.
She said the new rules would lead to heavy demand for her company's product.
"I think with the new rules the government will be expecting service providers to govern their content in a more regularized way, and this is what our system can do," she said.
By JOSEPH KAHN
BEIJING, July 2 - China has begun filtering billions of telephone text messages to ensure that people do not use the popular communication tool to undermine one-party rule.
The campaign, announced on Friday by the official New China News Agency, comes after text messages sent between China's nearly 300 million mobile phone users helped to expose the national cover-up of the SARS epidemic last year. Text messages have also generated popular outrage about corruption and abuse cases that had received little attention in the state-controlled media.
It is a sign that while China has embraced Internet and mobile phone technology, the government has also substantially increased its surveillance of digital communications and adopted new methods of preventing people from getting unauthorized information about sensitive subjects.
This week, government officials began making daily inspections of short-message service providers, including Web sites and the leading mobile phone companies. They had already fined 10 providers and forced 20 others to shut down for not properly policing messages passing through their communication systems, the news agency said.
The dispatch said the purpose was to stop the spread of pornographic messages and false or deceptive advertising as well as to block illicit news and information.
All such companies are being required to install filtering equipment that can monitor and delete messages that contain key words, phrases or numbers that authorities consider suspicious before they reach customers. The companies must contact the relevant authorities, including the Communist Party's propaganda department, to make sure they stay in touch with the latest lists of banned topics, executives in the industry said.
Although text messaging is still in its infancy in the United States, it has become a primary means of communication in China. Chinese mobile phone users sent 220 billion text messages in 2003, or an average of 7,000 every second, more than the rest of the world combined, China Telecom data shows.
Many people with mobile phones like text messaging because it is quieter and less expensive than making phone calls. Messages can also be sent to multiple people at once and, at least until recently, were considered too unimportant or technologically difficult to monitor.
The authorities have become increasingly attuned to the threat posed by mobile messaging, as it has become not only a convenient way to talk and gossip, but also a competitor in the news business.
Phone messaging is faster and easier than using chat sites on the Web, which have also become forums to disseminate information and opinions. China had already taken steps to monitor Web sites more carefully and had arrested several dozen "cyberdissidents" for posting articles or expressing views on the Internet that the authorities deemed unacceptable.
New regulations on messaging appear to have been phased in during recent weeks. Some mobile phone users said they had had trouble sending ordinary text messages around the 15th anniversary of the June 4, 1989, crackdown on democracy demonstrations in Beijing, perhaps because of tighter policing of the service.
One user said that messages he sent that included the numbers 6 and 4 close together were never delivered, perhaps because they were screened as a possible reference to the date of the crackdown.
Wang Hongwei, a 25-year-old air-conditioning technician in Beijing, said he got up to 100 text messages every day - from friends, colleagues and news sites. He said he had found the service slower and less reliable recently, although he had not heard of the new monitoring orders.
"I don't think there's any justification for filtering every single message," he said. "The government should not be deciding what people say to each other."
Industry experts say message filtering technology is relatively straightforward, much like programs to block junk e-mail. The challenge is to provide robust software that can process enormous volumes of text messages without reducing their efficiency.
"You can filter as much as you like, just like a list of words," said Wang Yuanyuan, a sales manager at Venus Info Tech, which sells filtering software to Chinese messaging service providers.
She said the new rules would lead to heavy demand for her company's product.
"I think with the new rules the government will be expecting service providers to govern their content in a more regularized way, and this is what our system can do," she said.
July 5: The Philippine Stock Market Review
PLDT once again cushioned the Philippine benchmark, the Phisix, which closed little changed, from the generally bearish market bias that pervaded today’s trading activities. Bolstered by foreign investors whom injected P 85 million worth of capital representing 73% of the company’s traded output, PLDT was the sole winner among the major heavyweights adding 2.09% to the company’s market cap. Rival Globe Telecoms, San Miguel B and Ayala Corp were the major decliners that weighed on the index while San Miguel A, banking heavyweights Metrobank and Bank of the Philippine Islands, and Property heavyweights SM Primeholdings and Ayala Land closed unchanged.
Domestic investors dominated today’s trading accounting for about 63% of today’s turnover with declining issues leading advancing issues by 41 to 29. Foreigners reported a net buying of P 65.492 million with a substantial majority of the inflows concentrated on PLDT. This suggests that local investors were on a selling mode probably due to profit taking from sectors that posted substantial gains.
Among the industry indices the PLDT driven Commercial and Industrial Index and the Sunlife and Manulife dominated Phi-All index were today’s gainers, while the extractive industries the oil and mining indices, as well as Banking and Finance and the Property Indices closed lower.
PLDT’s rise in New York last Friday, defied the bearish general sentiment in Wall Street, and practically the same mien was replicated in today’s trading activities.
Domestic investors dominated today’s trading accounting for about 63% of today’s turnover with declining issues leading advancing issues by 41 to 29. Foreigners reported a net buying of P 65.492 million with a substantial majority of the inflows concentrated on PLDT. This suggests that local investors were on a selling mode probably due to profit taking from sectors that posted substantial gains.
Among the industry indices the PLDT driven Commercial and Industrial Index and the Sunlife and Manulife dominated Phi-All index were today’s gainers, while the extractive industries the oil and mining indices, as well as Banking and Finance and the Property Indices closed lower.
PLDT’s rise in New York last Friday, defied the bearish general sentiment in Wall Street, and practically the same mien was replicated in today’s trading activities.
Saturday, July 03, 2004
Forbes on Outsourcing: Cashing In On Savings
Cashing In On Savings
Kerry A. Dolan, 07.01.04, 5:10 PM ET
SAN FRANCISCO - The public backlash against moving jobs overseas has died down of late. But the offshoring of specific functions by financial services companies is moving full steam ahead, according to a new report out this week.
More than 80% of the world's largest banks, insurance companies, investment banks and brokerages have undertaken initiatives to move jobs out of their home bases, says Deloitte Research. The study found, in the last year, a 38% increase in the number of financial firms that have moved activities offshore for the first time. And the large financial institutions that have yet to offshore anything are seriously considering it, the report concludes.
Some of the world's biggest financial players, including American Express (nyse: AXP - news - people ) and the GE Capital unit of General Electric (nyse: GE - news - people ), have moved jobs like call centers and software development for a number of years. Others, like Mellon Financial (nyse: MEL - news - people ) and Bank of America (nyse: BAC - news - people ), are more recent converts to the trend. Bank of America just opened its first offshore "back-office" center in India in late May this year.
In the same survey a year ago, only 29% of institutions surveyed by Deloitte had moved operations offshore. This year 67% have already done so, and another 13% are planning to move at least some operations offshore. The big players are embracing offshoring more wholeheartedly than smaller financial institutions, according to Deloitte.
The primary reason for most offshoring is cost savings. The top 100 global financial services institutions--those with market capitalizations exceeding $10 billion--will send approximately $210 billion of their cost base overseas, saving an average $700 million per institution by 2005, the survey concludes.
Given the Fed's recent move to raise interest rates and the expectation of more hikes to come, savings from offshoring look even more attractive to lending institutions in search of new ways to boost the bottom line. The principal activities being moved overseas are IT services, software development, call centers and back-office work.
India ranked as by far the top destination for offshoring activities. "India is winning eight out of ten new deals," says Peter Lowes, U.S. leader of Deloitte Consulting's outsourcing practice. "It's developed the critical mass and the necessary infrastructure. The system in India is now a much more well-oiled machine."
India's large supply of educated workers, as well as tax deals offered by the Indian government, are important incentives. Many financial firms are not even evaluating other countries, says Lowes. However, the Philippines and Malaysia follow India as destinations of choice.
A growing number of firms--40%--are choosing to set up "captive" operations offshore, rather than outsource activities to a third party. One reason, says Lowes, is that global firms are already comfortable managing operations--and risk--in overseas locations. Such a move is a greater challenge for smaller financial firms.
Deloitte's second annual Global Offshore Survey, called "The Titans Take Hold," was based on responses from 43 financial institutions, 60% of which are U.S. based, with the remainder in Europe. It included 13 of the top 25 financial institutions in the world by market capitalization.
******
The Prudent Investor's view: In answer to Morgan Stanley economist Mr. Lian's dour outlook on the Philippines (article posted earlier), the prospects of outsourcing as presented above by the Forbes magazine, could be one of the possible growth corridors which could help spur the Philippine economy. This would be only possible if government is cognizant of its potentials and works on ensuring the viability, conduciveness and competitiveness of the industry players, as well as, retool the local labor force to meet the required standards.
Moreover, if there were any economic models that the Philippines should possibly try to emulate given its litany of disadvantages such as low savings and inadequate investments, low-value added exports, weak government finance and burdensome debts, vulnerable government institutions, poor infrastructure, low inflows of FDI and dependency on consumption, possibly the Indian paragon of a domestic services sector led growth strategy could be the rightful answer to our plaguing woes.
India’s economic infirmities in some ways parallel that of the Philippines, while on the other hand, India’s strengths, namely, well educated workforce, IT competency and English proficiency are by no means strangers to the Philippine labor force. The key to curbing the brain drain or the intellectual hemorrhage would be to harness these skills to attract offshoring service contracts. The offshoring/outsourcing phenomenon is by large an offshoot of the globalization efforts linked by the web-based platform and other IT enabled services. All that is required of the Philippines is to focus on attaining its competitiveness in an industry with exploding potentials.
Kerry A. Dolan, 07.01.04, 5:10 PM ET
SAN FRANCISCO - The public backlash against moving jobs overseas has died down of late. But the offshoring of specific functions by financial services companies is moving full steam ahead, according to a new report out this week.
More than 80% of the world's largest banks, insurance companies, investment banks and brokerages have undertaken initiatives to move jobs out of their home bases, says Deloitte Research. The study found, in the last year, a 38% increase in the number of financial firms that have moved activities offshore for the first time. And the large financial institutions that have yet to offshore anything are seriously considering it, the report concludes.
Some of the world's biggest financial players, including American Express (nyse: AXP - news - people ) and the GE Capital unit of General Electric (nyse: GE - news - people ), have moved jobs like call centers and software development for a number of years. Others, like Mellon Financial (nyse: MEL - news - people ) and Bank of America (nyse: BAC - news - people ), are more recent converts to the trend. Bank of America just opened its first offshore "back-office" center in India in late May this year.
In the same survey a year ago, only 29% of institutions surveyed by Deloitte had moved operations offshore. This year 67% have already done so, and another 13% are planning to move at least some operations offshore. The big players are embracing offshoring more wholeheartedly than smaller financial institutions, according to Deloitte.
The primary reason for most offshoring is cost savings. The top 100 global financial services institutions--those with market capitalizations exceeding $10 billion--will send approximately $210 billion of their cost base overseas, saving an average $700 million per institution by 2005, the survey concludes.
Given the Fed's recent move to raise interest rates and the expectation of more hikes to come, savings from offshoring look even more attractive to lending institutions in search of new ways to boost the bottom line. The principal activities being moved overseas are IT services, software development, call centers and back-office work.
India ranked as by far the top destination for offshoring activities. "India is winning eight out of ten new deals," says Peter Lowes, U.S. leader of Deloitte Consulting's outsourcing practice. "It's developed the critical mass and the necessary infrastructure. The system in India is now a much more well-oiled machine."
India's large supply of educated workers, as well as tax deals offered by the Indian government, are important incentives. Many financial firms are not even evaluating other countries, says Lowes. However, the Philippines and Malaysia follow India as destinations of choice.
A growing number of firms--40%--are choosing to set up "captive" operations offshore, rather than outsource activities to a third party. One reason, says Lowes, is that global firms are already comfortable managing operations--and risk--in overseas locations. Such a move is a greater challenge for smaller financial firms.
Deloitte's second annual Global Offshore Survey, called "The Titans Take Hold," was based on responses from 43 financial institutions, 60% of which are U.S. based, with the remainder in Europe. It included 13 of the top 25 financial institutions in the world by market capitalization.
******
The Prudent Investor's view: In answer to Morgan Stanley economist Mr. Lian's dour outlook on the Philippines (article posted earlier), the prospects of outsourcing as presented above by the Forbes magazine, could be one of the possible growth corridors which could help spur the Philippine economy. This would be only possible if government is cognizant of its potentials and works on ensuring the viability, conduciveness and competitiveness of the industry players, as well as, retool the local labor force to meet the required standards.
Moreover, if there were any economic models that the Philippines should possibly try to emulate given its litany of disadvantages such as low savings and inadequate investments, low-value added exports, weak government finance and burdensome debts, vulnerable government institutions, poor infrastructure, low inflows of FDI and dependency on consumption, possibly the Indian paragon of a domestic services sector led growth strategy could be the rightful answer to our plaguing woes.
India’s economic infirmities in some ways parallel that of the Philippines, while on the other hand, India’s strengths, namely, well educated workforce, IT competency and English proficiency are by no means strangers to the Philippine labor force. The key to curbing the brain drain or the intellectual hemorrhage would be to harness these skills to attract offshoring service contracts. The offshoring/outsourcing phenomenon is by large an offshoot of the globalization efforts linked by the web-based platform and other IT enabled services. All that is required of the Philippines is to focus on attaining its competitiveness in an industry with exploding potentials.
Morgan Stanley's Daniel Lian: Pivotal Elections in Southeast Asia
Pivotal Elections in Southeast Asia
Daniel Lian (Singapore)
Three Southeast Asian countries held elections this year. After the general election in Malaysia, concluded in March, Indonesia went to the polls in April to elect a new national legislature and local governments and the Philippines elected a new president and half the Senate in May. Indonesia is also scheduled to vote for a new president in July. These are pivotal elections as they usher in new economic and political leadership that will affect future economic development and improved political stability in Southeast Asia.
On June 24, the Philippine Congress declared President Gloria Macapagal Arroyo the winner of the May 10 election. Ms. Arroyo secured a six-year unambiguous mandate, thus ending her “indirect ascent” to the presidency – as in the prior 3½ years she had assumed the presidency from former President Estrada after he was overthrown in January 2001. On July 5, Indonesia will, for the first time, directly elect its president from a pool of five candidates.
Challenging Social-Economic and Geopolitical Risks
The Indonesian and the Philippine elections are pivotal. Both have large populations – 219 million and 82 million, respectively, and their combined population is more than three quarters of the almost 400 million people in the five ASEAN economies. Both face considerable economic and geopolitical risks, and both are “non-investment grade,” with lowest rankings on various economic metrics among the “market-oriented” economies in East Asia. Relative economic underdevelopment, the inequitable distribution of income and wealth, high unemployment and poverty, coupled with poorly developed institutions and deep-rooted rent-seeking behavior by governments, corporates and other elites create considerable problems.
