Slump

We do not know if we hit bottom yet. From a high of 7,400 points, the Phisix is expected to test the 6,000-point level, perhaps even plunge to 5,900.

The peso eroded as well. It is expected that the peso will remain in the 43 to the dollar range for some time. That might be good news for families dependent on remittances; but it will also mean oil prices will be significantly higher.

The fall of our stock exchange and our currency is not an isolated case. Equity markets and currencies receded dramatically all over the world the last two weeks.

The most immediate precipitating factor is the US Fed’s decision to curtail or even terminate its quantitative easing program (QE). The QE is a program where the US government basically pumps hundreds of billions of dollars into its economy through the purchase of bonds.

QE intended to pull the US economy from the brink of recession and revive market activity. One obvious consequence of the QE is that it pushed down the value of the dollar, boosting the value of other currencies. With the end of QE, the dollar expectedly bounces back to its former exchange value and the other currencies decline as a result.

There are two reasons for ending QE. The money appropriated for the purpose of buying bonds in the open market has run out and Washington does not seem inclined to throw in more money into the program. Also, the US economy exhibited strong signs of recovery, making the anti-recession program unnecessary.

We should have seen this coming. QE is not forever. Yet somehow markets everywhere appear shocked that QE has ended. From Asia to Europe, investors rushed out of the market, causing a selldown that is probably excessive.

Analysts tell us that at 7,400 points, the Phisix had become too expensive. At 6,000 points, however, the local equities market has become too cheap. After the initial bout with panic, the expectation is that the local bourse will settle at around the 6,000-point level.

Confidence is high about the strength of Philippine companies. Most of them are generally well-run and profitable. Their fundamentals are robust.

The present selldown is therefore generally seen as a healthy correction. Some of the listed stocks have simply become too expensive. Money was too easy. That is never a good thing.

While money was easy and the going was too good, many of our companies began investing heavily in property development. There are fears that maybe a property bubble has begun to form. The selldown makes the formation of a property bubble less likely.

The easy money was due to the gradual easing of interest rates the past few years. The easing of interest rates was part of the general effort to fight off global recession beginning from the financial crisis of 2008. Lower interest rates generally encourage firms to borrow and increase investments, expanding economic activity in the process.

From this point onwards, however, we will likely see a gradual rise in interest rates. That will enforce greater discipline on firms and more prudence in investments. Unfortunately, that will also mean more moderate growth.

Forget about extending our over 7% growth performance for the first quarter. That was a fluke, brought about by a combination of hurried infra spending by government and election spending by politicians. We always have an uptick of growth during election season that does not carry through to the post-election period.

Much of the hot money that left our market the past few weeks did so in anticipation of the rise in the value of the US dollar. When the exchange rates move from this episode of volatility and settle down, expect some of the hot money to return to our market. That will help prop up the price of our stocks.

When interest rates were low, money was flushed from fixed-income instruments to the booming stock exchange. When interest rates begin to rise, there will likely be less speculation in stocks. That will encourage more realistic pricing.

What should be truly worrying is the net outflow of direct foreign investments in our economy. That is a bad sign. It indicates our economy has become inhospitable to investments. Even Filipino companies are looking to move capital to rising economies in the region such as Myanmar, Cambodia and Laos.

Government should work doubly hard at improving the investment climate. The decline in investments is the culprit behind rising unemployment.

It cannot be true, as President Aquino hypothesized, that unemployment rose because the weather was too hot and farmers postponed planting. The loss of jobs in agriculture is chronic. This might be reversed by introducing a comprehensive policy program that encourages capitalization of our agriculture, considering we can no longer increase our arable land.

There are ten thousand things to do to improve the ease of doing business in our country and our government has moved is a painfully slow pace in trying to address them. We cannot attract investments if our infra is deficient, our streets constantly clogged and our cities always flooded.

A recent UP engineering study calculates the economy wasted P1.7 trillion in gas because of the infernal traffic and a couple of hundred billion in lost manhours. That is the sort of pure waste we ought to have avoided had government been a lot more foresighted in anticipating the needs of our economy.

The stock market may bounce back a little over the next few weeks after this current slump. But fixing the basics of our economy’s competitiveness remains far beyond the horizon.