Category: economy

Bigas, Koryente, Gasolina — pamahal nang pamahal

Good to know that we are not imagining it, that government’s inflation figure — 3.8% in April — hardly reflects the inflation that the common tao struggles with on a daily basis in terms of the increase in prices, year on year, of daily essentials rice, electricity, and gasoline,

‘IN-OUR-FACE’ INFLATION
By Orlando Roncesvalles
Letter from Dumaguete

Rice, electricity, and gasoline

Electricity bills can shock, like the live wires in the 220-volt outlets. Doomsayers will have a field day, and cynics will peddle conspiracy theories even as we experience de rigeur brownouts. We need a superhero to deal with a blooming power crisis. Hmmm. We need a cha-cha fix.

The Dumaguete MetroPost reports that Noreco I and II bills show residential electricity has reached P14 to P16 per kilowatt hour, up by P0.87 and P1.40 from the previous month. The news raises questions about affordability and whether alternative sources such as residential solar energy or ‘mini’ nuclear reactors are viable solutions. The latest editorial in the paper advocates energy conservation measures. It left out going to a porch or veranda with a nice cold cocktail. The better to forget.

The bill shock is a ‘perfect storm’ brewed from seasonal demand and a higher supply price. These two phenomena reinforce each other, leading to a ‘double whammy.’ A third whammy is on the way. Why? Because bad luck comes in threes. Surely, I jest. Keep your fingers crossed on two.

A national official blames “the pass-through cost from the power suppliers.” The pass-through cost shows up as ‘generation cost’ in our electricity bills. This raises a more challenging question: Why are generation costs higher? Noreco II explains that these costs follow a seasonal pattern, rising in the summer and falling later in the year.

But there is no denying that electricity prices have risen. For decades, the story behind electricity prices has remained complicated. Is there too little supply? Yes. Do the power producers compete to lower the price? A few players dominate the market. Is there a problem of red tape that inhibits the entry of more players? Yes. Has government regulation over distribution utilities cut the costs charged to the consumer? We’re still determining. Is the exchange rate a factor? Only sometimes, because the peso fluctuates. Are prices sensitive to imported inputs? Yes.

The inflation issue isn’t just related to finances. It is also psychological. We are creatures of habit. The P500 bill was yellow and comfortable. The polymerized blue P1,000 bill has now become more commonplace. The value of daily transactions has risen faster than monthly incomes. We wish we were like the Argentines who bravely lived with inflation. Or like Henry Higgins getting accustomed to Eliza Doolittle’s face in My Fair Lady. Some search for an antidote in the crypto rabbit hole. The economists say it’s just another tax we cannot evade. Pay it and forget it.

While the educated elite may find an uneasy peace with the official inflation rate (see below), the common tao struggles. He can feel the prices of rice, electricity, and gasoline. These three commodities — called necessities — figure prominently in his limited budget. A measure of inflation focused on these goods is one that we can label as ‘anecdotal’ or ‘memorable.’ The number we get will stick to our brain cells even if the official inflation number does not.

The year-on-year price increase for rice was 21% in May. Local well-milled rice sold for P51.42/kg, compared with P42.50/kg a year ago. For electricity, the local utility (Noreco II) set the residential power rate at P14/kWh, compared with P12.79 in May 2023. This gives an electricity inflation rate of about 9.5%. Gasoline in the Philippines sold for P64.40/liter in May versus P59 a year ago. The gas inflation rate is about 9%. A simple average of these inflation rates is 13%. This memorable inflation rate is unbearably high. (Interestingly, the official inflation rate is much lower at 3.8% in April.)

But what accounts for the disconnect between the low official inflation rate and the high one for the ‘survival’ commodities? One possibility is that the prices of other consumer goods have not risen much or may even have declined. Someone from the Philippine Statistics Authority can explain. A further explanation is that the prices of these three goods are very volatile.

Does the disconnect even matter? Yes, for government officials who have to decide on mandated wage levels. The same goes for political leaders with a support base in the C-E classes. These voters suffer the most with memorable inflation. Economic managers also have to pay attention to the disconnect. They may become complacent with the low official inflation and urge the Bangko Sentral to cut interest rates prematurely.