Social discontent and geopolitical challenges are evident in both economies, and in some instances, this has led to the establishment of radical Islamic movements. There are about 210 million Muslims in the five major Southeast Asia economies. In Indonesia, they are 184 million, or 85% of the estimated 219 million population, but in the Philippines a much smaller 7 million, or 9% of the 82 million population. I believe governments need to deal with the level of discontent among the underprivileged in both economies to avoid disillusionment with the established secular democracies and reduce the appeal of radical Islamic groups.
Economic Challenges
The new leaderships in Indonesia and the Philippines must confront considerable economic challenges.
(1) Skin-deep industrialization and the fallacy of China-trade induced prosperity: While both economies have pursued FDI-driven mass manufacturing export orientation and are fairly successfully in generating export growth, their manufacturing production base and exports remain extremely low value-added and are vulnerable to competition from China and other low-cost economies.
While many point to the recent surge in two-way trade between both countries and China, as well as the robustness in intra-Sino-Southeast Asian trade, as the prelude to a mutually beneficial and symbolic structural relationship, I believe the optimism is misplaced. The economic reality is that China cannot be a major growth factor for both countries, in my view. Exports to China accounted for only 6.2% of Indonesia’s merchandise exports and 6% of Philippines in 2003. Also China does not actively invest in both countries.
China’s substantially enlarged two-way trade and growing deficits with ASEAN in the past few years suggest neither economic advantage nor strength in the ASEAN traded sector. In my view, this signals that Southeast Asia is rapidly losing its traditional export markets to China, while at the same time surviving by exporting parts to China to fulfill the world’s appetite for Chinese goods on terms drawn up by multinational corporations. The rapidly growing two-way trade and Chinese trade deficits are increasingly characterized by China buying more mass-manufactured parts (heavily concentrated in IT-related sectors) and primary products (agriculture, commercial crops and commodities) from ASEAN.
(2) Consumption dependency and inadequate saving and investment: Both Indonesia and the Philippines persistently have the lowest national saving and domestic capital formation rates in the region. FDI trends have also been the most negative among East Asia peers in recent years.
While I have consistently endorsed a more balanced dual track model to boost domestic demand and balance excessive dependence on high saving, wasteful government and crony corporate-led investment, and the “lack of pricing power” for mass-manufactured exports, both economies are not saving or investing enough. While they should pursue more second track development to engineer structural resilience in domestic demand, the correct route is through more productive investment rather than consumption.
(3) Weak government finance and heavy debt: A major reason for inadequate saving and investment rates, other than capital and intellectual capital flight, and a poor political economy, is their structurally weak government finance positions and the concomitant excessive public and external debt burden. Other East Asia governments have considerable debt but also possess significant assets and large foreign reserves.
(4) The lack of a well-thought out rural platform and long-term economic development strategy: I believe both economies have few prospects to win the global FDI game in the near future, and thus the low-value generic mass manufacturing export model will not bring sufficient economic growth and prosperity. It is thus critical for policymakers to establish a well thought out rural development platform to better leverage their vast and less developed rural sector – Indonesia’s population is 58% rural and the Philippines is 41%. Both economies also need to map out a long-term development blueprint with a strengthened platform to address the long-term needs of the urban poor, and the resource, SME and the government and corporate sectors.
In my view, Thailand’s dual-track development strategy has a lot of relevance for both of these largely agrarian economies.
Political-Economy and Other Structural Impediments
The challenges confronting both economies stretch beyond economic parameters. In my view, the leaders in both countries must strive to overcome two common structural impediments:
(1) Ineffective government institutions vs. an institutionalized rent-seeking complex: In both countries, public institutions are not strong and there is a well-entrenched rent-seeking complex that dominates the corporate and government spheres, leaving most of the population without much economic or social mobility.
(2) Capital and intellectual capital flight: Substantial domestic savings are overseas and the top echelons of talent are not serving the domestic economies and institutions.
Bottom Line: Rural Development Platform
The presidential election just concluded in the Philippines, and the presidential election that is set to unfold in Indonesia are pivotal for two of the less developed economies in Southeast Asia. Both countries face substantial social, economic and geopolitical risks. The primary economic challenges are that both economies have attained only skin-deep industrialization and are overly dependent on consumption for growth as both nations lack savings and investment. The low-saving and investment trap is in no small part due to weak government finances and a heavy debt burden. Beyond economic parameters, both economies face the common impediments of a strong institutionalized rent-seeking complex, ineffective public institutions, and severe capital and intellectual capital flight.
In my view, both economies have few prospects of winning the global FDI game in the near future and concomitantly the low-value generic mass manufacturing-based export model will not bring sufficient economic growth and prosperity that are desperately needed to circumvent low growth, high debt and poverty traps. It is thus critical for their policymakers to establish a well thought out rural development platform to better leverage their vast but underprivileged and less developed rural sectors. Both countries also need to map out a long-term development blueprint with a strengthened platform to address the long-term needs of the urban underprivileged, resources, SMEs, and the government and corporate sectors.
Daniel Lian (Singapore)
Three Southeast Asian countries held elections this year. After the general election in Malaysia, concluded in March, Indonesia went to the polls in April to elect a new national legislature and local governments and the Philippines elected a new president and half the Senate in May. Indonesia is also scheduled to vote for a new president in July. These are pivotal elections as they usher in new economic and political leadership that will affect future economic development and improved political stability in Southeast Asia.
On June 24, the Philippine Congress declared President Gloria Macapagal Arroyo the winner of the May 10 election. Ms. Arroyo secured a six-year unambiguous mandate, thus ending her “indirect ascent” to the presidency – as in the prior 3½ years she had assumed the presidency from former President Estrada after he was overthrown in January 2001. On July 5, Indonesia will, for the first time, directly elect its president from a pool of five candidates.
Challenging Social-Economic and Geopolitical Risks
The Indonesian and the Philippine elections are pivotal. Both have large populations – 219 million and 82 million, respectively, and their combined population is more than three quarters of the almost 400 million people in the five ASEAN economies. Both face considerable economic and geopolitical risks, and both are “non-investment grade,” with lowest rankings on various economic metrics among the “market-oriented” economies in East Asia. Relative economic underdevelopment, the inequitable distribution of income and wealth, high unemployment and poverty, coupled with poorly developed institutions and deep-rooted rent-seeking behavior by governments, corporates and other elites create considerable problems.
Social discontent and geopolitical challenges are evident in both economies, and in some instances, this has led to the establishment of radical Islamic movements. There are about 210 million Muslims in the five major Southeast Asia economies. In Indonesia, they are 184 million, or 85% of the estimated 219 million population, but in the Philippines a much smaller 7 million, or 9% of the 82 million population. I believe governments need to deal with the level of discontent among the underprivileged in both economies to avoid disillusionment with the established secular democracies and reduce the appeal of radical Islamic groups.
Economic Challenges
The new leaderships in Indonesia and the Philippines must confront considerable economic challenges.
(1) Skin-deep industrialization and the fallacy of China-trade induced prosperity: While both economies have pursued FDI-driven mass manufacturing export orientation and are fairly successfully in generating export growth, their manufacturing production base and exports remain extremely low value-added and are vulnerable to competition from China and other low-cost economies.
While many point to the recent surge in two-way trade between both countries and China, as well as the robustness in intra-Sino-Southeast Asian trade, as the prelude to a mutually beneficial and symbolic structural relationship, I believe the optimism is misplaced. The economic reality is that China cannot be a major growth factor for both countries, in my view. Exports to China accounted for only 6.2% of Indonesia’s merchandise exports and 6% of Philippines in 2003. Also China does not actively invest in both countries.
China’s substantially enlarged two-way trade and growing deficits with ASEAN in the past few years suggest neither economic advantage nor strength in the ASEAN traded sector. In my view, this signals that Southeast Asia is rapidly losing its traditional export markets to China, while at the same time surviving by exporting parts to China to fulfill the world’s appetite for Chinese goods on terms drawn up by multinational corporations. The rapidly growing two-way trade and Chinese trade deficits are increasingly characterized by China buying more mass-manufactured parts (heavily concentrated in IT-related sectors) and primary products (agriculture, commercial crops and commodities) from ASEAN.
(2) Consumption dependency and inadequate saving and investment: Both Indonesia and the Philippines persistently have the lowest national saving and domestic capital formation rates in the region. FDI trends have also been the most negative among East Asia peers in recent years.
While I have consistently endorsed a more balanced dual track model to boost domestic demand and balance excessive dependence on high saving, wasteful government and crony corporate-led investment, and the “lack of pricing power” for mass-manufactured exports, both economies are not saving or investing enough. While they should pursue more second track development to engineer structural resilience in domestic demand, the correct route is through more productive investment rather than consumption.
(3) Weak government finance and heavy debt: A major reason for inadequate saving and investment rates, other than capital and intellectual capital flight, and a poor political economy, is their structurally weak government finance positions and the concomitant excessive public and external debt burden. Other East Asia governments have considerable debt but also possess significant assets and large foreign reserves.
(4) The lack of a well-thought out rural platform and long-term economic development strategy: I believe both economies have few prospects to win the global FDI game in the near future, and thus the low-value generic mass manufacturing export model will not bring sufficient economic growth and prosperity. It is thus critical for policymakers to establish a well thought out rural development platform to better leverage their vast and less developed rural sector – Indonesia’s population is 58% rural and the Philippines is 41%. Both economies also need to map out a long-term development blueprint with a strengthened platform to address the long-term needs of the urban poor, and the resource, SME and the government and corporate sectors.
In my view, Thailand’s dual-track development strategy has a lot of relevance for both of these largely agrarian economies.
Political-Economy and Other Structural Impediments
The challenges confronting both economies stretch beyond economic parameters. In my view, the leaders in both countries must strive to overcome two common structural impediments:
(1) Ineffective government institutions vs. an institutionalized rent-seeking complex: In both countries, public institutions are not strong and there is a well-entrenched rent-seeking complex that dominates the corporate and government spheres, leaving most of the population without much economic or social mobility.
(2) Capital and intellectual capital flight: Substantial domestic savings are overseas and the top echelons of talent are not serving the domestic economies and institutions.
Bottom Line: Rural Development Platform
The presidential election just concluded in the Philippines, and the presidential election that is set to unfold in Indonesia are pivotal for two of the less developed economies in Southeast Asia. Both countries face substantial social, economic and geopolitical risks. The primary economic challenges are that both economies have attained only skin-deep industrialization and are overly dependent on consumption for growth as both nations lack savings and investment. The low-saving and investment trap is in no small part due to weak government finances and a heavy debt burden. Beyond economic parameters, both economies face the common impediments of a strong institutionalized rent-seeking complex, ineffective public institutions, and severe capital and intellectual capital flight.
In my view, both economies have few prospects of winning the global FDI game in the near future and concomitantly the low-value generic mass manufacturing-based export model will not bring sufficient economic growth and prosperity that are desperately needed to circumvent low growth, high debt and poverty traps. It is thus critical for their policymakers to establish a well thought out rural development platform to better leverage their vast but underprivileged and less developed rural sectors. Both countries also need to map out a long-term development blueprint with a strengthened platform to address the long-term needs of the urban underprivileged, resources, SMEs, and the government and corporate sectors.
Friday, July 02, 2004
Elliot Wave's Folsom: Why Do Most Investors Fail to Act on What They Know?
Why Do Most Investors Fail to Act on What They Know?
by Robert Folsom
You really can't overemphasize the danger each individual presents to his or her own portfolio. Even the relative few investors who sense this danger may not truly understand it. Consider the following truism:
Fear is stronger than greed, which is why financial markets fall more rapidly than they climb.
Most investors will say the sentence above is common knowledge. But, if so, why then do most investors fail to act on what they know?
The failure I have in mind is the behavior toward risk, namely: The average investor is risk-averse toward a known gain, but is risk-seeking toward a certain loss.
When a stock goes up in price, individuals will sell too soon, especially when that stock has outperformed the broader market. They avoid risk by locking in the gain. When a stock goes down, individuals won't sell soon enough, especially when that loser has underperformed the market. They assume the risk of even deeper declines, rather than choose to cut their certain losses.
Study after study bears out this truth, both in controlled experiments and in the data reflecting the actual gains and losses of real investors. Published results from firms like Dalbar Financial and Vanguard consistently show that, over the past 20 years, individual investors and mutual fund shareholders have had average returns that are half (at best) of the annual returns of the broader stock market.
This sad tale of underperformance tells itself in many ways. Dalbar's data shows that equity fund investors held their shares less than 30 months on average, with fixed-income shareholders averaging about 34 months.
One assumes that 30 to 34 months is long enough for an investor to realize that a given fund isn't "hot" any more, and that it's time to look for the next hot one, only to repeat the self-destructive cycle again.
The phenomenon has appeared in markets from metals to tech stocks to commodities to overseas stock indexes, etc., ad nauseam.
What's more, these same studies and surveys also show that most investors are overconfident in the decisions they make. Put another way, they don't even know that they are their own worst enemy.
Market prices move in recognizable patterns: Those patterns can also reveal specific price levels that help confirm the direction of the trend, or identify the time to step aside. Respecting the price, pattern and trend is the first step toward discipline, instead of yielding to emotions. Learn the patterns, and you'll starve the emotional beast.
Robert Folsom
Elliott Wave International
by Robert Folsom
You really can't overemphasize the danger each individual presents to his or her own portfolio. Even the relative few investors who sense this danger may not truly understand it. Consider the following truism:
Fear is stronger than greed, which is why financial markets fall more rapidly than they climb.
Most investors will say the sentence above is common knowledge. But, if so, why then do most investors fail to act on what they know?
The failure I have in mind is the behavior toward risk, namely: The average investor is risk-averse toward a known gain, but is risk-seeking toward a certain loss.
When a stock goes up in price, individuals will sell too soon, especially when that stock has outperformed the broader market. They avoid risk by locking in the gain. When a stock goes down, individuals won't sell soon enough, especially when that loser has underperformed the market. They assume the risk of even deeper declines, rather than choose to cut their certain losses.
Study after study bears out this truth, both in controlled experiments and in the data reflecting the actual gains and losses of real investors. Published results from firms like Dalbar Financial and Vanguard consistently show that, over the past 20 years, individual investors and mutual fund shareholders have had average returns that are half (at best) of the annual returns of the broader stock market.
