Thursday, March 01, 2007

Save the Economy, Save the Philippines!

How can we make heads or tails about the Economy when we hear news that there was an 8% drop in the Philippine Stock Market, not to mention global markets everywhere? How does this affect us? What does make sense for us?

XYZ Corporation isn't poor by any chance. before it was formed, Sara and her brother Mike had some startup money. They had US$1,000 invested in the company. They were successful in selling Sweet Yellow Mangoes at the Local Supermarket in downtown Manila. They wanted to hit it big. Sell all over the world! Sara and Mike would ponder for days. Would they borrow from the bank? They could. But Mike's a finance wiz so he looked at the numbers and thought, it would be cheaper to open up their business to the Stock Market. So XYZ opened their store to the Stock Market, to grow their business.

Think of the Stock Market as a place, a real place like the mall. The companies listed in the stock market as real live stalls selling goods and services. Now, an investor John enters the market and sees XYZ Corporation. He tries out their Sweet Yellow Mangoes and says, "oh wow! this is great!" He listens to XYZ's President, Sara, who gives him their plan to rule every supermarket in the world. John is thrilled and since he's a real brainy guy knows XYZ can actually do it. So he gives US$10 to XYZ--- because he just believes in the product and the company and their management team. XYZ Corporation then gives John a receipt--- 10 certificates, one for each dollar that he lent out to XYZ as proof of investment. the stock market folks call it the stock certificate, which we will call "iou".

At the end of the week, John receives news that XYZ had successfully shipped Sweet Yellow Mangoes to the United States. Hotels, Supermarkets were buying metric tons of Sweet Yellow Mangoes so much so that for every US$1 that john gave, earned him US$0.50. XYZ's iou for John is now worth US$15. They made so much money that the company's value--- pretty much like the value of your real estate grew. Now everyone wants to give US$ to XYZ. In two weeks time, the Value of XYZ was US$20!

The Stock Market Index rose. it ended positive because everyone was expecting good news, profits everywhere!

A month later, John was looking at some numbers for the US economy. Americans were going to be buying less. They were putting away their money on 401ks (i.e. employer-sponsored retirement plan). John being a smart guy at once knew that XYZ and everyone listed on the stock market who were exporting to the United States wouldn't be making the same amount of money. So he calls the stock market and sells 5 of his iou certificates at the market price of US$2 for every iou.

At the same time, Gracy--- an investor herself was looking at the same figures that John was reading earlier. She saw the same "risk" that john saw and decided, she wouldn't want to risk her US$5 investment (now valued at US%10). So she calls in the iou.

Pretty soon everyone was selling their IOUs. And so the Stock Market registered a 10% drop in its value.

At the end of the day, XYZ's iou-value was priced at $1.50 instead of US$2 an iou when John sold his iou.

Did XYZ Corporation lose significant money? its not the end of the world. Not really because, Mike was a good finance manager that he had put aside enough money in the bank so that XYZ could still do business for the indefinite future. So his growers and employees would still be paid. XYZ could still pay the power company and the landlord. and since XYZ still sold Sweet Yellow Mangoes at a profit of 50%, they could still weather out the storm of the Stock Market. They may not sell as many mangoes as they would normally do if the Supermarkets and the Hotels in the US were buying their usual amount.

this is a snippet from the new york times:
"The managing director general of the Asian Development Bank, Rajat M. Nag, said in an interview in Hong Kong this morning that the economic fundamentals of most Asian economies remained strong. But the region remains dependent on exports to markets, especially the United States, where the growth prospects are cloudy, Mr. Nag said. China is among the most dependent of all, he said, with international trade in goods equal to 65 percent of its economic output last year."

So why did investors pull out of china? simply because they wouldn't be making the money that they think they would. they wouldn't want to "risk" their money. when investors looked at the us market and "saw" weaker economic figures and looked at asian businesses who are doing a lot of their business with the us--- they pulled out their money. who wouldn't if they'd lose us$?

is the world significantly at a lost? no it isn't. San Miguel Corporation would still be making Beer. Globe Telecom would still be selling Phone services. They all have money in the bank and thriving businesses to keep going. And even if they didn't they still have assets to use--- sell them to keep their businesses going or to borrow from the bank. What is the stock market but a place where people lend others money?