The disconnect and both types of inflation will inevitably disappear. This is because economists assume or expect the relative prices between various goods to stabilize in the long run. The question of how long before both inflations converge is nonetheless uncharted territory. The answer will depend on how persistent the short-run factors, such as ‘shocks’ and ‘policy mistakes,’ are.

Can we forecast the inflation rate for the three goods in the next few months?

According to economists at the World Bank, the global rice market has been tightening. This is due to a ‘Niño’ effect and to export restrictions by the major rice-producing countries. Unless the government decides to subsidize the retail price or reduce the import duty on rice, we are in for a rough ride. Proposals to allow more rice imports will do little to reduce the local price. But at least there would be supply. So, no long lines to buy rice.

The world oil market and the peso-dollar exchange rate drive gasoline inflation. Even if the world price were to stabilize, the peso has lately been falling. For thinking purposes, we assume that the exchange rate stays where it is. The so-called ‘base effects’ will give us the near-term inflation rate in this scenario. Base effects mean that the inflation rate is calculated using current prices (P64/liter) compared with the average June through August 2023 price of P63.8/liter. This means that we can project a zero inflation rate for gasoline. Good news!

Electricity is more of a mystery. Taxes and subsidies can shift the balance between demand and supply. So can rule changes for the major players in the evolving electricity market. The entry of solar energy has ramped up with technological advances and lower prices for solar panels. At the same time, it is still government policy to push for economic growth. The net effect on the price level is possibly a wash, similar to what we might project for gasoline.

Electricity pricing by Noreco II could stabilize at P14/kWh. The base effect suggests an inflation rate of 12% (from an average price of P12.47/kWh for June-August 2023).

An approximate ‘base effect’ inflation projection for the three products in the next three months would be around 8%. This is based on zero inflation for gasoline and 12% for electricity and rice. Such a projection assumes an unchanged peso-dollar exchange rate. I surmise that inflation will remain persistent, like a disease that requires a lifestyle change.

All is never lost. Containing memorable inflation is no pipe dream. We can do our civic duty by changing our bad habits. Rice makes us fat anyway. We can reset the thermostats on our air conditioners and walk or ride bicycles. Our local governments can build nice sidewalks and bike lanes. We can also pray that the peso will strengthen. Civics are good. Honda thought so.

Some suggest that the government should impose price controls or targets. Never mind that such policies require subsidies and new taxes. They can also result in shortages and long lines. Will that be politically correct? Will the voters in next year’s election care? Time will tell. Space doesn’t know.

The Stoics claim that what matters is the line between things we can and cannot control. Aside from a renewal of civic virtues, memorable inflation is beyond our human ken. That is the province of gods, statesmen, and legislators. The official inflation rate is less problematic. It will remain within the 2-4% target range that the Bangko Sentral has set. That promise is easy enough to keep, especially if memorable inflation dissipates.

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Author’s email: ORoncesval4@gmail.com; Twitter: @ORoncesvalles

Maharlika — everything, everywhere, all at once

Pasting this in full before it gets paywalled.

By Stephen CuUnjieng

SIGNED, sealed, delivered — it’s yours. Now what do we have with Maharlika and what will they do with it? I have previously said I am supportive of a national development fund. Preferably one like Indonesia’s, but at least the Senate improved on the House version. Still, would it be the way I would do it? No, but I am not the president or a senator, so what should the managers and board do with what we have?

It is clear as can be seen from the rushed document that there are even sloppy typographical errors that could have been cured with a little proofreading. In the section on the Bangko Sentral ng Pilipinas (BSP), the bill mentions “the monetary board” when it clearly should be “the Monetary Board.” Was that so hard to miss, and correct? What else might be there?