This sad tale of underperformance tells itself in many ways. Dalbar's data shows that equity fund investors held their shares less than 30 months on average, with fixed-income shareholders averaging about 34 months.
One assumes that 30 to 34 months is long enough for an investor to realize that a given fund isn't "hot" any more, and that it's time to look for the next hot one, only to repeat the self-destructive cycle again.
The phenomenon has appeared in markets from metals to tech stocks to commodities to overseas stock indexes, etc., ad nauseam.
What's more, these same studies and surveys also show that most investors are overconfident in the decisions they make. Put another way, they don't even know that they are their own worst enemy.
Market prices move in recognizable patterns: Those patterns can also reveal specific price levels that help confirm the direction of the trend, or identify the time to step aside. Respecting the price, pattern and trend is the first step toward discipline, instead of yielding to emotions. Learn the patterns, and you'll starve the emotional beast.
Robert Folsom
Elliott Wave International
July 2 Philippine Stock Market Review
PLDT’s upsurge is truly an incredible phenomenon. After breaking past its May 26th resistance levels at 1,160, the Philippines largest market cap is now on its way to test its July 13th 1999 or a 5-year high level of 1,275. Moreover, PLDT has long been buttressed by massive capital infusion from foreigners; as of today’s trade it is the largest recipient of foreign money, offsetting the enormous outflows seen in Globe Telecoms. PLDT’s continued winning streak (+1.70%) plus Globe Telecom’s local support (+.59%) have basically cushioned the Phisix’s decline by only 2.96 points or .19%. PLDT’s spectacular rise stoically comes in the face of the huge declines seen in the key US benchmarks where it is also traded.
FOUR of the index heavyweights cumbered on the Philippine 30-company bellwether, Ayala Corp (-1.72%), BPI (-1.17%), Ayala Land (-1.72%) and SM Primeholdings (-1.63%). San Miguel local and foreign shares as well as Metrobank closed unchanged.
Aside from PLDT which recorded the most foreign inflows, minor inflows were seen in First Philippine Holdings and Benpres Corp. Meanwhile, huge outflows by overseas investors were seen in Ginebra San Miguel (-3.57%) and Globe Telecoms as well as minor outflows in BPI and Ayala Land.
Like what I’ve noted on yesterday, trading activities by local investors have ostensibly been growing, even as foreign participation seems to be on a decline. Today’s modest peso volume turnover of P 645 million saw domestic investor’s activities account for 51.6% of the total trades, this comes in the light of a cumulative net foreign selling to the tune of P 38.362 million.
The Market’s general sentiment had a slight bearish backdrop as declining issues edged out advancing issues by a slim 34 to 31 while the number of traded issues came at 110 for its 10th consecutive session above the 100’s. This reinforces our view that the activities of local investors are gradually picking up as more issues are being traded.
On a per industry basis, most of the major indices posted declines, namely the mining, property, banking and finance and the ALL Share index, led by MFC (-.89%) and SLF (-2.5%), shadowing the steep drop of the US markets. On the other hand, the commercial-industrial index led by the telcos as well as the oil index posted gains. Incidentally, the gains from the oils sector could probably be imputed to PSE’s disclosure that the UNOCAL consortium has uncovered traces of gas in their ongoing drilling project at the Sulu Sea.
Finally, regarding our observations of the recent notable declines of foreign activities in the Philippine market, as opined in numerous occasions on my weekly newsletters, this phenomenon could be viewed on a regional scale and is most likely associated with the issue of rising US interest rates and its ramifications, particularly from the unwinding of the so-called ‘Carry Trades’. Noted globetrotting analyst, Chris Wood of the CLSA in his recent report, as quoted by David Fuller of fullermoney.com provides for a wider perspective:
As one of the most underdeveloped bourse in the world, local buying should enable the Philippine market to progress from its current level even if the foreign players would slowdown due to the abovestated reasons. Of course, there are other considerations such as economic and corporate fundamentals, investor psychology and sentiment, money flows, technicals and hosts of other variables in play, however, in contrast to that of our neighbors specifically the so called ASEAN-5 crisis affected countries, as categorized by the Institute of International Finance, whom have practically recouped or are trading near their 2000 levels, the Philippines has been the region’s laggard, practically due to the local investor’s inertia or aversion to the market which currently trades at a huge discount from the said levels.
AS the Economist noted, the Philippines has the world’s most undervalued currency based on its Big Mac Index as of its May 27th table, this likewise mirrors the state of its domestic equity market being the region’s tailender.
FOUR of the index heavyweights cumbered on the Philippine 30-company bellwether, Ayala Corp (-1.72%), BPI (-1.17%), Ayala Land (-1.72%) and SM Primeholdings (-1.63%). San Miguel local and foreign shares as well as Metrobank closed unchanged.
Aside from PLDT which recorded the most foreign inflows, minor inflows were seen in First Philippine Holdings and Benpres Corp. Meanwhile, huge outflows by overseas investors were seen in Ginebra San Miguel (-3.57%) and Globe Telecoms as well as minor outflows in BPI and Ayala Land.
Like what I’ve noted on yesterday, trading activities by local investors have ostensibly been growing, even as foreign participation seems to be on a decline. Today’s modest peso volume turnover of P 645 million saw domestic investor’s activities account for 51.6% of the total trades, this comes in the light of a cumulative net foreign selling to the tune of P 38.362 million.
The Market’s general sentiment had a slight bearish backdrop as declining issues edged out advancing issues by a slim 34 to 31 while the number of traded issues came at 110 for its 10th consecutive session above the 100’s. This reinforces our view that the activities of local investors are gradually picking up as more issues are being traded.
On a per industry basis, most of the major indices posted declines, namely the mining, property, banking and finance and the ALL Share index, led by MFC (-.89%) and SLF (-2.5%), shadowing the steep drop of the US markets. On the other hand, the commercial-industrial index led by the telcos as well as the oil index posted gains. Incidentally, the gains from the oils sector could probably be imputed to PSE’s disclosure that the UNOCAL consortium has uncovered traces of gas in their ongoing drilling project at the Sulu Sea.
Finally, regarding our observations of the recent notable declines of foreign activities in the Philippine market, as opined in numerous occasions on my weekly newsletters, this phenomenon could be viewed on a regional scale and is most likely associated with the issue of rising US interest rates and its ramifications, particularly from the unwinding of the so-called ‘Carry Trades’. Noted globetrotting analyst, Chris Wood of the CLSA in his recent report, as quoted by David Fuller of fullermoney.com provides for a wider perspective:
“It has gone on for long enough now that it requires some more explanation. GREED & fear is referring to Asia ex-Japan's relative underperformance vis-Ã -vis the S&P 500 and the MSCI AC World Index. The MSCI AC Asia ex-Japan Index has fallen by 17.1% since peaking on 13 April, while the S&P500 has risen by 1.3% and the MSCI AC World Index has fallen by 1.2% over the same period (see Figure 1). One explanation for this has clearly been the move out of "risky" assets and the associated unwinding of the dollar carry trade. But the recent underperformance of economically sensitive Asia is also likely an early signal that global growth momentum has peaked. This is also what is suggested by the OECD leading indicators. It is also suggested by recent news in the tech sphere of a peaking out in demand for certain hot consumer electronics products, a trend which is likely to result in rising inventories.”
As one of the most underdeveloped bourse in the world, local buying should enable the Philippine market to progress from its current level even if the foreign players would slowdown due to the abovestated reasons. Of course, there are other considerations such as economic and corporate fundamentals, investor psychology and sentiment, money flows, technicals and hosts of other variables in play, however, in contrast to that of our neighbors specifically the so called ASEAN-5 crisis affected countries, as categorized by the Institute of International Finance, whom have practically recouped or are trading near their 2000 levels, the Philippines has been the region’s laggard, practically due to the local investor’s inertia or aversion to the market which currently trades at a huge discount from the said levels.
AS the Economist noted, the Philippines has the world’s most undervalued currency based on its Big Mac Index as of its May 27th table, this likewise mirrors the state of its domestic equity market being the region’s tailender.
Thursday, July 01, 2004
July 1 Philippine Stock Market Review
Today’s trading activities marked an impressive display of optimism mainly led by our local investors. The key Philippine equity market benchmark, the Phisix, climbed a modest .9% on significantly expanded volume of P 830.25 million, almost double the daily average of the last two trading sessions.
Local investors dominated the trading activities, accounting for 53% of cumulative peso turnover, even as foreign moolah posted positive inflows worth P 20.892 million. Market breadth was lopsidedly in favor of the Bulls as advancing issues clobbered declining issues by 56 to 15, or by a ratio of more than 3 to 1. In other words, while foreigners shopped on select heavyweights, local investors bought up the broadmarket.
FOUR of the eight index heavyweights chalked up gains for the day, led by foreign propelled buying on PLDT shares (+2.17%), followed by locally supported Globe Telecoms (+1.82%), Ayala Corp (+1.75%) and San Miguel (+.86%). Ayala Land, Metrobank and SM Primeholdings closed unchanged while Bank of the Philippine Islands (-1.16%) was the sole heavyweight issue that was in the red.
Aside from PLDT, foreigners scooped up shares of Ayala Corp, Ayala Land, First Philippine Holdings and Petron. On the other hand, capital outflow from overseas investors were recorded in GLOBE Telecoms, Ginebra San Miguel, Meralco B, Bank of the Philippine Islands, Equitable Bank and ABS-CBN Preferred Shares.
Except for the banking and financial sector index, all other major indices recorded gains for the day. The Small and Medium Exchange index was unchanged.
What was quite palpable in today’s activities was that the local investors dabbled with the second tier issues or in the market player’s jargon the so-called ‘trader’s stocks’. Based on percentage growth and liquidity of the issues, today’s best performers were Empire East (+16.67%), followed by DMCI Holdings (+14.28%), C & P Homes (+14.28%) and Metro Pacific (+10.71%). All of these second tier issues are mostly in the real estate related industries, which as of today have outperformed their heavyweight counterparts who were unchanged, except for Megaworld (+ 1.75%).
The US Federal Reserve, as anticipated, has raised its overnight lending rate, which has been pegged since June of last year to its lowest level since 1958. The quarter percentage point hike marks the FED’s first rate increase since May 2000 and was among the June 30th most sought after especially by the investing world. The global markets have so far responded with equanimity. The Asian markets are trading mixed as of this writing.
In the domestic arena, foreign activities have notably been pared down, although they have still been on the long side of the trade which apparently are now geared towards select issues, in contrast to last year’s conspicuous broad market buying. However, what seems to be a positive development is that local investors have gradually taken up the slack left by the aggressive buying of overseas investors. The local bullish optimism could underpin the ‘transition or honeymoon rallies’ seen in each of the government turnover that the Philippines had since 1986.
Local investors dominated the trading activities, accounting for 53% of cumulative peso turnover, even as foreign moolah posted positive inflows worth P 20.892 million. Market breadth was lopsidedly in favor of the Bulls as advancing issues clobbered declining issues by 56 to 15, or by a ratio of more than 3 to 1. In other words, while foreigners shopped on select heavyweights, local investors bought up the broadmarket.
FOUR of the eight index heavyweights chalked up gains for the day, led by foreign propelled buying on PLDT shares (+2.17%), followed by locally supported Globe Telecoms (+1.82%), Ayala Corp (+1.75%) and San Miguel (+.86%). Ayala Land, Metrobank and SM Primeholdings closed unchanged while Bank of the Philippine Islands (-1.16%) was the sole heavyweight issue that was in the red.
Aside from PLDT, foreigners scooped up shares of Ayala Corp, Ayala Land, First Philippine Holdings and Petron. On the other hand, capital outflow from overseas investors were recorded in GLOBE Telecoms, Ginebra San Miguel, Meralco B, Bank of the Philippine Islands, Equitable Bank and ABS-CBN Preferred Shares.
Except for the banking and financial sector index, all other major indices recorded gains for the day. The Small and Medium Exchange index was unchanged.
What was quite palpable in today’s activities was that the local investors dabbled with the second tier issues or in the market player’s jargon the so-called ‘trader’s stocks’. Based on percentage growth and liquidity of the issues, today’s best performers were Empire East (+16.67%), followed by DMCI Holdings (+14.28%), C & P Homes (+14.28%) and Metro Pacific (+10.71%). All of these second tier issues are mostly in the real estate related industries, which as of today have outperformed their heavyweight counterparts who were unchanged, except for Megaworld (+ 1.75%).
The US Federal Reserve, as anticipated, has raised its overnight lending rate, which has been pegged since June of last year to its lowest level since 1958. The quarter percentage point hike marks the FED’s first rate increase since May 2000 and was among the June 30th most sought after especially by the investing world. The global markets have so far responded with equanimity. The Asian markets are trading mixed as of this writing.
In the domestic arena, foreign activities have notably been pared down, although they have still been on the long side of the trade which apparently are now geared towards select issues, in contrast to last year’s conspicuous broad market buying. However, what seems to be a positive development is that local investors have gradually taken up the slack left by the aggressive buying of overseas investors. The local bullish optimism could underpin the ‘transition or honeymoon rallies’ seen in each of the government turnover that the Philippines had since 1986.
The Economist: America: the world's biggest hedge fund
America: the world's biggest hedge fund
Jun 29th 2004
From The Economist Global Agenda
Are markets about to start panicking about the dollar again—with good reason?
YOU, dear reader, along with everyone else from Tokyo to Tallahassee, will be casting your gaze towards Washington this week, to see how large will be the puff of smoke emanating from the Federal Open Market Committee. Airwaves will be filled and forests felled with discussions, learned and otherwise, parsing the utterances of the members of that august committee of interest-rate setters, and particularly those of its chairman, Alan Greenspan, for clues as to how fast interest rates will rise in coming months. Precious few eyes, it is safe to aver, will be on an annual survey of America’s net investment position released on Wednesday June 30th by the Department of Commerce’s Bureau of Economic Analysis (BEA). But since everyone knows what the Fed will decide on the same day, Buttonwood wonders whether the BEA’s is not the more important statistic coming out of Washington this week, since it will provide reasons aplenty why the dollar has further—a lot further, perhaps—to fall.
Last year and earlier this year, if memory serves, financial markets were abuzz with talk of the dollar’s dismal prospects, perhaps even its imminent collapse. There was much discussion of America’s humungous twin deficits (its budget deficit and current-account deficit); fuming about Asian central banks trying to stop their currencies rising against the dollar (though less fuming about how their purchases kept down long-term interest rates); and raging about how none of this was sustainable. The dollar, most right-thinking people agreed, needed to drop, though in an orderly fashion so as not to scare off those nice Asian central banks who had bought squillions of dollars’ worth of Treasury bonds. Buttonwood himself even weighed in with a few less-than-cogent thoughts, and discussed the advantages of America as a holiday destination with his daughters. Naturally, the dollar went up, and talk about it doing otherwise has dwindled to vanishing point.
