Duck and cover
Ben D. Kritz
AS a general rule, the significance of the performance of any stock market to its corresponding national economy is overstated. There are times, however, when the market actually does serve as the canary in the coal mine, giving warning of impending danger to the economy before it becomes obvious to everyone. In that sense, the Philippine Stock Exchange index (PSEi), which fell into bear market territory this week, may in fact be a suffocating bird.
The PSEi has been declining for some time, and crossed the dreaded bear market threshold – the level 20 percent below the market’s highest close – on Thursday. The PSEi settled at 7,063.20 to end the week, about 22 percent below its high-water mark of 9,058.62 back on January 29.
Outwardly, there does not seem to be much correlation between the market’s performance and the strength of the Philippine economy. In spite of some persisting concerns over the weak peso and higher inflation, the economy is still growing at a respectable pace. Likewise, the companies that make up the PSEi are in generally good shape; the index is free from any large scale problems like General Electric in the US, which was just booted from the Dow Jones after more than a century due to its ongoing collapse.
Analysts’ views on the local stock market largely align with the impression that the market is declining in spite of rather than because of the local economy. While the weak peso and inflation are noted as concerns, the greater balance of blame for the PSEi’s slide is directed at external factors; first, the likelihood of tighter monetary policy from the US Fed, and more recently, the disturbing implications of the escalating global trade war started by that horrible thing the Americans elected as their president. To a large extent, even the apparently local factors of inflation and a depreciating currency are attributed to factors beyond local control. Higher inflation is primarily the result of higher oil prices, and the peso is weaker because the US dollar is stronger, which in turn is largely attributable to the US Fed’s decisions to raise interest rates. And of course, the somewhat circular logic that the local market is weaker because other markets are weaker is also cited, although that seems to be an argument of convenience more than anything else.
Taken all together, the impression is that the stock market behaves independently of the overall economy, and this is a reasonable conclusion because most of the time it is correct. It may not be now, however, and the implications of signals that investors are anxious to reduce their exposure to the Philippines’ flagship companies – and by inference, the Philippine economy as a whole – should not be ignored.
Even though the Philippines is not directly involved in the trade war, at least not yet, it is going to be significantly affected by it; reassurances that the economy can ride out the crisis are unjustifiably optimistic at this point. Because of globalization, the prices of many goods will rise, even if they are traded between countries that do not impose aggressive tariffs on each other’s products, depending on the sources of their components or raw materials. For some other goods, prices will rise as exporters try to compensate for higher tariffs elsewhere. All of that is going to make imports more expensive for the Philippines; perhaps not to a great degree, but any increase will put additional pressure on the country’s trade gap. Some Philippine exporters might see a boost in their revenues if they are producing goods that are substitutes for others that are subject to high tariffs, but for the most part, Philippine products do not fit that description; thus, they are likely to feel the pinch as well as import buyers in other countries are forced to reduce or realign spending.
Inflation and the weak peso simply aggravate those conditions, and there is a growing sense that the BSP has waited too long to act to slow inflation, which would in turn strengthen the peso by slowing growth of the money supply. Even though Wednesday’s widely expected decision by the Monetary Board to raise its benchmark interest rates was the second in a month, its modest 0.25 percent increment was considered insufficient; the market’s fall into bear market territory happened the following day.
Economic policymakers should consider following the market’s duck-and-cover lead, and implement some protective measures before the warning signs actually turn into a legitimate economic crisis. A more aggressive monetary policy stance is obviously the first and easiest step to take, and the resulting decline in inflation and improvement in the peso’s value will go a long way toward calming public anxiety as well as boosting market sentiment. On a broader scale, the government should be circumspect in pushing its infrastructure development and tax reform agendas. Without stopping or seriously impeding the momentum of development, focus should be shifted to projects and initiatives that will be least affected by external conditions, which may mean postponing the otherwise sensible fiscal incentives reform package, and setting aside some larger scale projects in favor of smaller ones.
ben.kritz@manilatimes.net
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