* This is my article yesterday in interaksyon.com
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MANILA - A few weeks ago, an article from forbes.com
written by contributor Jesse Colombo, “Here’s
why the Philippines’ economic miracle is really a bubble in disguise,” went
viral in the social media. One may not agree with the analysis and conclusion
but many data presented were useful.
The Philippines’ recent strong economic performance --
like the 7.4 percent GDP growth in the first three quarters of 2013 -- is it a
miracle or a bubble in disguise, as Mr. Colombo and a few others would put it?
Chart 1. Quarterly GDP growth, 1st quarter
2009 to 2nd quarter 2013.
Source: Colombo article
An “economic bubble” simply means the value of something
is a lot higher than what it should normally be, thus its price is not anchored
on its real earning capacity – what we call macro fundamentals.
People should recognize that capitalism, innovation and
competition is about bubbles inflating and popping in an endless cycle. For
some companies, it is the cycle of expansion and contraction, with some going
through a phase of bankruptcy, temporary or permanent. Capitalism without huge
rewards is like religion without heaven, and capitalism without bankruptcy is
like religion without sin. Innovation and competition always result in some
bubbles.
To disprove Colombo’s conclusion -- that the country’s
fast economic growth was a “miracle” or a “bubble in disguise” -- three data
sets are outlined below, using the very same charts he cited in his article. In
a sense, this is analyzing the same set of data from a different perspective.
Data A: Interest rates declining.
Both short term and 10-year bond rates are coming down.
This means that there is more confidence in the long-term growth potential of
the economy, even with bubbles and instabilities factored in.
Chart 2. 10-year bond rate, unprecedented 3.61
percent. (US is 2.79 percent).
Source: Colombo article
Chart 3. Benchmark interest rates are at all-time low.
Source: Colombo article
Chart 4. Consumer loans to individuals and companies
also declining.
The above charts show that the supply of money -- whether
coming from within or from abroad -- keeps rising. In economic jargon, the
supply curve is shifting to the right, resulting in lower interest rates.
Graphically, this can be portrayed as follows:
Data B: Consumer spending is rising.
Someone’s consumption is somebody else’s production.
Supply and demand, production and consumption, they regularly meet each other
at various equilibrium prices or mutually-agreed price points per commodity.
Chart 5. Overall consumer spending.
Source: Colombo article
We have our big and young population to thank for this.
More people means more entrepreneurs and workers, more producers and consumers.
Many investment analysts and banks abroad look at it more positively than
negatively; more as assets than liabilities.
Car registrations as proxy for car sales also showed a
rising trend, soaring 50 percent since 2008. This means more people are leaving
or selling their motorcycles or jeeps and buying cars. Cars and vans are
productivity-enhancing investments that transport people, students, goods
and cargo.
Chart 6. Personal savings declining.
Source: Colombo article
Mr. Colombo and other people look at this negatively as
it is a “credit-driven growth and bubble.” Not true. A better perspective is
that lower personal savings is a result of low incentives to save money in
banks due to low interest rates. Reacting to Mr. Colombo, newspaper columnist John Mangun wrote in another
article: “Why would you save to earn 1-percent interest when inflation
is 3 percent? The sensible thing to do is to buy a house or open a business,
which is exactly what Filipinos have been doing in the last five years.”
Or instead of putting extra income in the banks, people
buy a car, or send the kids to more expensive schools, or take more trips
abroad for vacation. These are purchases of goods and services produced by
other people and sectors of the economy.
Recall the basic Economics equation, Y or GDP = C + I + G
+ (X-M), where C is Consumption by households; I is investment in the form of
capital outlay, durable equipment, plus stock market investments; G is
government consumption; and (X-M) is net of exports minus imports.
In the Philippines, C comprises about 70 percent of GDP
so that fast growth in C results in fast growth in GDP even if I and G do not
grow fast.
Data C: Investments rising.
Consistent with “someone’s consumption is somebody else’s
production”, both local and foreign investors are putting their money here to
capitalize on long-term continued growth and expansion of the economy, while
other countries such as those in Europe suffer from low growth, if not
recession.
Chart 7. Philippines FDI net inflows, current $
Foreign direct investments (FDIs) are rising. The numbers
are net inflows, meaning what has remained of the inflows after outflows are
removed. The amounts may be a pittance compared to what other emerging Asian
markets like Indonesia and Thailand get, mainly due to a protectionist
Constitution that limits if not prohibits foreign equity investments in many
sectors of the economy. Still, the trend of rising FDIs is there for the past
three decades or more.
Chart 8. Stock market has more than tripled since 2009.
Source: Colombo article
Unlike FDIs that are long-term investments, portfolio
investments here are generally short term but still, a short term taste of
profit can lead to long-term investments at least for the publicly-listed
firms.
So, is Philippine economic performance a “miracle” and a
“bubble in disguise”? Far out. People are simply working hard, saving extra for
future investments or future schooling of children, or future vacation, and
there is no miracle there.
Property bubbles can happen anywhere, anytime -- whether
the macroeconomic fundamentals are weak or strong. When a property bubble pops
or bursts, it is a correction mechanism but the price does not go down to zero.
For instance, a condo unit priced at $100,000 and later mellows to $60,000 or
less is bubble popped and the real price is corrected. A bubble burst does not
mean that the condo price goes down to zero.
An economy without bubbles is a communist like North
Korea. Property bubble there is impossible as everything is regulated and
controlled by the state. Thus, economic bubbles are 100 percent part of society
where people have the economic freedom to pursue commerce and entrepreneurship.
People should just be wary when some guys promise them things that seem too
good to be true, like Ponzi schemes. These are huge bubbles with bubbly returns
for early investors but little or zero for late investors.
The one thing that shows real and long-term bubble
performance is the Philippine government. For many years, government has been
living beyond its means, spending more than domestic revenues can sustain and
resorting to endless borrowing to finance the annual fiscal deficit. Wasteful
public spending is clearly captured by persistent budget deficit even -- if
there are no clear national emergencies -- and by rising total public debt
stock.
Chart 9. Budget balance since 1995.
Source: Colombo article
So the Philippine economy is not that weak as portrayed
by Mr. Colombo and other skeptics of the Filipinos’ capacity for hard work. A
bubble does exist in some sectors or sub-sectors, and they will ultimately pop
or burst, say a few years from now. But it is a correction mechanism: prices go
down, stabilize, then climbs back again. And life goes on, waiting for another
round or opportunity at high-risk, high-return projects.
What really makes an economy weak is the lack of rule of
law. Laws are arbitrarily changed and applied by government (if at all). Strict
requirements with penalties and high taxes for some, but lax requirements and
tax avoidance by others. Many institutional investors, foreign and local, do
not like this, so they do not invest or come in, and that reduces the
productive capacity of the economy.
See also:
Fat Free Econ 43: On the Philippines' Fast Economic Growth, June 14, 2013
Fat Free Econ 46: On Pork Barrel Aboition, August 25, 2013Fat Free Econ 47: Pork Scam vs. Public Debt Scam, September 07, 2013
Fat Free Econ 48: Jobs, Taxes and the World Bank, September 15, 2013
Fat Free Econ 49: Growth Amid Storms, December 03, 2013
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