Perhaps that is why, in recent weeks, the greenback has begun to slide again, while gold has staged a comeback to $400 an ounce. Since mid-May, the dollar has fallen by 4% on a trade-weighted basis. On the face of it, this seems peculiar. The dollar has started to fall again even as the chatter about interest-rate rises has got louder. Naively, you might expect a currency whose interest rates are about to rise to go up, not down. One explanation why the reverse has been the case is that the Fed has been late in stamping on inflationary pressures, so real interest rates—ie, adjusted for inflation—are falling even as nominal rates are expected to rise. There might, however, be another explanation: that rising rates will make an already awful current-account deficit worse still, and that markets are again starting to realise that the only way in which this can be corrected in the long term is by a sharply lower dollar.
The current account essentially comprises two things: the trade balance and overseas investment income. America’s trade deficit is bad and getting worse, even though the dollar has fallen by 23% from its recent high in February 2002. A $46.6 billion trade deficit in March had risen to $48.3 billion in April. In the absence of a net surplus from foreign investment, notes Jim O’Neill, the chief international economist at Goldman Sachs, this would mean a current-account deficit for the year of more than $600 billion, or getting on for 6% of GDP. No problem, say the more sanguine: America has long been able to finance its large and growing deficit because it is such a wonderful place in which to invest.
There are, however, a couple of snags with this argument. The first is that Americans find foreign climes more attractive to invest in than foreigners regard America: net foreign direct investment (FDI) has amounted to minus $155 billion over the last 12 months. And who can blame them? Returns on FDI into America were 5.5% in the first quarter, compared with returns of 11.7% on American firms’ foreign investment. Nor is this an aberration: the returns in America have been consistently lower for many years.
This gap has been plugged by portfolio flows (investment in such things as stocks and bonds) but of late the overwhelming majority of these have been due to foreign central banks, particularly Asian ones, trying to stop their currencies rising against the dollar, and buying Treasuries as a by-product of this intervention. Foreign central banks now hold $1.2 trillion of Treasury bonds. As growth and inflation rise in Asia (or in Japan’s case, as deflation eases), the arguments for intervening look much shakier. Japan, indeed, seems almost to have stopped wading into the foreign-exchange markets. Foreign central banks are, moreover, starting to fret about the amount that they hold in dollars. None of this bodes well for the dollar’s future value.
Nor does the net income that America makes on foreign investment. In the first quarter, this surplus amounted to almost 0.5% of GDP. This seems extraordinary, for reasons that have everything to do with the BEA’s annual survey. In 2002, America had net foreign liabilities of almost 23% of GDP and by the end of last year this figure had probably risen to 25-30%. Despite that, the country still managed to make more money from investing abroad than it had to pay to foreigners, for the simple reason that American investors’ domestic financing costs were so much lower than their overseas returns. In other words, says Mr O’Neill, the United States is like a giant hedge fund, borrowing huge wodges of cheap money at home and then investing it in higher-yielding foreign assets.
Which is where we return to the subject of higher interest rates. When interest rates go up, this net surplus on America’s investment income will turn into a deficit. A yield on ten-year Treasury bonds of 6%, says Goldman Sachs, would in the space of a few years add 1% of GDP to the current-account deficit, solely through higher interest charges. Whether or not yields reach such giddy heights depends mainly on two things: how much inflation is actually picking up; and foreigners’ continued willingness to supply the giant hedge fund known as the United States of America with cheap finance. Still, Mr O’Neill, for one, thinks it “virtually impossible to be a structural bull on the dollar”. Buttonwood finds it virtually impossible to disagree. His pony-mad younger daughter is enthralled by the idea of a holiday on a dude ranch.
Jun 29th 2004
From The Economist Global Agenda
Are markets about to start panicking about the dollar again—with good reason?
YOU, dear reader, along with everyone else from Tokyo to Tallahassee, will be casting your gaze towards Washington this week, to see how large will be the puff of smoke emanating from the Federal Open Market Committee. Airwaves will be filled and forests felled with discussions, learned and otherwise, parsing the utterances of the members of that august committee of interest-rate setters, and particularly those of its chairman, Alan Greenspan, for clues as to how fast interest rates will rise in coming months. Precious few eyes, it is safe to aver, will be on an annual survey of America’s net investment position released on Wednesday June 30th by the Department of Commerce’s Bureau of Economic Analysis (BEA). But since everyone knows what the Fed will decide on the same day, Buttonwood wonders whether the BEA’s is not the more important statistic coming out of Washington this week, since it will provide reasons aplenty why the dollar has further—a lot further, perhaps—to fall.
Last year and earlier this year, if memory serves, financial markets were abuzz with talk of the dollar’s dismal prospects, perhaps even its imminent collapse. There was much discussion of America’s humungous twin deficits (its budget deficit and current-account deficit); fuming about Asian central banks trying to stop their currencies rising against the dollar (though less fuming about how their purchases kept down long-term interest rates); and raging about how none of this was sustainable. The dollar, most right-thinking people agreed, needed to drop, though in an orderly fashion so as not to scare off those nice Asian central banks who had bought squillions of dollars’ worth of Treasury bonds. Buttonwood himself even weighed in with a few less-than-cogent thoughts, and discussed the advantages of America as a holiday destination with his daughters. Naturally, the dollar went up, and talk about it doing otherwise has dwindled to vanishing point.
Perhaps that is why, in recent weeks, the greenback has begun to slide again, while gold has staged a comeback to $400 an ounce. Since mid-May, the dollar has fallen by 4% on a trade-weighted basis. On the face of it, this seems peculiar. The dollar has started to fall again even as the chatter about interest-rate rises has got louder. Naively, you might expect a currency whose interest rates are about to rise to go up, not down. One explanation why the reverse has been the case is that the Fed has been late in stamping on inflationary pressures, so real interest rates—ie, adjusted for inflation—are falling even as nominal rates are expected to rise. There might, however, be another explanation: that rising rates will make an already awful current-account deficit worse still, and that markets are again starting to realise that the only way in which this can be corrected in the long term is by a sharply lower dollar.
The current account essentially comprises two things: the trade balance and overseas investment income. America’s trade deficit is bad and getting worse, even though the dollar has fallen by 23% from its recent high in February 2002. A $46.6 billion trade deficit in March had risen to $48.3 billion in April. In the absence of a net surplus from foreign investment, notes Jim O’Neill, the chief international economist at Goldman Sachs, this would mean a current-account deficit for the year of more than $600 billion, or getting on for 6% of GDP. No problem, say the more sanguine: America has long been able to finance its large and growing deficit because it is such a wonderful place in which to invest.
There are, however, a couple of snags with this argument. The first is that Americans find foreign climes more attractive to invest in than foreigners regard America: net foreign direct investment (FDI) has amounted to minus $155 billion over the last 12 months. And who can blame them? Returns on FDI into America were 5.5% in the first quarter, compared with returns of 11.7% on American firms’ foreign investment. Nor is this an aberration: the returns in America have been consistently lower for many years.
This gap has been plugged by portfolio flows (investment in such things as stocks and bonds) but of late the overwhelming majority of these have been due to foreign central banks, particularly Asian ones, trying to stop their currencies rising against the dollar, and buying Treasuries as a by-product of this intervention. Foreign central banks now hold $1.2 trillion of Treasury bonds. As growth and inflation rise in Asia (or in Japan’s case, as deflation eases), the arguments for intervening look much shakier. Japan, indeed, seems almost to have stopped wading into the foreign-exchange markets. Foreign central banks are, moreover, starting to fret about the amount that they hold in dollars. None of this bodes well for the dollar’s future value.
Nor does the net income that America makes on foreign investment. In the first quarter, this surplus amounted to almost 0.5% of GDP. This seems extraordinary, for reasons that have everything to do with the BEA’s annual survey. In 2002, America had net foreign liabilities of almost 23% of GDP and by the end of last year this figure had probably risen to 25-30%. Despite that, the country still managed to make more money from investing abroad than it had to pay to foreigners, for the simple reason that American investors’ domestic financing costs were so much lower than their overseas returns. In other words, says Mr O’Neill, the United States is like a giant hedge fund, borrowing huge wodges of cheap money at home and then investing it in higher-yielding foreign assets.
Which is where we return to the subject of higher interest rates. When interest rates go up, this net surplus on America’s investment income will turn into a deficit. A yield on ten-year Treasury bonds of 6%, says Goldman Sachs, would in the space of a few years add 1% of GDP to the current-account deficit, solely through higher interest charges. Whether or not yields reach such giddy heights depends mainly on two things: how much inflation is actually picking up; and foreigners’ continued willingness to supply the giant hedge fund known as the United States of America with cheap finance. Still, Mr O’Neill, for one, thinks it “virtually impossible to be a structural bull on the dollar”. Buttonwood finds it virtually impossible to disagree. His pony-mad younger daughter is enthralled by the idea of a holiday on a dude ranch.
Bloomberg: Fed Raises Rate to 1.25%, Maintains `Measured' Pace
Fed Raises Rate to 1.25%, Maintains `Measured' Pace (Update5)
June 30 (Bloomberg) -- Federal Reserve policy makers raised the U.S. benchmark interest rate by a quarter-point to 1.25 percent and reiterated that further increases can come at a ``measured'' pace, as long as inflation remains ``relatively low.''
The first increase since May 2000 came on a unanimous vote, a sign that no Federal Open Market Committee member saw enough of an inflation threat to seek a more aggressive move. Economic developments that threaten stable prices may cause them to change their gradual approach to raising rates, the policy makers said.
``With underlying inflation still expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured,'' members of the FOMC said in a statement following their two-day meeting in Washington. ``Nonetheless, the committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.''
The Fed is changing course after a year of holding the overnight bank lending rate at the lowest since 1958 to ward off deflation and revive a job market that lagged after the 2001 recession. Thirteen cuts took the rate from 6.5 percent in January 2001 to 1 percent last June, the fastest plunge in Alan Greenspan's 16-year tenure as chairman. The U.S. has added 1.2 million jobs this year and some inflation gauges have risen.
``Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors,'' the statement said. The FOMC said the risks to growth and inflation for the next few quarters are ``roughly equal.''
Market Reaction
The benchmark 10-year Treasury note gained almost 7/8 of a point after the announcement, pushing the yield down 11 basis points to 4.58 percent, the lowest since May 5, at 5:15 p.m. in New York. The yield on two-year notes, among the most sensitive to Fed moves, fell 14 basis points to 2.67 percent after rising by almost a full percentage point this year.
Today's pledge to ``respond to changes in economic prospects as needed'' was foreshadowed in Greenspan's June 8 comments to an international monetary conference in London. At that time he said the Fed is ``prepared to do what is required'' should inflation exceed the Fed's forecasts.
``The statement is exactly as it should be,'' said John Roberts, head of trading in inflation-linked U.S. bonds at Barclays Capital Inc. in New York. ``They specifically gave themselves flexibility to act as they see fit and made it clear they will do what it takes to maintain price stability.''
Forecasts
The U.S. central bank is trying to raise rates to a level that allows for economic growth with low inflation, without disrupting the economy or investors as in 1994, economists said. The increase has extra sensitivity in an election year, as President George W. Bush faces criticism about his handling of the economy from Democrat John Kerry, a Massachusetts senator.
A 25-basis point increase was expected by 138 of 143 economists surveyed by Bloomberg News, and 22 of 23 of Wall Street's largest bond firms had predicted the Fed would maintain its call for ``measured'' rate increases. Investors had interpreted the language, adopted in May, as signaling a series of 25 basis point increases.
The fed funds rate influences borrowing costs for consumers and businesses, from mortgages to auto loans. Citigroup Inc., Bank of America Corp. and J.P. Morgan Chase & Co., the three biggest U.S. banks, raised their prime lending rates to 4.25 percent from 4 percent following the Fed move. Wells Fargo & Co., Wachovia Corp. and other lenders also raised their prime rates to 4.25 percent.
Some executives said the Fed increase simply ratifies that demand is strong and welcomed the move to keep the economy from overheating. ``The economy is getting better and it needs to get better at a nice, gradual rate,'' said Charles O. Holliday Jr., chairman and chief executive of DuPont Co., the second-biggest U.S. chemical maker, in an interview. ``It doesn't need to soar up because then it soars down too fast.''
Companies
The rate increase also may bolster the balance sheet of U.S. manufacturers such as Delphi Corp., the world's largest auto-parts maker, by reducing their pension and health-care liabilities, which are projected based in part on long-term rates. A quarter- point increase, for example, could cut each liability by $300 million, said Delphi Treasurer Pamela Geller.
``We'll feel a little bit in our short-term borrowings, but that will be dwarfed by the benefit to the balance sheet,'' Geller said.
Futures contracts on the federal funds rate show traders expect the U.S. central bank to raise rates by a full percentage point between now and December, or an average of 25 basis points over the next four Fed meetings, consistent with a ``measured pace,'' economists said.
``Unless we get a surprise, we'll see another quarter-point increase on Aug. 10,'' said Robert ``Tim'' McGee, chief economist at U.S. Trust Corp. in New York. ``The Fed has likely begun the process of raising rates up to as much as 3 percent by the middle of next year.''
Greenspan Era
In the past decade Greenspan, who became chairman in 1987 and was confirmed for a fifth term this month at age 78, always started tightening cycles with a 25-basis point move. On average during his tenure, the central bank has raised the benchmark eight times in the first year of each cycle.
Policy makers raised the so-called fed funds rate an average of 2.67 percentage points in six to 12 steps during three rate- increase phases since 1987, each lasting 11-12 months.
While inflation is rising in government measures and in private surveys, Greenspan this month told the Senate Banking Committee that inflation is ``not likely to be a serious concern.''
The personal consumption expenditures price index, a measure closely monitored by the Fed, rose 0.5 percent in May, the largest rise since September 1990, and is up 2.5 percent over 12 months. Minus food and energy, the index is up 1.6 percent since May 2003, within a range of stable prices defined by some Fed officials.
Inflation Measures
The Labor Department this month said the rate of core consumer price increases slowed to 0.2 percent in May from 0.3 percent in April. Wage costs, which tend to lag inflation, are rising more slowly. Unit labor costs rose at a 0.80 percent annualized rate in the first quarter, down from a 1.7 percent rate in the last year's final quarter.