More important, there are contradictions or at least ambiguities, which should have been worked out, unless they were intentional. If the latter, then I would be worried. Sec. 2 on the “Declaration of Policy” seems to imply without being explicit that this is a national development fund from what the aims are. Yet there is no provision delineating this or limiting the breadth of what the Fund can invest in or where. Then in Section 14 on what the Fund can invest in, it reads to me like “Everything, Everywhere, All at Once.” Literally any type of equity, debt, or hybrid debt or equity plus joint ventures anywhere is allowed. That was carried over from the bill passed by the House. This does not seem in line with the “Declaration of Policy” in Sec. 2. If I was charitable, I could argue that this is where to park the money, starting with the initial P75 billion until they make the long-term investments but that is something the board and management may choose to follow, impose or ignore. If the latter, then it is no longer a national development fund but a regular fund with unlimited scope.

Short-term, long-term

Let us even argue that this broader scope of permissible investments is just “short-term” until the long-term investments are made. What if they lose value in the meantime or are so illiquid that they can’t be liquefied to fund the long-term investments? Why do I worry that Sec. 14 was not meant for just short-term investments, i.e. for the money on hand until the long-term investments are made? If it was just short-term, why would that section allow joint ventures and unlisted securities which are not liquid, short-term, or easily sold? If for the long term as well, then why is there no limitation on where and what the Fund can invest in? Again, it seems to be the old provision from the bill passed by the House and just carried over without clarifying what it meant, unless they really plan for it to be open-ended. Unless that was the intent and the Declaration of Policy was just principle that the Fund’s board and managers could comply with in whatever way they want to. So, in reality, full discretion. If so, then it really is the old House bill version with some statements of principle but no implementing or limiting provisions, which is an all-encompassing fund and not a national development fund. If that happens, then I worry and I don’t think that is a very good use of proceeds or worth the trouble and use of funds from the various government sources as Sen. Imee Marcos pointed out. Frankly, the government through existing entities can do that already, so why create something new and use profits of the Bangko Sentral (BSP) which are better used building up its own balance sheet? More on that later, but as Senator Marcos pointed out this is not coming from a windfall. The funds are being allocated away from other potential uses of funds by the DBP, LandBank, BSP and the national government.

Open-ended

On June 3, Sen. Mark Villar, the principal author of the bill which has become law, basically said it is both a general fund that can invest in anything and a national development fund. That means it is open-ended and really can be anything, unless the board and management choose to limit the Fund’s scope voluntarily. The board and management have the discretion to allocate what percent to a general fund and to the development side. Should they decide, that scope can also be changed by subsequent boards and managements.

Then there is the way the Fund is being funded. Most mutual funds that invest in public debt and equity are fully funded from the start and fully invest their funds in a short period of time. Unless they are open-end funds and raise new capital, they sell some of their holdings to buy other stocks or bonds. Most private equity firms that invest in unlisted securities (as at least what should be the national development fund side is targeted to do), usually get commitments but only call the funds when needed. What does that mean? Let us for example say XYZ Fund raises $1 billion in commitments from 100 investors who for simplicity commit $10 million each. At that start, there is no money in the fund, except perhaps an initial call of 5 percent or less for organizational purposes. So, in this case all that is put is $50 million. Then they decide to make a $100 million investment in a company or project, the Fund will receive 10 percent, or $100 billion, from the investors who will each send $1 million, or 10 percent of their commitment. This continues until the Fund is fully invested or the Fund reaches the end of its investment period. That way there is no worry about what to do with the money until the Fund makes the investments.

Here we are starting with zero targeted investments but P75 billion in funds. What will the Fund do with this pending use of proceeds? It also reads that this Fund will continue to be funded until it gets to P500 billion regardless of whether the Fund is making the envisioned long-term investments or not. Or is it profitable or not. Not the normal way it is done. For example, GIC manages the reserves of Singapore. Their private equity fund and investments in global private equity funds don’t send the money ahead except for calls for management fees and the like. They usually send the funds when investments are made. It is different if you are a windfall fund like Norway where revenues from their sale of oil is managed but this is not the case here. While sovereign funds are not limited to those with windfalls it is unusual when there is no windfall or revenue stream to fund ahead of commitments. Even more odd if what is envisioned is a national development fund and not a sovereign wealth fund, then as I put it, why can Maharlika invest in everything, everywhere, all at once? I suppose because it is a two-in-one fund, but those two are at cross-purposes.