Money is like air and water. everybody needs air and water to live. the question is, how much of air and water do you have, do you need to keep doing what you do?

Now with regard to the Philippine Economy, what has changed with an 8% drop in the stock market?

Let's change our analogies and imagine we're Hiro Nakamura. Can we save the cheerleader, save the world? By saving the economy, do we save the philippines? Does it need saving?

Personally, I prefer looking at the economy from various angles:

a) how many people are employed,
b) how many people are NOT underemployed

which really means, if the economy is thriving, then more jobs are created.
c) how much is the non-performing loans of banks i.e. are people able to pay their loans, credit cards and mortgages etc.?

this can be an indicator of whether or not people can pay their bills. if more people can't pay--- the interest for future borrowings is higher, thus it'll be harder and more expensive to borrow money for future business/purchases.

d) inflation

A rate of increase in the general price level of all goods and services. (This should not be confused with increases in the prices of specific goods relative to the prices of other goods.) as defined here.

e) cost of electricity and power

is an important indicator because everything runs on power. if the cost of electricity is so high it can be detrimental to expanding a factory or increasing your office or setting up shop in a country.

f) how educated the future population is,

is an important indicator to me because it shows what's next. people die and are replaced, will those that replace the current workforce be up to the task? i.e. like looking at a computer part. will say a certain type of ram be still available in two years when my computer might need replacing ram or would it force me to scrap the new computer and opt to buy a new one because future ram won't support this infrastructure?

g) what industries are growing,

tells us what opportunities are on hand and where a country's particular strengths are at the moment. when you look at the philippines for example you see a consumer driven society. we consume but how much do we consume and can we match them with our productive output. i.e. you breathe oxygen in, you have to breathe out carbon dioxide, right?

h) gdp--- the rate by which an economy grows.

GDP is the total value of goods and services produced by a nation as opposed to Gross national product (GNP) which is the value of all final goods and services produced by a nation in a given year, including income earned by its citizens abroad, minus income earned by foreigners from domestic production.

i) is the government on a budget surplus or deficit?

is the government making or losing money? like any business, it shouldn't lose money or shouldn't spend more than it has.

Isn't it the Economy stupid or does this mean Mrs. Arroyo is doing a good job as President as she claims to?

Why don't we rate her according to this simple list and based on our reasons above.

a) how many people are employed,
b) how many people are NOT underemployed

According to NEDA 7.3% are unemployed (figure from last quarter) and 20% (figure from last quarter) are Underemployed meaning, they have jobs but are over qualified for it. Assuming we have 80 million souls and if our working population is ~40 Million, then 7.3% is roughly 3 Million people. Out of the 37 Million people with jobs, then 7 Million people are working in jobs that are beneath their educational attainment. call me demanding but isn't that one person too much without a job and one person too much working in jobs they're over qualified for, don't you think?

our rating for these two conditions: 2 x 0.0 = 0 Gold Stars.
c) how much is the non-performing loans of banks i.e. are people able to pay their loans, credit cards and mortgages etc.?

This is being contained and is improving year-on-year since Erap's time, thanks to excellent care our Banko Sentral people have been doing over the years. President Arroyo had the good sense to let them do their job.

So 1 Gold Star!

d) inflation

inflation is contained at 4%.

Let's give her 0.5 Gold Stars

e) cost of electricity and power

is still too expensive to increase productivity or spur new ventures vis-a-vis our neighboring country. How can we expect to build more factories, to spur jobs if this cost skyrockets?

0 Gold Stars

f) how educated the future population is,

the educational capability of our people is in terrible shape. test scores as rated by the DEPED is dire. Does this really mean that our people can't think? That our people are not thinkers? May be we'd be better off encouraging young people to try out the movie business?

g) what industries are growing,

NEDA reported strength in the services sector (7%) but lackluster agriculture and manufacturing performance (range of 3% to 4% for both), i.e. more poor people in the countryside aren't making money, and more people are working in jobs like call centers.