For now, Greenspan is predicting weakening of commodity prices, somewhat slower U.S. economic growth, and international competition that will help control inflation for goods and services. That was reflected in today's statement that some measures of inflation have been ``transitory.''
`Transitory'
So far, the data have partly confirmed those forecasts. Crude oil prices have fallen about 16 percent from a record close of $42.33 per barrel on June 1. Orders for goods made to last at least three years dropped for a second month in May, suggesting corporate spending may be moderating. An index of growth for Chicago-area businesses fell more than expected in June as orders and production slowed, the National Association of Purchasing Management-Chicago said today.
Other indicators remain strong. Low-cost financing helped push consumer spending up 1 percent in May, the biggest gain since October 1, and sales of previously owned homes rose to a record 6.8 million annual pace that month.
Inflation remains tame in Europe as well, and Japan continues to grapple with declining prices.
Inflation in the dozen euro nations slowed in June, easing pressure on the European Central Bank to raise interest rates as the economic recovery gathers pace. Japan's consumer prices excluding fresh food fell 0.3 percent in May. The Bank of Japan's Tankan index measuring optimism for large manufacturers probably rose to 17 this quarter, the highest since Japan's asset bubble burst in 1991, according the median forecast in a Bloomberg poll.
Bush and Greenspan
President Bush reappointed Greenspan to a fifth term as Fed chairman and the Senate confirmed him June 18. Greenspan's Fed has raised interest rates in previous election years as well, and Bush's advisers say markets are well-prepared for the change.
``As the economy grows and jobs are being created, I think it's always expected that a rate increase would be part of that strengthening in the economy,'' White House spokesman Scott McClellan said. `` It is a reflection of our strong economy that these things might happen.''
The Fed raised the benchmark in 1988, when the current president's father, George H.W. Bush, beat Democratic nominee Michael Dukakis. The rate also rose in 2000, when the current president beat Democratic nominee Al Gore.
Election Year
The first President Bush blamed his 1992 loss to Bill Clinton in part on the Greenspan Fed's failure to lower interest rates enough to boost growth. Officials from the current administration said that they too expect interest rates to rise.
Greenspan increased his visits to the White House in recent years, according to Fed documents. Last year, he met with White House personnel 68 times, versus 55 in 2002 and 37 times in 2001.
In the latest New York Times/CBS News poll, 40 percent of adults surveyed approved of how Bush is handling the economy and 52 percent disapproved. The survey of 1,053 adults was taken June 23-27.
In addition to today's benchmark interest rate decision, the Fed board also voted unanimously to approve requests by all 12 Fed banks for an increase in the discount rate. The rate, which the Fed charges banks for direct loans, rose a quarter-point to 2.25 percent.
To contact the reporter on this story: Craig Torres in Washington
at ctorres3@bloomberg.net
To contact the editor of this story:
Kevin Miller at kmiller@bloomberg.net
Last Updated: June 30, 2004 19:34 EDT
June 30 (Bloomberg) -- Federal Reserve policy makers raised the U.S. benchmark interest rate by a quarter-point to 1.25 percent and reiterated that further increases can come at a ``measured'' pace, as long as inflation remains ``relatively low.''
The first increase since May 2000 came on a unanimous vote, a sign that no Federal Open Market Committee member saw enough of an inflation threat to seek a more aggressive move. Economic developments that threaten stable prices may cause them to change their gradual approach to raising rates, the policy makers said.
``With underlying inflation still expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured,'' members of the FOMC said in a statement following their two-day meeting in Washington. ``Nonetheless, the committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.''
The Fed is changing course after a year of holding the overnight bank lending rate at the lowest since 1958 to ward off deflation and revive a job market that lagged after the 2001 recession. Thirteen cuts took the rate from 6.5 percent in January 2001 to 1 percent last June, the fastest plunge in Alan Greenspan's 16-year tenure as chairman. The U.S. has added 1.2 million jobs this year and some inflation gauges have risen.
``Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors,'' the statement said. The FOMC said the risks to growth and inflation for the next few quarters are ``roughly equal.''
Market Reaction
The benchmark 10-year Treasury note gained almost 7/8 of a point after the announcement, pushing the yield down 11 basis points to 4.58 percent, the lowest since May 5, at 5:15 p.m. in New York. The yield on two-year notes, among the most sensitive to Fed moves, fell 14 basis points to 2.67 percent after rising by almost a full percentage point this year.
Today's pledge to ``respond to changes in economic prospects as needed'' was foreshadowed in Greenspan's June 8 comments to an international monetary conference in London. At that time he said the Fed is ``prepared to do what is required'' should inflation exceed the Fed's forecasts.
``The statement is exactly as it should be,'' said John Roberts, head of trading in inflation-linked U.S. bonds at Barclays Capital Inc. in New York. ``They specifically gave themselves flexibility to act as they see fit and made it clear they will do what it takes to maintain price stability.''
Forecasts
The U.S. central bank is trying to raise rates to a level that allows for economic growth with low inflation, without disrupting the economy or investors as in 1994, economists said. The increase has extra sensitivity in an election year, as President George W. Bush faces criticism about his handling of the economy from Democrat John Kerry, a Massachusetts senator.
A 25-basis point increase was expected by 138 of 143 economists surveyed by Bloomberg News, and 22 of 23 of Wall Street's largest bond firms had predicted the Fed would maintain its call for ``measured'' rate increases. Investors had interpreted the language, adopted in May, as signaling a series of 25 basis point increases.
The fed funds rate influences borrowing costs for consumers and businesses, from mortgages to auto loans. Citigroup Inc., Bank of America Corp. and J.P. Morgan Chase & Co., the three biggest U.S. banks, raised their prime lending rates to 4.25 percent from 4 percent following the Fed move. Wells Fargo & Co., Wachovia Corp. and other lenders also raised their prime rates to 4.25 percent.
Some executives said the Fed increase simply ratifies that demand is strong and welcomed the move to keep the economy from overheating. ``The economy is getting better and it needs to get better at a nice, gradual rate,'' said Charles O. Holliday Jr., chairman and chief executive of DuPont Co., the second-biggest U.S. chemical maker, in an interview. ``It doesn't need to soar up because then it soars down too fast.''
Companies
The rate increase also may bolster the balance sheet of U.S. manufacturers such as Delphi Corp., the world's largest auto-parts maker, by reducing their pension and health-care liabilities, which are projected based in part on long-term rates. A quarter- point increase, for example, could cut each liability by $300 million, said Delphi Treasurer Pamela Geller.
``We'll feel a little bit in our short-term borrowings, but that will be dwarfed by the benefit to the balance sheet,'' Geller said.
Futures contracts on the federal funds rate show traders expect the U.S. central bank to raise rates by a full percentage point between now and December, or an average of 25 basis points over the next four Fed meetings, consistent with a ``measured pace,'' economists said.
``Unless we get a surprise, we'll see another quarter-point increase on Aug. 10,'' said Robert ``Tim'' McGee, chief economist at U.S. Trust Corp. in New York. ``The Fed has likely begun the process of raising rates up to as much as 3 percent by the middle of next year.''
Greenspan Era
In the past decade Greenspan, who became chairman in 1987 and was confirmed for a fifth term this month at age 78, always started tightening cycles with a 25-basis point move. On average during his tenure, the central bank has raised the benchmark eight times in the first year of each cycle.
Policy makers raised the so-called fed funds rate an average of 2.67 percentage points in six to 12 steps during three rate- increase phases since 1987, each lasting 11-12 months.
While inflation is rising in government measures and in private surveys, Greenspan this month told the Senate Banking Committee that inflation is ``not likely to be a serious concern.''
The personal consumption expenditures price index, a measure closely monitored by the Fed, rose 0.5 percent in May, the largest rise since September 1990, and is up 2.5 percent over 12 months. Minus food and energy, the index is up 1.6 percent since May 2003, within a range of stable prices defined by some Fed officials.
Inflation Measures
The Labor Department this month said the rate of core consumer price increases slowed to 0.2 percent in May from 0.3 percent in April. Wage costs, which tend to lag inflation, are rising more slowly. Unit labor costs rose at a 0.80 percent annualized rate in the first quarter, down from a 1.7 percent rate in the last year's final quarter.
For now, Greenspan is predicting weakening of commodity prices, somewhat slower U.S. economic growth, and international competition that will help control inflation for goods and services. That was reflected in today's statement that some measures of inflation have been ``transitory.''
`Transitory'
So far, the data have partly confirmed those forecasts. Crude oil prices have fallen about 16 percent from a record close of $42.33 per barrel on June 1. Orders for goods made to last at least three years dropped for a second month in May, suggesting corporate spending may be moderating. An index of growth for Chicago-area businesses fell more than expected in June as orders and production slowed, the National Association of Purchasing Management-Chicago said today.
Other indicators remain strong. Low-cost financing helped push consumer spending up 1 percent in May, the biggest gain since October 1, and sales of previously owned homes rose to a record 6.8 million annual pace that month.
Inflation remains tame in Europe as well, and Japan continues to grapple with declining prices.
Inflation in the dozen euro nations slowed in June, easing pressure on the European Central Bank to raise interest rates as the economic recovery gathers pace. Japan's consumer prices excluding fresh food fell 0.3 percent in May. The Bank of Japan's Tankan index measuring optimism for large manufacturers probably rose to 17 this quarter, the highest since Japan's asset bubble burst in 1991, according the median forecast in a Bloomberg poll.
Bush and Greenspan
President Bush reappointed Greenspan to a fifth term as Fed chairman and the Senate confirmed him June 18. Greenspan's Fed has raised interest rates in previous election years as well, and Bush's advisers say markets are well-prepared for the change.
``As the economy grows and jobs are being created, I think it's always expected that a rate increase would be part of that strengthening in the economy,'' White House spokesman Scott McClellan said. `` It is a reflection of our strong economy that these things might happen.''
The Fed raised the benchmark in 1988, when the current president's father, George H.W. Bush, beat Democratic nominee Michael Dukakis. The rate also rose in 2000, when the current president beat Democratic nominee Al Gore.
Election Year
The first President Bush blamed his 1992 loss to Bill Clinton in part on the Greenspan Fed's failure to lower interest rates enough to boost growth. Officials from the current administration said that they too expect interest rates to rise.
Greenspan increased his visits to the White House in recent years, according to Fed documents. Last year, he met with White House personnel 68 times, versus 55 in 2002 and 37 times in 2001.
In the latest New York Times/CBS News poll, 40 percent of adults surveyed approved of how Bush is handling the economy and 52 percent disapproved. The survey of 1,053 adults was taken June 23-27.
In addition to today's benchmark interest rate decision, the Fed board also voted unanimously to approve requests by all 12 Fed banks for an increase in the discount rate. The rate, which the Fed charges banks for direct loans, rose a quarter-point to 2.25 percent.
To contact the reporter on this story: Craig Torres in Washington
at ctorres3@bloomberg.net
To contact the editor of this story:
Kevin Miller at kmiller@bloomberg.net
Last Updated: June 30, 2004 19:34 EDT
Wednesday, June 30, 2004
Cross-border stock trading has a long way to go
Cross-border stock trading has a long way to go
Posted: 2:41 AM | Jun. 30, 2004
Inquirer News Service
OFFICIALS of the Securities and Exchange Commission are keen on allowing cross-border trading on the stock exchange but they admit that there is still a lot of work to be done before they can go ahead with listing and trading of companies registered in other countries.
Registration requirements related to cross-border trading still have to be established in the Philippines, SEC Chairperson Lilia Bautista said.
The law requires companies to be registered first with the SEC before they are traded or listed on the stock exchange.
Bautista, who attended a June 19 ASEAN capital markets forum meeting in Bangkok, said most ASEAN members were still consulting one another on the standards that would make an integrated capital market possible.
According to a working paper discussed in the forum, integration of capital markets would make the ASEAN region more self-reliant, and development of a regional capital market in Asia would improve the region's economies by reducing reliance on bank loans.
With INQ7.net
The Prudent Investor: Cross-border stock trading should be one of the priorities of the SEC and the PSE in the pursuit of the development of our largely outmoded capital markets.
First it allows local investors to tap opportunities within the region which has thus far been the primary beneficiary of the US-China centric global growth engine. Second, it would dissuade domestic funds from habitually fleeing the local market out of the perceived 'lack of opportunities' and lastly, volume turnover would most likely improve as dometic investors would gradually learn of the intricaties of stock market investing. As volume improves, the sophistication of new products or instruments for investments would eventually emerge which should likewise expand the access of capital by local investors and entreprenuers.
Posted: 2:41 AM | Jun. 30, 2004
Inquirer News Service
OFFICIALS of the Securities and Exchange Commission are keen on allowing cross-border trading on the stock exchange but they admit that there is still a lot of work to be done before they can go ahead with listing and trading of companies registered in other countries.
Registration requirements related to cross-border trading still have to be established in the Philippines, SEC Chairperson Lilia Bautista said.
The law requires companies to be registered first with the SEC before they are traded or listed on the stock exchange.
Bautista, who attended a June 19 ASEAN capital markets forum meeting in Bangkok, said most ASEAN members were still consulting one another on the standards that would make an integrated capital market possible.
According to a working paper discussed in the forum, integration of capital markets would make the ASEAN region more self-reliant, and development of a regional capital market in Asia would improve the region's economies by reducing reliance on bank loans.
With INQ7.net
The Prudent Investor: Cross-border stock trading should be one of the priorities of the SEC and the PSE in the pursuit of the development of our largely outmoded capital markets.
First it allows local investors to tap opportunities within the region which has thus far been the primary beneficiary of the US-China centric global growth engine. Second, it would dissuade domestic funds from habitually fleeing the local market out of the perceived 'lack of opportunities' and lastly, volume turnover would most likely improve as dometic investors would gradually learn of the intricaties of stock market investing. As volume improves, the sophistication of new products or instruments for investments would eventually emerge which should likewise expand the access of capital by local investors and entreprenuers.
June 30 Philippine Stock Market Review
On PGMA’s inauguration as the 14th President of the Philippines, the Phisix or the country’s major stock market bellwether fell 6.95 points or .44%.
While others may opt to oversimplify today’s market activities to exogenous factors, like the much awaited decision by the US Federal Reserve to raise its Fed rates later today, or internal events like the yesterday’s dispersal of the rallyists or die-hard supporters of vanquished presidential candidate action movie icon Fernando Poe Jr., looking closely, the 30-company Phisix slipped mostly due to foreign selling of Globe Telecom and Metrobank shares.