Most problematic

Then there is the matter of using the profits of the BSP. Central banks, especially if you are not fortunate to be from a reserve currency like the US or European Community, are never big enough. Most prudent governments want to build the asset base of their central banks as fast and as much as they can to have the wherewithal to act in a financial crisis whether homegrown (like we had in 1983-1985) or regional (1997) or global (2008 and Covid and this year after the Ukraine invasion), which happen with regularity and more so recently. Under the BSP law, 100 percent of the profits of the BSP are returned as additional capital. Well, not anymore. The Senate version adds that “the monetary board (sic) can recommend to the president” that the investment of their profits to Maharlika be deferred if needed. Note, it is the president who decides, not the independent central bank and Monetary Board. Also, the nature of emergencies and crises is they are usually unforeseen, hence the need to prepare for their possibility ahead of time and not post its occurrence. When it happens, the central bank will have to use what resources it has and not be able to recall prior profits given to Maharlika or wait for the forthcoming profits and defer sending that if the president agrees. Frankly, this is the most problematic provision of Maharlika for me.

That analogously, is also the issue with using DBP and LandBank as funders. It lessens what is available to lend and by about 10 times the amount they invest in Maharlika. Why 10 times? Regardless of how they find it, what the LBP and DBP invest in Maharlika is charged to their equity. In their respective cases, initially P50 billion and P25 billion. Now a bank needs about 10 percent Tier 1 capital. So P1 in capital supports about P10 in loans and other debt instruments. As the Maharlika investment is charged to their equity, that means up to P750 billion less lending for both. Can the Bankers Association of the Philippines and BSP confirm if I am correct? I hope I am wrong but if I am right this is something to carefully assess and suggest the administration consider.

Especially given the clashing goal of merging LBP and DBP to make them bigger so they can be more efficient and lend more. How is that accomplished by taking away P750 billion in lending capacity up front, even while Maharlika has yet to find investments, and this will continue if the capital investments continue for these two banks.

Let me put it analogously. If it was too imprudent to let the pension funds like SSS and GSIS invest in Maharlika and are permanently barred, wouldn’t the same logic apply to the BSP given their need to constantly build up their balance sheet and resources to defend the peso and stabilize the economy as needed? Same with DBP and LBP if they are to fund infrastructure, development and agriculture. Why take away equity which will result in 10 times reduction in lending capacity?

Let me leave discussion of management, organizational structure and funding to another column. If we had to have a government-funded investment fund, I wish it was a national development fund, similar to the one Indonesia is trying out. That is not what Maharlika is. It could be implemented as a national development fund, but what is provided by the law is open-ended. It seems to be some hybrid fund whose direction is open to the board and managers but whose funding is set.

In the week since its passage, I have been listening to all the arguments of the government officials on how this will help Philippine infrastructure and so on. I agree if the Fund dedicated its resources to be a national development fund, it could. If that was the intent, then why did they set up a Fund that could invest in everything, everywhere, all at once? And why is that part not being explained?

 

NO to BBM’s Maharlika Wealth Fund!

“Honorable Senators of the Republic” by Diwa C. Guinigundo https://www.bworldonline.com/opinion/2023/02/16/505267/honorable-senators-of-the-republic/

“Investing a mountain of debt?” by  Diwa C. Guinigundo https://www.bworldonline.com/opinion/2023/01/12/498061/investing-a-mountain-of-debt/

“In the bag, ho ho ho!” by Manuel L. Quezon III
https://opinion.inquirer.net/159692/in-the-bag-ho-ho-ho

“More critical than Maharlika” by Cielito F. Habito
https://opinion.inquirer.net/159649/more-critical-than-maharlika

“Maharlika is the new government” by Ma. Lourdes Tiquia https://www.manilatimes.net/2022/12/20/opinion/columns/maharlika-is-the-new-government/1870966

“Will Marcos Jr. take up Maharlika Fund at Davos?” by Satur C. Ocampo  https://www.philstar.com/opinion/2022/12/17/2231329/will-marcos-jr-take-maharlika-fund-davos

