Hitting bottom

The year just passed is perhaps the most exciting 12-month calendar period in recent history of world economics.

If there are any doubts as to the absolute power of money and its influence in global balance, then the previous year surely erased all that. It is a tale worth retelling and remembering.

The year that was started with oil breaching the $100-mark, causing people to worry that the home-loan crisis in the US, which began in the third quarter of 2007, was spilling over to 2008. That it would actually spiral out of control later in the year was something that was mostly unexpected, a Black Swan, if we were to borrow bestselling author Nassim Taleb’s description of the occurrence of unforeseen events.

Delayed spillover

At the start of 2008, the Philippines was still basking in the glow of a 7.2 percent, a three-decade high economic growth. The peso had just ended its best year in record, inflation was muted, the deficit had shrank to the smallest in a decade, and interest rates were still dropping.

In the early days of 2008, very few were paying attention to a looming rice supply problem so much so that the central bank even lowered its benchmark borrowing rate by 25 basis points in January to five percent, and continued to loosen monetary policy by shortening the tenor of special deposit accounts in March.

Then the rice supply crunch became evident, and along with it, the effect of increased crude oil prices. As pump prices continued its ascent every week, the rising cost of rice and food made the life of daily wage earners more and more strenuous.

The situation seemed serious enough considering that labor groups did not have to go out to the streets to demand higher wages as they got some adjustment just a few weeks after submitting their petition to the wage boards.

By the end of May, economic managers had no choice but to go back to the drawing board and revise almost all their numbers. Crude oil, after all, was breaking records almost every day, already veering to the $150 level by July.

The Development Budget Coordination Committee on May 28 yanked down the growth forecast and postponed balancing the budget to 2010, supposedly the original timetable for the goal, as the government needed to accelerate spending to shield the economy from the global slump.

A week later, the central bank started raising interest rates to prevent inflation from spinning out of control. By then, like many central banks in the region and elsewhere, the tightening cycle was already behind the curve.

By August, the BSP had lifted overnight borrowing rate by 100 basis points to 6 percent, the same month that inflation peaked at 12.5 percent or an almost 17-year-high.

The government downgraded growth targets for the year a few more times before settling on a range of 4.1 to 5.1 percent by November; the low-end of which would be the lowest since 2002.

Spinning out of control

By this time, all doubts as to whether major global economies would sink into a recession had been settled because the United States, Japan, Germany and Singapore had already suffered two quarters of negative growth.

And the third quarter performances haven’t even factored in the effect of the collapse of Lehman Brothers, the bailouts of AIG, of Fannie and Freddie, of the auto makers and the end of Wall Street as we know it.

By the time the big American banks were written down as history, and investment outfits had started transforming themselves back into plain vanilla banking institutions, the US economy was falling deeper into recession and job losses were becoming more pronounced.

In the Philippines, the impact of the Wall Street fiasco hasn’t been felt yet, except for the seeming reluctance of banks to lend to one another (which too, was a global phenomenon) and the dramatic plunge in the sovereign bond prices that threatened the capital of local banks that had invested heavily in the so-called ROPs.

BSP to the rescue

The Bangko Sentral, fortunately, acted swiftly this time by opening a dollar-lending window to stave off a perceived tightness in dollar supply, which caused the peso to weaken to as low as the 50-level in November.

Before the end of October, the BSP also allowed banks to reclassify their fixed-income assets and let lenders avoid huge paper losses on their ROP investments that would have required them to put up capital at a time when raising money was expensive.

By early November, the central bank reduced its reserve requirement by 200 basis points to 19 percent to release an estimated P60 billion in the financial system and encourage banks to lend.

In its last meeting for the year on Dec. 18, the monetary board cut the benchmark rate by a more-than-expected half-point and signaled further reductions to support the economy as the peso went back to the 46 to 47 level while inflation slowed below 10 percent in November.

As of the first three quarters, economic growth averaged around 4.6 percent, amid slowing growth in remittances that could dent private consumption. The Bangko Sentral, it seems, is managing to be on track with its target of 3.5 percent to 5.5 percent by 2010.

Picking up the pieces

What’s left now with government is to hope that public investment in infrastructure and spending during the holidays would remain robust and hopefully provided sufficient fuel for the economy to rev up a decent performance for 2008.

And speaking of fuel, diesel prices have gone down to about P28 a liter from almost P60 during in the third quarter, the drastic halving of which summarizes how volatile 2008 had been.

Indeed, a most exciting year in recent history has ended. It was a period of extreme volatility that in the end had unraveled and purged not just toxic debts running to trillions of dollar but also that icon known as Wall Street and its investment bankers.

Our only consolation to all the grief that came with 2008 is an age-old stock market adage: when you hit bottom, there’s nowhere to go but up. But, have we reached the bottom?

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit http://www.BizlinksPhilippines.net.