Of the eight major market heavyweights, the advances in property issues Ayala Land (+1.75%) and SM Primeholdings (+1.66%) failed to counterbalance the hefty declines in Globe Telecoms (-2.95%) and Metrobank shares (-3.57%) which practically weighed on the general market sentiment, as evidenced by declining issues dominating advancing issues 34 to 20. The other key index heavyweights closed unchanged.
Volume was light to moderate at P 493 million with foreign trades accounting for 68.29% of the aggregate output. Overseas money recorded a net positive inflow of P 30.784 million with the thrusts of buying limited to companies such as PLDT, Bank of the Philippine Islands, Ayala Land, Sunlife, Empire East and First Philippine Holdings. Aside from Globe and Metrobank, which registered the major foreign outflows for today, Petron (-1.61%)and Jollibee Foods (-2.04%) likewise succumbed to profit taking from overseas investors.
By industry basis, the commercial and industrial, banking and finance, and the oil index closed lower, while the mining, property, and the ALL index recorded slight gains for the day.
Incidentally, the rise of the ALL shares index was mainly due to gains in Sunlife which as of today's close accounts for 23.46% of the All share index, while its competitior the Manulife Financial accounts for 43.46%. Combined these two Canadian insurance titans represent 66.92% of the All shares index. The All share index, which supposedly function to reflect the broad market has been skewed towards the two insurance giants. The PSE should be replace the ALL-share index to MFC-SLF index instead.
While others may opt to oversimplify today’s market activities to exogenous factors, like the much awaited decision by the US Federal Reserve to raise its Fed rates later today, or internal events like the yesterday’s dispersal of the rallyists or die-hard supporters of vanquished presidential candidate action movie icon Fernando Poe Jr., looking closely, the 30-company Phisix slipped mostly due to foreign selling of Globe Telecom and Metrobank shares.
Of the eight major market heavyweights, the advances in property issues Ayala Land (+1.75%) and SM Primeholdings (+1.66%) failed to counterbalance the hefty declines in Globe Telecoms (-2.95%) and Metrobank shares (-3.57%) which practically weighed on the general market sentiment, as evidenced by declining issues dominating advancing issues 34 to 20. The other key index heavyweights closed unchanged.
Volume was light to moderate at P 493 million with foreign trades accounting for 68.29% of the aggregate output. Overseas money recorded a net positive inflow of P 30.784 million with the thrusts of buying limited to companies such as PLDT, Bank of the Philippine Islands, Ayala Land, Sunlife, Empire East and First Philippine Holdings. Aside from Globe and Metrobank, which registered the major foreign outflows for today, Petron (-1.61%)and Jollibee Foods (-2.04%) likewise succumbed to profit taking from overseas investors.
By industry basis, the commercial and industrial, banking and finance, and the oil index closed lower, while the mining, property, and the ALL index recorded slight gains for the day.
Incidentally, the rise of the ALL shares index was mainly due to gains in Sunlife which as of today's close accounts for 23.46% of the All share index, while its competitior the Manulife Financial accounts for 43.46%. Combined these two Canadian insurance titans represent 66.92% of the All shares index. The All share index, which supposedly function to reflect the broad market has been skewed towards the two insurance giants. The PSE should be replace the ALL-share index to MFC-SLF index instead.
World Bank: High Oil Prices Cause ASEAN to Look at Renewable Energy Sources
Rising oil prices have prompted ASEAN members to take a serious look at renewable energy sources, despite concerns over the cost of developing such resources, reports Agence France Presse. Renewable energy was among the key topics raised at a forum of energy ministers of ASEAN and Pacific Rim countries held in the Philippine capital this month to discuss ways of dealing with the high price of imported fuel.
The Philippines has one of the most ambitious plans. It wants to double its capacity for renewable energy from the present level of 4,500 megawatts or 37 percent of the total to 9,000 megawatts or 60 percent of the total by 2013. Energy Secretary Vicente Perez said this would involve wider use of geothermal energy, with the Philippines eventually overtaking the United States as the world's biggest producer of such energy. The Philippines also aims to be the biggest producer of wind power in Southeast Asia by the end of the decade and a leading producer of solar cells, while further tapping energy from bio-mass or organic waste materials like rice husks and sugar cane scraps.
Guillermo Balce, outgoing head of the Jakarta-based ASEAN Centre for Energy, said a study he had conducted found that ASEAN's demand for renewable energy was estimated at 68 million tons of oil equivalent (MTOE) in 2005 or about 1.8 percent of total energy demand. By 2020, demand for renewable energy was expected to rise to only 74 MTOE or 12 percent of the total. In contrast, demand for oil is expected to shoot up from 166 MTOE in 2005 to 292 MTOE in 2020. Even under ASEAN's energy plans, investment in renewable sources from 2001 to 2020 will only amount to about $15.44 billion or barely two percent of all ASEAN investment in the power sector, the centre said. In contrast, investment in natural gas will hit 85 billion dollars or about 43 percent of the total in the same period, its figures showed.
The Philippines has one of the most ambitious plans. It wants to double its capacity for renewable energy from the present level of 4,500 megawatts or 37 percent of the total to 9,000 megawatts or 60 percent of the total by 2013. Energy Secretary Vicente Perez said this would involve wider use of geothermal energy, with the Philippines eventually overtaking the United States as the world's biggest producer of such energy. The Philippines also aims to be the biggest producer of wind power in Southeast Asia by the end of the decade and a leading producer of solar cells, while further tapping energy from bio-mass or organic waste materials like rice husks and sugar cane scraps.
Guillermo Balce, outgoing head of the Jakarta-based ASEAN Centre for Energy, said a study he had conducted found that ASEAN's demand for renewable energy was estimated at 68 million tons of oil equivalent (MTOE) in 2005 or about 1.8 percent of total energy demand. By 2020, demand for renewable energy was expected to rise to only 74 MTOE or 12 percent of the total. In contrast, demand for oil is expected to shoot up from 166 MTOE in 2005 to 292 MTOE in 2020. Even under ASEAN's energy plans, investment in renewable sources from 2001 to 2020 will only amount to about $15.44 billion or barely two percent of all ASEAN investment in the power sector, the centre said. In contrast, investment in natural gas will hit 85 billion dollars or about 43 percent of the total in the same period, its figures showed.
Tuesday, June 29, 2004
CBS Marketwatch: China beats U.S. as investment draw
China beats U.S. as investment draw
By Rachel Koning, CBS.MarketWatch.com
Last Update: 1:48 PM ET June 28, 2004
CHICAGO (CBS.MW) -- China has passed the United States as the recipient of the most foreign direct investment, luring $53 billion from developed countries in 2003, according to the Organization for Economic Cooperation and Development.
In all, as foreign capital flowed into emerging areas including China, developed countries saw investment slide 28 percent, to $384 billion last year from $535 billion in 2002, according to findings released Monday by the OECD, a group that tracks trade, economic and development issues for its 30 member countries.
The United States felt the biggest sting from a preference for headier, if often riskier, returns on development and investment in emerging markets. Investment flowing into the United States declined to $40 billion last year, down from $72 billion in 2002 and $167 billion in 2001.
This was the second consecutive year that the United States was a bigger provider of investment abroad compared to the investment it attracted.
Overall, a weak global economy in 2003, international security instability and a preference among firms to consolidate acquisitions rather than buy more companies contributed to falling direct investment among the OECD's 30 members.
By contrast, China offers investors the market size of developed nations, but developed areas in general can no longer entice business with the lower wages and production costs to be found in China, the group said. See more on the organization.
Foreign direct investment in China dipped only slightly, to $53 billion from $55 billion the year before, placing it as top recipient. The results typically exclude tax haven Luxembourg, which continues each year to draw vast capital flows.
India attracted $4 billion in foreign direct investment from OECD members in 2003. Russia lured just $1 billion, the lowest amount since the mid-1990s, as businesses were detracted by risks of regulation, the OECD said.
Among its European counterparts, France remained the biggest draw of foreign capital, seeing inflows of $47 billion in 2003, a sliver below that seen a year earlier -- but about three times the amount invested in Germany and the United Kingdom. It is relatively easier for foreign firms to buy French companies, at least conventional manufacturing, or "old economy" firms, than those in many other European countries, the OECD said.
Rachel Koning is a reporter for CBS.MarketWatch.com in Chicago.
By Rachel Koning, CBS.MarketWatch.com
Last Update: 1:48 PM ET June 28, 2004
CHICAGO (CBS.MW) -- China has passed the United States as the recipient of the most foreign direct investment, luring $53 billion from developed countries in 2003, according to the Organization for Economic Cooperation and Development.
In all, as foreign capital flowed into emerging areas including China, developed countries saw investment slide 28 percent, to $384 billion last year from $535 billion in 2002, according to findings released Monday by the OECD, a group that tracks trade, economic and development issues for its 30 member countries.
The United States felt the biggest sting from a preference for headier, if often riskier, returns on development and investment in emerging markets. Investment flowing into the United States declined to $40 billion last year, down from $72 billion in 2002 and $167 billion in 2001.
This was the second consecutive year that the United States was a bigger provider of investment abroad compared to the investment it attracted.
Overall, a weak global economy in 2003, international security instability and a preference among firms to consolidate acquisitions rather than buy more companies contributed to falling direct investment among the OECD's 30 members.
By contrast, China offers investors the market size of developed nations, but developed areas in general can no longer entice business with the lower wages and production costs to be found in China, the group said. See more on the organization.
Foreign direct investment in China dipped only slightly, to $53 billion from $55 billion the year before, placing it as top recipient. The results typically exclude tax haven Luxembourg, which continues each year to draw vast capital flows.
India attracted $4 billion in foreign direct investment from OECD members in 2003. Russia lured just $1 billion, the lowest amount since the mid-1990s, as businesses were detracted by risks of regulation, the OECD said.
Among its European counterparts, France remained the biggest draw of foreign capital, seeing inflows of $47 billion in 2003, a sliver below that seen a year earlier -- but about three times the amount invested in Germany and the United Kingdom. It is relatively easier for foreign firms to buy French companies, at least conventional manufacturing, or "old economy" firms, than those in many other European countries, the OECD said.
Rachel Koning is a reporter for CBS.MarketWatch.com in Chicago.
The Guardian: Greenspan tiptoes on a tightrope
Greenspan tiptoes on a tightrope
Ashley Seager
Monday June 28, 2004
This week will almost certainly see the definitive end to the cheap money that refuelled the US and world economies in the dark days of the dotcom bust, September 11 and the war in Iraq.
The US federal reserve, the world's most powerful central bank, will on Wednesday finally raise interest rates for the first time in four years and by a quarter point from a 46-year low of 1%.
The move has been so widely hinted at by Fed officials in recent months that anything else would be a major surprise. Markets should be unperturbed. So far, so good.
For the past year the Fed, led by the redoubtable 78-year-old Alan Greenspan, sworn in a week ago for a fifth and final term, has sought to ensure the economy is firmly back on track after its three-year slowdown by keeping rates rock bottom. In real terms, adjusted for inflation, they are negative.
That job looks done or, possibly, as Greenspan's detractors say, overdone. Economic growth is steaming along at an annualised 4%, factory output is booming, and confidence among consumers and businesses is high.
And the recovery, long dubbed "jobless", is now generating a quarter of a million jobs a month, offering President Bush the chance to avoid becoming the first president since Herbert Hoover to preside over a net loss of jobs. Indeed, some argue that Greenspan, whose rate rises in the early 1990s have been cited as one reason George Bush Sr did not win re-election in 1992, has delayed tightening policy this time because an election is looming in November.
While Greenspan has retorted that he wanted to wait until the economy was creating plenty of jobs, there is no doubt that inflation is now rearing its ugly head. The headline measure has moved up to 3.1% from 2.1% a year ago while even core inflation, which strips out rising oil prices, is up to 2.0% from 1.1%.
The crucial question now is how the Fed weans the economy off the medicine of ultra-cheap money without causing nasty withdrawal symptoms such as a collapse in the over-heated housing market. The US economy is also carrying some other nasty imbalances apart from the the housing market. There is a record current account deficit and huge budget deficit, thanks to Bush's big tax cuts and spending on the war in Iraq.
Thus Greenspan is walking a tightrope and arguably without a safety net beneath him. Rates are clearly too low, say the critics, and have been for too long.
As the Bank of England's governor, Mervyn King, pointed out this week, rates in Britain have been rising since November and have only had to move from 3.5% to 4.5%, not far from where they probably need to be. And the economy here is only growing at an annualised rate of 2.5%, a lot slower than the US, as is inflation. In the US, Mr King said, rates will have to rise much further and faster than here. But the last time the Fed raised rates quickly, from 3% to 6% in 1994-95, financial markets suffered a meltdown, with knock-on effects on the economy.
It is clear that policy makers around the world are casting nervous glances across the sea to the US, fearful of the impact on their own economies if the Fed should mess up. Alistair Clark, a key aide to Mr King, crystalised the concerns last week: "Managing the process in a way that generates minimum disruption will call for considerable care both in determining monetary policy and in its presentation."
Small wonder, then, that Greenspan has stressed the Fed's gradualist approach and has used the word "measured" to describe the likely pace of rate rises. He has also argued that "inflationary pressures are not likely to be a serious concern in the period ahead", but that the Fed will do "what is required to fulfil our obligations to achieve the maintenance of price stability". In other words, "rates are going up slowly but we'll speed up if we have to".
A key part of controlling inflation is controlling workers' and firms' expectations about it. Give the impression that you have lost your grip on it and people demand bigger pay rises and companies raise prices. But stamp down too resolutely with rate rises and you can tip the economy off the edge.
So all eyes will be on the language the Fed uses to accompany its rate rise, particularly how the word "measured" is used, for any hint that the Fed may raise rates more quickly than markets are expecting.
For now, at least, economists think the Fed will bide its time, raising rates in quarter-point increments to 2% by the end of this year and 3% a year from now. But after that things are murkier. It is clear from statements from Fed officials that there is little agreement about how high rates may have to go to no longer stimulate the economy, known as the "neutral" rate. They have offered their own ideas in recent times, ranging anything between 3% and 5%.
"They are starting off on a journey but they don't know what the destination is," says Stephen Lewis, chief economist at Monument Securities in London. "I think they will carry on raising rates until the economy shows signs of slowing down, then they will stop."