“Maharlika muddle” by Stephen CuUnjieng https://www.manilatimes.net/2022/12/16/opinion/columns/maharlika-muddle/1870530

“Maharlika foolish, corrupt – critics” by Jarius Bondoc
https://www.philstar.com/opinion/2022/12/14/2230635/maharlika-foolish-corrupt-critics

“ENRILE URGES MARCOS: Review Maharlika bill” https://www.manilatimes.net/2022/12/14/news/review-maharlika-bill/1870127

“Upping the ante by doubling down” by Manuel L. Quezon III
https://opinion.inquirer.net/159500/upping-the-ante-by-doubling-down

“Why the Sovereign Wealth Fund is still problematic on many levels” by Andrew J. Masigan
https://www.philstar.com/opinion/2022/12/14/2230636/why-sovereign-wealth-fund-still-problematic-many-levels

“Decorative” by Alex Magno
https://www.philstar.com/opinion/2022/12/13/2230386/decorative

“Maharlika Wealth Fund: Devil is in the details” by Teresa S. Abesamis
https://www.bworldonline.com/opinion/2022/12/13/492801/maharlika-wealth-fund-devil-is-in-the-details/

“Imploding” by Alex Magno https://www.philstar.com/opinion/2022/12/10/2229774/imploding

“Who Wants the Maharlika Wealth Fund?” by Solita Monsod https://marengwinniemonsod.ph/2022/12/10/maharlika-wealth-fund/

Maharlika Investment Fund ‘beyond repair,’ says Economist & National Scientist  Raul Fabella https://newsinfo.inquirer.net/1703562/mif-beyond-repair-says-natl-scientist-in-economics

Economist Winnie Monsod reacts to Maharlika Fund proposal [“Ridiculous!”] https://www.youtube.com/watch?v=919ww8jbzBk

“Fumble” by Boo Chanco https://www.philstar.com/business/2022/12/09/2229496/fumble

“Maharlika conundrum” by Stephen CuUnjieng https://www.manilatimes.net/2022/12/09/opinion/columns/maharlika-conundrum/1869617

“Death blow for a dumb idea” by Ben Kritz https://www.manilatimes.net/2022/12/08/opinion/columns/death-blow-for-a-dumb-idea/1869481

“Blink thrice if you don’t mean it” by Manuel L. Quezon III https://opinion.inquirer.net/159368/blink-thrice-if-you-dont-mean-it

“Defeat” by Alex Magno https://www.philstar.com/opinion/2022/12/06/2228787/defeat

“Drop the Maharlika fund” by Cielito F. Habito https://opinion.inquirer.net/159331/drop-the-maharlika-fund

“Maharlika Fund idea is incredibly obtuse like, ‘what are we in power for?'” by Yen Makabenta  https://www.manilatimes.net/2022/12/06/opinion/columns/maharlika-fund-idea-is-incredibly-obtuse-like-what-are-we-in-power-for/1869196

“Business groups, economists issue joint statement on ‘Maharlika’” by Ma. Stella F. Arnaldo https://businessmirror.com.ph/2022/12/06/business-groups-economists-issue-joint-statement-on-maharlika/

“Are we ready for a sovereign wealth fund?” by Randy David https://opinion.inquirer.net/159282/are-we-ready-for-a-sovereign-wealth-fund

“Cronies wealth fund?” by Boo Chanco  https://www.philstar.com/business/2022/12/05/2228516/cronies-wealth-fund

“The Maharlika Fund: A Pricey Stud Or A Milking Cow?” by Heneral Lunacy https://heneralunacy.wordpress.com/2022/12/05/the-maharlika-fund-a-pricey-stud-or-a-milking-cow/

“Keep your hands off our SSS, GSIS money” by Jarius Bondoc https://www.philstar.com/opinion/2022/12/02/2227919/keep-your-hands-our-sss-gsis-money

“Maharlika Fund: Dubious, pretentious and self-serving” by Sonny Africa https://www.ibon.org/maharlika-fund-dubious-pretentious-self-serving/

“The Maharlika Wealth Fund” by Filomeno S. Sta. Ana https://www.bworldonline.com/opinion/2022/12/04/490838/the-maharlika-wealth-fund/