0.5 Gold Stars for the performance of the services sector.

h) gdp--- the rate by which an economy grows.

Am I the only one who isn't satisfied by the government line that we are doing 5%-6% growth? i don't think thats enough. I think that is mediocre performance. I believe we can do 8% to 10% and when we do, you'll know we're on the right track.

0.5 Gold Stars for holding the line.

i) is the government on a budget surplus or deficit?

This is really the best thing President Arroyo has done. Seriously. Government is correcting our budget deficit and we should be on track for a surplus, if all goes well. Is this something to do with credit ratings and creditors? of course. our government needs to borrow money and to pay for money. we're no different from an american who uses one credit card to pay for the last credit card that he maxed out. being in debt isn't a bad thing. the important thing is you actually pay for the money you borrow and the money that one borrows is actually used to spur development. the latter part is where we go wrong 99% of the time. So we're forced to raise taxes, which is really no one wants to pay.

Why is it important to balance our budget? Imagine always spending more than you earn per month. you'd never earn money or save it, right? so what happens in the future?

1 Gold Star for this job.
Lets count our gold stars. Mrs. Arroyo's score is 3.5 Gold Stars out of 8 Gold Stars or 43.75%. ;)

is that good enough for you?

What can we do?

What can you do for your country? Would you believe me if i tell you that there is much we can do, as private citizens? And would you believe me, if I said that people are already doing it?

As Milton wrote: "they also serve those who stand and wait". We can be heroes for our country in our own little way and still be a hero like Hiro.

A lot of us can't hire more people for our businesses. But we can sure do a better job at running it and growing it, so that some day, maybe our companies can be bigger and can contribute more. Filipinos everywhere can help prepare their kids for a better future. make them have a balanced child-school life. teach kids better values. get them to be more creative thinkers (not just singing and dancing and playing--- but innovative out of the box thinking). Get them to exercise some responsibility for their lives and we can avoid unwanted pregnancies for example. If you're an OFW, dream of a better future. Maybe think of how your money can best improve your family's lives and make every lonely day worth it. If you're an immigrant and want to help out, may be you could help put a niece or nephew to school. A lot of people are doing these things already.

There are still loads of ways for you to do your bit for your Motherland. None of them, blaming politicians for our state of the nation (though there is a lot for them to account for) but does that really help? We keep working, we keep trying to improve the system by following rules and voting for the right people (or at least try to). Why? because most of those things-- GDP, inflation rates, unemployment rates, interest rates etc., are not in our hands. It isn't to say, there isn't plenty for us to do, so we should do the things that we can.


Paskalino Semirana said...

Hi, cocoy-

I am one of the original "Get Realers" going back about a decade. While I know that your intentions are good, this article is simply too verbose and poorly composed to the movement justice. The analysis is also misguided, although well-intentioned. Hope you can come up with better.

cvj said...

I think your explanation and the subsequent list is balanced and thoughtful. i agree with your observation about the 5 to 6% GDP growth. At 2% annual population growth, and assuming that the benefits of growth are distributed evenly, on average it will take 18 to 24 years for a person's income to double. That's almost the entire working life of a Filipino worker.

benign0 said...

You're spot on with the first recommendation you make about the average Pinoy entrepeneur -- do a better job at running and growing their business.

The Chinese run their businesses on the principle of sacrificing profit margins and going for volume to boost absolute income. Pinoys on the other hand seem to go after the quick profit and lack a long-term vision for their businesses.

That is why in a matter of several years, the old Chinese balut and taho vendors moved on whereas many native Pinoy taho and balut vendors who replaced them have been at it for decades.

The future is also bleak for the next-generation of Pinoys. A whole sector of them -- the offspring of OFWs -- is growing up half-parented and spoiled rotten by easy OFW remittance cash.

Bleak indeed.