The key lies with inflation. The gradualists on the Fed's rate-setting committee argue that the recent rise is only temporary and will pass. Oil prices appear to have stabilised below $40 a barrel and unemployment, at 5.6%, shows that the economy still has lots of slack to be used up before the labour market, in particular, starts to generate any upward pressure on wages and prices.
But the pessimists point to the fact that as inflation was very low last year, so-called "base effects" will mean some high reported numbers through the summer and autumn this year.
That could have a big upward effect on Americans' views about inflation. Figures show inflation expectations have already picked up to above 3%.
So if inflation does take off, Greenspan could well be proved to have been behind the curve. And if he has to play catch-up, talk of rates peaking in the 3%-5% range may be overoptimistic. The last peak, four years ago, took rates up to 6.5%.
Having said that, whichever candidate wins the US presidential race in November, there is likely to be a period of belttightening. Both Bush and his Democratic challenger John Kerry have promised to halve the budget deficit in the next few years.
So, just as the fiscal and monetary loosening of the early years of the new millennium have bought America, in the words of former IMF chief economist Ken Rogoff, the "best recovery money can buy", so a combined tightening may just slow things down nicely. But if things go wrong, Greenspan will go down in history as the Fed chief that lost the plot.
ashley.seager@guardian.co.uk
Ashley Seager
Monday June 28, 2004
This week will almost certainly see the definitive end to the cheap money that refuelled the US and world economies in the dark days of the dotcom bust, September 11 and the war in Iraq.
The US federal reserve, the world's most powerful central bank, will on Wednesday finally raise interest rates for the first time in four years and by a quarter point from a 46-year low of 1%.
The move has been so widely hinted at by Fed officials in recent months that anything else would be a major surprise. Markets should be unperturbed. So far, so good.
For the past year the Fed, led by the redoubtable 78-year-old Alan Greenspan, sworn in a week ago for a fifth and final term, has sought to ensure the economy is firmly back on track after its three-year slowdown by keeping rates rock bottom. In real terms, adjusted for inflation, they are negative.
That job looks done or, possibly, as Greenspan's detractors say, overdone. Economic growth is steaming along at an annualised 4%, factory output is booming, and confidence among consumers and businesses is high.
And the recovery, long dubbed "jobless", is now generating a quarter of a million jobs a month, offering President Bush the chance to avoid becoming the first president since Herbert Hoover to preside over a net loss of jobs. Indeed, some argue that Greenspan, whose rate rises in the early 1990s have been cited as one reason George Bush Sr did not win re-election in 1992, has delayed tightening policy this time because an election is looming in November.
While Greenspan has retorted that he wanted to wait until the economy was creating plenty of jobs, there is no doubt that inflation is now rearing its ugly head. The headline measure has moved up to 3.1% from 2.1% a year ago while even core inflation, which strips out rising oil prices, is up to 2.0% from 1.1%.
The crucial question now is how the Fed weans the economy off the medicine of ultra-cheap money without causing nasty withdrawal symptoms such as a collapse in the over-heated housing market. The US economy is also carrying some other nasty imbalances apart from the the housing market. There is a record current account deficit and huge budget deficit, thanks to Bush's big tax cuts and spending on the war in Iraq.
Thus Greenspan is walking a tightrope and arguably without a safety net beneath him. Rates are clearly too low, say the critics, and have been for too long.
As the Bank of England's governor, Mervyn King, pointed out this week, rates in Britain have been rising since November and have only had to move from 3.5% to 4.5%, not far from where they probably need to be. And the economy here is only growing at an annualised rate of 2.5%, a lot slower than the US, as is inflation. In the US, Mr King said, rates will have to rise much further and faster than here. But the last time the Fed raised rates quickly, from 3% to 6% in 1994-95, financial markets suffered a meltdown, with knock-on effects on the economy.
It is clear that policy makers around the world are casting nervous glances across the sea to the US, fearful of the impact on their own economies if the Fed should mess up. Alistair Clark, a key aide to Mr King, crystalised the concerns last week: "Managing the process in a way that generates minimum disruption will call for considerable care both in determining monetary policy and in its presentation."
Small wonder, then, that Greenspan has stressed the Fed's gradualist approach and has used the word "measured" to describe the likely pace of rate rises. He has also argued that "inflationary pressures are not likely to be a serious concern in the period ahead", but that the Fed will do "what is required to fulfil our obligations to achieve the maintenance of price stability". In other words, "rates are going up slowly but we'll speed up if we have to".
A key part of controlling inflation is controlling workers' and firms' expectations about it. Give the impression that you have lost your grip on it and people demand bigger pay rises and companies raise prices. But stamp down too resolutely with rate rises and you can tip the economy off the edge.
So all eyes will be on the language the Fed uses to accompany its rate rise, particularly how the word "measured" is used, for any hint that the Fed may raise rates more quickly than markets are expecting.
For now, at least, economists think the Fed will bide its time, raising rates in quarter-point increments to 2% by the end of this year and 3% a year from now. But after that things are murkier. It is clear from statements from Fed officials that there is little agreement about how high rates may have to go to no longer stimulate the economy, known as the "neutral" rate. They have offered their own ideas in recent times, ranging anything between 3% and 5%.
"They are starting off on a journey but they don't know what the destination is," says Stephen Lewis, chief economist at Monument Securities in London. "I think they will carry on raising rates until the economy shows signs of slowing down, then they will stop."
The key lies with inflation. The gradualists on the Fed's rate-setting committee argue that the recent rise is only temporary and will pass. Oil prices appear to have stabilised below $40 a barrel and unemployment, at 5.6%, shows that the economy still has lots of slack to be used up before the labour market, in particular, starts to generate any upward pressure on wages and prices.
But the pessimists point to the fact that as inflation was very low last year, so-called "base effects" will mean some high reported numbers through the summer and autumn this year.
That could have a big upward effect on Americans' views about inflation. Figures show inflation expectations have already picked up to above 3%.
So if inflation does take off, Greenspan could well be proved to have been behind the curve. And if he has to play catch-up, talk of rates peaking in the 3%-5% range may be overoptimistic. The last peak, four years ago, took rates up to 6.5%.
Having said that, whichever candidate wins the US presidential race in November, there is likely to be a period of belttightening. Both Bush and his Democratic challenger John Kerry have promised to halve the budget deficit in the next few years.
So, just as the fiscal and monetary loosening of the early years of the new millennium have bought America, in the words of former IMF chief economist Ken Rogoff, the "best recovery money can buy", so a combined tightening may just slow things down nicely. But if things go wrong, Greenspan will go down in history as the Fed chief that lost the plot.
ashley.seager@guardian.co.uk
June 29 Philippine Stock Market Review
The Philippines' largest market cap and leading telecom company, the PLDT, buoyed the key 30-company benchmark by .38% on light but improved volume. Market turnover in Pesos swelled by 54.78% to P 414.660 million from yesterday’s sluggish P 267.892 million.
There were only two gainers among index heavyweights; PLDT’s modest advance of 2.2% plus Metrobank’s significant 1.81% gain more than offset the declines of Ayala Corp, down 1.72%, and Globe Telecoms, slightly lower by .58%. The rest of the heavyweights, Ayala Land, San Miguel A and B shares, SM Prime and Bank of the Philippine Islands closed unchanged.
Market sentiment was generally upbeat as advancers beat decliners 31 to 19 and these help support the gains of the select heavyweight issues. Moreover, foreign capital flow yielded a net positive P 13.674 million with the bulk of these directed to choiced companies, i.e. PLDT, First Philippine Holdings, Ayala Corp, Ayala Land and Jollibee, respectively.
The movements of the local market seem to mirror those of our neighbors; Thailand and Malaysia like us had marginal gains while Indonesia posted a slight decline, as of this writing.
As for the domestic industry indices, only the oil and the property issues reported declines, while the Commercial Industrial, Financial, the Phi-All and Mining Index posted gains. The Small and Medium Enterprise Index was untraded.
The oil index dropped by a significant 4.26% solely based Oriental Petroleum’s hefty fall. Other oil issues were unchanged. The Property index fell by a slim .15% on Filinvest Land’s 3.77% drop.
There were only two gainers among index heavyweights; PLDT’s modest advance of 2.2% plus Metrobank’s significant 1.81% gain more than offset the declines of Ayala Corp, down 1.72%, and Globe Telecoms, slightly lower by .58%. The rest of the heavyweights, Ayala Land, San Miguel A and B shares, SM Prime and Bank of the Philippine Islands closed unchanged.
Market sentiment was generally upbeat as advancers beat decliners 31 to 19 and these help support the gains of the select heavyweight issues. Moreover, foreign capital flow yielded a net positive P 13.674 million with the bulk of these directed to choiced companies, i.e. PLDT, First Philippine Holdings, Ayala Corp, Ayala Land and Jollibee, respectively.
The movements of the local market seem to mirror those of our neighbors; Thailand and Malaysia like us had marginal gains while Indonesia posted a slight decline, as of this writing.
As for the domestic industry indices, only the oil and the property issues reported declines, while the Commercial Industrial, Financial, the Phi-All and Mining Index posted gains. The Small and Medium Enterprise Index was untraded.
The oil index dropped by a significant 4.26% solely based Oriental Petroleum’s hefty fall. Other oil issues were unchanged. The Property index fell by a slim .15% on Filinvest Land’s 3.77% drop.
Monday, June 28, 2004
June 28: Philippine Stock Market Review
Lethargy could possibly be the appropriate word to describe today’s activities. Significantly reduced volume and mixed market breadth, despite a slight uptick recorded in the Phisix (.05%), reflected selective buying by local investors, as foreign capital recorded an outflow of a paltry P 5.580 million.
Among the blue chips Ayala Corp. (+3.57%), Ayala Land (+1.78%) and Bank of the Philippine Islands (+1.17%) lifted the Philippine benchmark, the Phisix, while major telecom issues PLDT (-1.31%) and Globe (-1.16%) declined on technical profit taking after last week’s blistering climb. San Miguel, SM Primeholdings and Metrobank closed neutral.
The market’s inertia could possibly be traced to the mixed performances of the US benchmarks on Friday, which sort of spilled over to the region’s bourses. As of this writing, among our neighbors, only Thailand and Singapore have manifested moderate gains, while Indonesia and Hong Kong, like our bourse, are almost unchanged. On the other hand, the bourses of Malaysia, South Korea and Taiwan are all modestly down.
The Asian region had an outstanding performance last week and today’s consolidation could possibly reflect a reprieve from the recent spurt. Aside, it looks as if the global markets are keeping a cautious eye/stance until June 30th when US Federal Reserve is expected to initiate the restoration of its Fed rates to ‘normal’ levels.
Among the blue chips Ayala Corp. (+3.57%), Ayala Land (+1.78%) and Bank of the Philippine Islands (+1.17%) lifted the Philippine benchmark, the Phisix, while major telecom issues PLDT (-1.31%) and Globe (-1.16%) declined on technical profit taking after last week’s blistering climb. San Miguel, SM Primeholdings and Metrobank closed neutral.
The market’s inertia could possibly be traced to the mixed performances of the US benchmarks on Friday, which sort of spilled over to the region’s bourses. As of this writing, among our neighbors, only Thailand and Singapore have manifested moderate gains, while Indonesia and Hong Kong, like our bourse, are almost unchanged. On the other hand, the bourses of Malaysia, South Korea and Taiwan are all modestly down.
The Asian region had an outstanding performance last week and today’s consolidation could possibly reflect a reprieve from the recent spurt. Aside, it looks as if the global markets are keeping a cautious eye/stance until June 30th when US Federal Reserve is expected to initiate the restoration of its Fed rates to ‘normal’ levels.
Stock exchanges to promote UN goals for business
Stock exchanges to promote UN goals for business
23 Jun 2004
By Irwin Arieff
UNITED NATIONS, June 23 (Reuters) - Ten stock exchanges from around the world will announce plans on Thursday to promote U.N.-backed environmental and labor standards among the 3,000 companies whose shares they list, U.N. officials said.
The initiative is part of a U.N. effort to expand the reach of the Global Compact, a four-year-old program that aims to help businesses become better corporate citizens.
U.N. Secretary-General Kofi Annan wants Thursday's Global Compact Leaders Summit to sharpen the focus of the program, which has grown since its birth to more than 1,400 firms in over 50 countries, making it the world's largest voluntary corporate citizenship network.
Hundreds of government, business and civic leaders involved in the compact are expected to attend the summit.
The 10 stock exchanges will announce plans to send the Global Compact's guiding principles to all their listed companies, with a total market capitalization of $3 trillion, the officials said.
The participating markets are Brazil's Bovespa, a grouping of European stock exchanges known as Euronext, and the German, Istanbul, Italian, Jakarta, Johannesburg, Luxembourg and Toronto stock exchanges, the officials said.
In addition, Bovespa and the Jakarta market are to become the first two stock exchanges to join the compact, they said.
Compact participants also plan to adopt a new guiding principle that "business should work against corruption in all its forms, including extortion and bribery."
Until now, the compact has had nine guiding principles in the fields of labor standards, civil rights, and environmental stewardship. Among them are developing environmentally friendly technologies and ending sweatshop conditions, child labor and discrimination against minorities and women.
"Adoption of the 10th principle commits compact participants not only to avoid bribery, extortion and other forms of graft but also to take action to prevent their occurrence," the program said in a statement.
Among those attending the conference will be Brazilian President Luiz Inacio Lula da Silva and about 150 corporate chief executives from around the globe.
Annan first proposed forming the Global Compact in 1999 as a way to encourage corporations to commit to key principles embodied in U.N. treaties or risk a backlash from poor nations left out of the benefits of globalization.
Participating firms have been asked to post their techniques for dealing with labor, human rights and environmental challenges spawned by globalization on the program's Web site (www.unglobalcompact.org/Portal/).
Most members are from Europe and just 8 percent come from North America, reflecting U.S. firms' concerns that the compact's labor rights provisions could lead to lawsuits, compact officials said.
But membership is growing in the developing world, reflecting poor nations' desire to become more competitive in an increasingly global economy, they said.
Some labor, environmental and human rights groups criticize the compact, however, for not imposing binding standards or ensuring that participants live up to the guiding principles and the commitments they make on the program's Web site.
23 Jun 2004
By Irwin Arieff
UNITED NATIONS, June 23 (Reuters) - Ten stock exchanges from around the world will announce plans on Thursday to promote U.N.-backed environmental and labor standards among the 3,000 companies whose shares they list, U.N. officials said.
The initiative is part of a U.N. effort to expand the reach of the Global Compact, a four-year-old program that aims to help businesses become better corporate citizens.