“13 reasons why WE OPPOSE House Bill 6398 (Maharlika Investment Fund/PH Sovereign Wealth Fund)” by David Michael San Juan https://www.facebook.com/lastrepublic/posts/pfbid0scC3HnBcZyvpdS1fr7ZP1j1ZH2jyUW1vcYgnBAk6mmUoWnmLC1Pxp4iUcdBfUengl

“Galawang Marcos. Another Corruption Scheme in the Making!” by Ed Lingao https://www.facebook.com/100083035164368/videos/679806213550044/

“More fun(d) in the Phl” by Ana Marie Pamintuan https://www.philstar.com/opinion/2022/12/05/2228532/more-fund-phl

Dollar diarrhea

As usual it’s OFW remittances that will keep us afloat somehow. And as usual America doesn’t care about the impact of their mopping-up operations on the rest of the world.

By CIELITO HABITO

With the peso-dollar exchange rate now seemingly courting P60 to the dollar, our economy appears to be suffering from a case of LDM, or loose dollar movement. Dollars are indeed flowing out of the country for various reasons, foremost being how the US economy is sucking in its own currency with its rising interest rates.

The US Federal Reserve Bank has been deliberately raising its rates to mop up too many dollars in circulation, which has caused inflation rates Americans have not seen in decades. High-interest rates make US financial investments more attractive, unless other countries match the US interest rate hikes point by point. But central banks have various reasons not to match the US Fed’s moves, especially because higher interest rates also stifle investments, production, jobs, and incomes.

Such is the predicament our own Bangko Sentral ng Pilipinas (BSP) faces. It saw no need to match US interest rate hikes point by point earlier on, as our own inflation has not been as high and was more due to supply disruptions (especially in meat and fish), not too much money going around. But then Russia invaded Ukraine, which affected supplies and pushed up prices of our vital imports like fossil fuels, fertilizers, and wheat, fueling further domestic inflation. It also led to greater outflow of dollars to pay for the now more expensive imports, adding to the dollar diarrhea, further raising the exchange rate. But a rising exchange rate actually favors a lot of people: workers in export, tourism, and import-competing industries (whose competing imports get more expensive), families of overseas Filipino workers receiving remittances, and workers who get jobs in new or expanding foreign firms that now find investing in the country cheaper. A peso that has lost value is, after all, also a more competitive peso. Thus, the BSP does not fret over a depreciating peso as much as it does with rising inflation.

But things changed by the time the exchange rate had risen by more than the inflation rate because that now meant that the exchange rate rise would worsen inflation itself. And given that managing inflation is BSP’s primary mandate, it must now stem inflation—and depreciation—with tighter money supply, which means raising interest rates, even if it means further dampening the already dampened growth of the economy. That means stifling jobs, if not killing them outright. Many argue that growth is not everything, and that controlling inflation is more important, but it’s hard to tell that to those who are unable to find jobs or losing their jobs outright.

There are two important things to note about the current peso depreciation. One, it is almost entirely caused by the rising dollar, and completely external to us. It can be seen in how the peso’s movement has closely tracked that of the euro and Japanese yen, two of the most important reference currencies for the dollar. This means that all other currencies closely linked to it have also been drastically losing value, including the mighty British pound which is now almost at parity with the dollar, as Britain braces for great economic troubles ahead.

Two, while it is said that the peso has been the “worst performing” currency in Asean and possibly Asia since the start of the year, we could also describe it as having become the most competitive currency, for reasons already explained. In fact, while major economies are now bracing for recession through next year, the Philippine economy remains positioned for robust growth, albeit slower than earlier projected. And much of that growth will come from how the effect of remittances, which have traditionally driven our consumption growth, will be boosted by the peso depreciation—not to mention its push on tourism, exports, and foreign direct investments. Still, we must expect things to get worse before they get better.

So, what can we do to weather the difficulties ahead? At the individual level, the same simple advice I heard back at the height of the Asian financial crisis in 1998 holds today: produce more, consume less, and share more. That could well be the way to minimize the pain for all of us.