U.N. Secretary-General Kofi Annan wants Thursday's Global Compact Leaders Summit to sharpen the focus of the program, which has grown since its birth to more than 1,400 firms in over 50 countries, making it the world's largest voluntary corporate citizenship network.
Hundreds of government, business and civic leaders involved in the compact are expected to attend the summit.
The 10 stock exchanges will announce plans to send the Global Compact's guiding principles to all their listed companies, with a total market capitalization of $3 trillion, the officials said.
The participating markets are Brazil's Bovespa, a grouping of European stock exchanges known as Euronext
In addition, Bovespa and the Jakarta market are to become the first two stock exchanges to join the compact, they said.
Compact participants also plan to adopt a new guiding principle that "business should work against corruption in all its forms, including extortion and bribery."
Until now, the compact has had nine guiding principles in the fields of labor standards, civil rights, and environmental stewardship. Among them are developing environmentally friendly technologies and ending sweatshop conditions, child labor and discrimination against minorities and women.
"Adoption of the 10th principle commits compact participants not only to avoid bribery, extortion and other forms of graft but also to take action to prevent their occurrence," the program said in a statement.
Among those attending the conference will be Brazilian President Luiz Inacio Lula da Silva and about 150 corporate chief executives from around the globe.
Annan first proposed forming the Global Compact in 1999 as a way to encourage corporations to commit to key principles embodied in U.N. treaties or risk a backlash from poor nations left out of the benefits of globalization.
Participating firms have been asked to post their techniques for dealing with labor, human rights and environmental challenges spawned by globalization on the program's Web site (www.unglobalcompact.org/Portal/).
Most members are from Europe and just 8 percent come from North America, reflecting U.S. firms' concerns that the compact's labor rights provisions could lead to lawsuits, compact officials said.
But membership is growing in the developing world, reflecting poor nations' desire to become more competitive in an increasingly global economy, they said.
Some labor, environmental and human rights groups criticize the compact, however, for not imposing binding standards or ensuring that participants live up to the guiding principles and the commitments they make on the program's Web site.
OPINION ON THE SPRATLY ISLANDS DISPUTE:Deflate tension with dialogue
UPDATE:
I noticed that this June 2011, there has been quite a number of visits on this page. Nevertheless, this is an old (2004) but relevant article, not from me but from the Japan Times. This article was one of my test-experimental posts prior to my 'calling' to go blogging.
My personal opinion on the concurrent (2011) Spratly's dispute can be read here and here.
SPRATLY ISLANDS DISPUTE
Deflate tension with dialogue
By RONALD A. RODRIGUEZ
Special to The Japan Times
HONOLULU -- Recent events confirm that maritime territorial disputes in the South China Sea remain an issue for East Asian governments. Ownership of the Spratly Islands is claimed, in whole or in part, by Brunei, China, Malaysia, the Philippines, Taiwan and Vietnam.
In the first quarter of 2004 alone, the claimants took turns building up anxiety, raising concerns about the sustainability of the status quo and whether the 2002 Delaration on the Conduct of Parties in the South China Sea could ensure the claimants' self-restraint.
First came the Philippines' announcement of the Balikatan exercises with the United States in the South China Sea in February. The Philippine action appeared to be driven by Manila's growing uneasiness over an increasing number of visits by Chinese research vessels and warships in the Spratly Islands, as well as the sudden appearance of new Chinese markers on the unoccupied reefs late last year. The mounting tension did not dissipate until Philippine President Gloria Macapagal Arroyo assured the region that the military exercises did not have anything to do with the maritime territorial disputes.
Then came Taiwan's turn. On March 23, a Taiwanese speedboat carrying eight individuals landed and carried out the swift construction of a makeshift "bird-watching stand" on the Ban Than Reef. Vietnam strongly condemned Taiwan's move and demanded an end to the construction activities. Vietnamese Foreign Ministry spokesperson Le Dung branded Taiwan's handiwork "an act of land-grabbing expansion that seriously violated Vietnam's territorial sovereignty" and warned of possible consequences from Taiwan's "adventurism."
Taiwan's action didn't go unanswered. Two days after the Ban Than Reef incident, Vietnam reaffirmed its sovereignty over the Truong Sa (Spratly) and the Hoang Sa (Paracel) atolls by announcing that it would hold the inaugural tourist boat trip to the contested islands. China decided to conduct a Navy drill in the South China Sea on April 12, sending signals to the other claimants to back off.
The Chinese display of naval capability in the South China Sea didn't stop Vietnam. Unfazed, Hanoi gave its white navy ship HQ988 the go signal to sail for the atolls with about 60 tourists and 40 officials on April 19. Many saw the controversial eight-day round trip as the beginning of more Vietnamese tourism activities in the area -- a development that follows the Malaysian lead of a few years ago.
The maneuvering for advantage in the South China Sea reveals the frailty of the nonbinding declaration. In November 2002, the region celebrated the signing in Phnom Penh of the landmark declaration between the Association of Southeast Asian Nations and China in which the claimants agreed to avoid actions that could raise tension in the South China Sea. The nonbinding nature of the declaration, however, has been a concern for some of the signatories. Two years after it was signed, the parties are almost back to where they started. Most, if not all, do not seem ready to allow regional concerns to supersede their national interests. This is why, at least for some critics, the declaration has been reduced to a "flimsy piece of paper."
There are two views on the value of the declaration. Mark Valencia, an ocean policies expert at the Honolulu-based East-West Center, typifies the skeptic's view. He anticipated that the declaration was doomed, considering it a flawed attempt to reduce the heat over territory in the South China Sea. This view sees the declaration to be a self-deceiving exercise that satisfied ASEAN's thirst for political accomplishment, but did not offer profound changes in the security situation in the South China Sea. Valencia emphasizes that no loose agreement would prevent claimants from positioning themselves strategically in the lingering dispute.
The other view takes a more cautious position. Aileen Baviera of the University of the Philippines' Asian Center, for instance, cautions against a rush to judgment and outright dismissal of the declaration, arguing the claimants' constant reference to it whenever there is a problem suggests that parties continue to find value and purpose in its spirit. In this sense, the declaration has value as a referent, and modifies the behavior of the parties to the dispute. The Philippines' and China's efforts to downplay their navy drills as either part of a regular security routine or unrelated to the maritime territorial disputes indicate a turnaround in their more self-assured positions of the past.
Recent moves by Taiwan and Vietnam cannot be downplayed, however. It's time to reassess the declaration and see how similar incidents can be avoided. For one, the parties should start molding a set of guidelines that will diminish the gray areas in the declaration. The declaration should define the 10 points that the parties have agreed on and seek strategies to put them into operation them as soon as possible. The mounting criticisms of the declaration should create momentum for greater interest in a more binding agreement.
In addition, the parties should build on the prospects for regional cooperation that emerged out of China's decision to sign the Treaty of Amity and Cooperation with ASEAN on Oct. 8, 2003. Not only does the treaty commit ASEAN and China to a nonaggression pact, but it also increases the possibility of a more binding agreement on the South China Sea in the future.
Optimists and skeptics share the view that dialogue is a basic need in the South China Sea. But any fresh initiative should emphasize the need for progress in cooperative endeavors, rather than dwell on infractions. The parties can begin with the six proposed areas of cooperation in the declaration, which include marine environmental protection, marine scientific research, safety of navigation and communications at sea, search and rescue operation and combating transnational crime.
Taiwan will continue to be a problem. To date, China has refused to allow Taiwan to become a signatory to any legal accord in the South China Sea. Yet any failure to consider Taiwan's interests will enable it to play spoiler. A peaceful resolution to the disputes requires effective management of the Taiwan problem.
In hindsight, it was probably the lack of sustained dialogue that has weakened the foundations of the declaration. The parties overlooked the fact that continuous interaction is an equally important element of the signed declaration. While an informal working group still convenes, the gradual retreat of catalysts like Canada and Indonesia, as well as key individuals like Hasjim Djalal, has had an impact.
The parties may not readily agree, but it appears that the South China Sea needs another intermediary. Takers anyone?
Ronald A. Rodriguez, head of the Northeast Asia program and officer in charge of the security and strategic studies program at the Center for International Relations and Strategic Studies, Foreign Service Institute of the Philippines, is currently a Vasey Fellow at the Pacific Forum CSIS, a U.S. think tank based in Honolulu. These are his personal views.
The Japan Times: June 28, 2004
(C) All rights reserved
I noticed that this June 2011, there has been quite a number of visits on this page. Nevertheless, this is an old (2004) but relevant article, not from me but from the Japan Times. This article was one of my test-experimental posts prior to my 'calling' to go blogging.
My personal opinion on the concurrent (2011) Spratly's dispute can be read here and here.
SPRATLY ISLANDS DISPUTE
Deflate tension with dialogue
By RONALD A. RODRIGUEZ
Special to The Japan Times
HONOLULU -- Recent events confirm that maritime territorial disputes in the South China Sea remain an issue for East Asian governments. Ownership of the Spratly Islands is claimed, in whole or in part, by Brunei, China, Malaysia, the Philippines, Taiwan and Vietnam.
In the first quarter of 2004 alone, the claimants took turns building up anxiety, raising concerns about the sustainability of the status quo and whether the 2002 Delaration on the Conduct of Parties in the South China Sea could ensure the claimants' self-restraint.
First came the Philippines' announcement of the Balikatan exercises with the United States in the South China Sea in February. The Philippine action appeared to be driven by Manila's growing uneasiness over an increasing number of visits by Chinese research vessels and warships in the Spratly Islands, as well as the sudden appearance of new Chinese markers on the unoccupied reefs late last year. The mounting tension did not dissipate until Philippine President Gloria Macapagal Arroyo assured the region that the military exercises did not have anything to do with the maritime territorial disputes.
Then came Taiwan's turn. On March 23, a Taiwanese speedboat carrying eight individuals landed and carried out the swift construction of a makeshift "bird-watching stand" on the Ban Than Reef. Vietnam strongly condemned Taiwan's move and demanded an end to the construction activities. Vietnamese Foreign Ministry spokesperson Le Dung branded Taiwan's handiwork "an act of land-grabbing expansion that seriously violated Vietnam's territorial sovereignty" and warned of possible consequences from Taiwan's "adventurism."
Taiwan's action didn't go unanswered. Two days after the Ban Than Reef incident, Vietnam reaffirmed its sovereignty over the Truong Sa (Spratly) and the Hoang Sa (Paracel) atolls by announcing that it would hold the inaugural tourist boat trip to the contested islands. China decided to conduct a Navy drill in the South China Sea on April 12, sending signals to the other claimants to back off.
The Chinese display of naval capability in the South China Sea didn't stop Vietnam. Unfazed, Hanoi gave its white navy ship HQ988 the go signal to sail for the atolls with about 60 tourists and 40 officials on April 19. Many saw the controversial eight-day round trip as the beginning of more Vietnamese tourism activities in the area -- a development that follows the Malaysian lead of a few years ago.
The maneuvering for advantage in the South China Sea reveals the frailty of the nonbinding declaration. In November 2002, the region celebrated the signing in Phnom Penh of the landmark declaration between the Association of Southeast Asian Nations and China in which the claimants agreed to avoid actions that could raise tension in the South China Sea. The nonbinding nature of the declaration, however, has been a concern for some of the signatories. Two years after it was signed, the parties are almost back to where they started. Most, if not all, do not seem ready to allow regional concerns to supersede their national interests. This is why, at least for some critics, the declaration has been reduced to a "flimsy piece of paper."
There are two views on the value of the declaration. Mark Valencia, an ocean policies expert at the Honolulu-based East-West Center, typifies the skeptic's view. He anticipated that the declaration was doomed, considering it a flawed attempt to reduce the heat over territory in the South China Sea. This view sees the declaration to be a self-deceiving exercise that satisfied ASEAN's thirst for political accomplishment, but did not offer profound changes in the security situation in the South China Sea. Valencia emphasizes that no loose agreement would prevent claimants from positioning themselves strategically in the lingering dispute.
The other view takes a more cautious position. Aileen Baviera of the University of the Philippines' Asian Center, for instance, cautions against a rush to judgment and outright dismissal of the declaration, arguing the claimants' constant reference to it whenever there is a problem suggests that parties continue to find value and purpose in its spirit. In this sense, the declaration has value as a referent, and modifies the behavior of the parties to the dispute. The Philippines' and China's efforts to downplay their navy drills as either part of a regular security routine or unrelated to the maritime territorial disputes indicate a turnaround in their more self-assured positions of the past.
Recent moves by Taiwan and Vietnam cannot be downplayed, however. It's time to reassess the declaration and see how similar incidents can be avoided. For one, the parties should start molding a set of guidelines that will diminish the gray areas in the declaration. The declaration should define the 10 points that the parties have agreed on and seek strategies to put them into operation them as soon as possible. The mounting criticisms of the declaration should create momentum for greater interest in a more binding agreement.
In addition, the parties should build on the prospects for regional cooperation that emerged out of China's decision to sign the Treaty of Amity and Cooperation with ASEAN on Oct. 8, 2003. Not only does the treaty commit ASEAN and China to a nonaggression pact, but it also increases the possibility of a more binding agreement on the South China Sea in the future.
Optimists and skeptics share the view that dialogue is a basic need in the South China Sea. But any fresh initiative should emphasize the need for progress in cooperative endeavors, rather than dwell on infractions. The parties can begin with the six proposed areas of cooperation in the declaration, which include marine environmental protection, marine scientific research, safety of navigation and communications at sea, search and rescue operation and combating transnational crime.
Taiwan will continue to be a problem. To date, China has refused to allow Taiwan to become a signatory to any legal accord in the South China Sea. Yet any failure to consider Taiwan's interests will enable it to play spoiler. A peaceful resolution to the disputes requires effective management of the Taiwan problem.
In hindsight, it was probably the lack of sustained dialogue that has weakened the foundations of the declaration. The parties overlooked the fact that continuous interaction is an equally important element of the signed declaration. While an informal working group still convenes, the gradual retreat of catalysts like Canada and Indonesia, as well as key individuals like Hasjim Djalal, has had an impact.
The parties may not readily agree, but it appears that the South China Sea needs another intermediary. Takers anyone?
Ronald A. Rodriguez, head of the Northeast Asia program and officer in charge of the security and strategic studies program at the Center for International Relations and Strategic Studies, Foreign Service Institute of the Philippines, is currently a Vasey Fellow at the Pacific Forum CSIS, a U.S. think tank based in Honolulu. These are his personal views.
The Japan Times: June 28, 2004
(C) All rights reserved
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