October 30, 2000, BusinessWorld, Business sector fears economic depression, by Romulo T. Luib, Yasmin Lee G. Arpon, Cecille E.Yap, and Marites S. Villamor, with Leotes Marie T. Lugo, 

A peso-dollar exchange rate of PhP51 can be a manna for the well-leveraged exporter, but is an undeserved scourge for many a small manufacturer who has to contend with a range of rising costs: interest rates, imports, power and transport fees. The future can even be more gloomy for labor. 

Indeed, not a few exporters are making a windfall, but a greater number of manufacturers selling in the domestic market may have to face the difficult task of shutting down factories and letting workers go. Businessman Herman Montenegro, former president of the Philippine Chamber of Commerce and Industry (PCCI), tells of an experience that illustrates this irony: his activated carbon exports plant is reaping nice margins, but he had to temporary close his floor tiles factory the other week. 

"We call this a recession, a correction in the economy. Wait until this is prolonged and it can slide into a depression. We'll go that way unless the economy picks up," he told BusinessWorld in a telephone interview. Though he acknowledged the country's economic fundamentals are "still good," he said "the crisis will get worse before it gets better." The bottom issue, he said, "is confidence and unless the leadership can restore that, we will continue to sink." 

It is a political problem rubbing off on the economy, agreed Escolastica Segovia, a former government executive who is now vice-president for operations of a garment exports firm. It will be noted the peso had just slightly recovered from speculative attacks triggered by the Mindanao conflict when President Estrada was accused of pocketing tobacco excise tax collections and payoffs from operators of an illegal numbers game, popularly known as jueteng. 

The local currency has since been on a tailspin, crashing below PhP51 to the US dollar last week. "The problem is instability of the peso. And we have to deal with the uncertainty," she told BusinessWorld, also in a telephone interview. Although admitting that garments firm Gelmart Industries Phils., Inc. is benefiting from the peso depreciation in terms of increased export earnings, Ms. Segovia said, "We also have foreign-denominated loans and the new exchange rate does not put us in a better situation." 

A businessman prefers dollar loans apparently due to lower lending rates, but the political drama clouding the real value of the peso has become a source of trepidation. And, of course, one has to take stock of the situation before borrowing as peso lending rates take flight. 

Mr. Montenegro noted the possibility of some exporters gaining handsomely. "But that must be qualified," he said, adding the gains can be derived from the value-added local components, including labor -- "if that does not go up further." 

In the case of his Pacific Activated Carbon, the gains can be considered huge because it uses 100% coconut shell charcoal. But then again, the money costs are a big portion of production expenses and, thus, the segregation between exporters making money and those facing difficult decisions concerning working capital "depends on how leveraged you are." 

With the prevailing peso interest rate, "the small (manufacturer) would really die," said an executive of a major jeans exporter who refused to be named. "Well, not in my case. Not much adverse effect for us because we get our imported raw materials on consignment basis." Many in the labor- intensive garments industry borrow dollars for working capital. "Only about 10% is financially stable and can live without dollar loans," the executive said. 

Beyond the woes related to interest rates, the plight becomes all the more taxing for those dependent on the domestic market as the peso's purchasing power weakens. Mr. Montenegro runs the HM Montenegro Group of Companies, "quite an international group" with reliable financial resources, as he described it. Yet, he decided to temporarily shut down Titan Megatiles Industrial Corp., a producer of PVC (polyvinyl chloride) floor tiles which employs 50 workers. 

The tile factory buys raw materials overseas and sells in the local market where the construction industry has had to contend with an anorexic appetite. "I have to restructure the firm. We're considering exports to improve viability of the business," he said, noting local hardware stores are having a hard time selling PVC tiles. 

All businessmen BusinessWorld interviewed said they understood the need for the Bangko Sentral (Central Bank) to mop up puddles of liquidity in the banking system to constrain speculation. "But (the rising interest rates and the prevailing instability of the peso) will kill exporters, particularly small and medium enterprises," Ms. Segovia said. 

"It's true there is a windfall," she said of profits exporters make on payments of orders made when the dollar was about PhP40. "But this is wiped out by the uncertainty that is killing us now." Banks may have been calling on exporters, preferring them over firms dependent on the local market, but the money costs are not as inviting, she said. 

Mr. Montenegro warned that if such "rudderless government continues, even the domestic investors will not invest. Then there will be deterioration of the labor ranks. And when people starve, that will be the last straw for President Estrada." 

EXPECTED BALM 

But despite the continued fall of the peso, the country's chief economist remains optimistic the exchange rate and the economy in general will stabilize within the next two months. Socioeconomic Planning Secretary Felipe M. Medalla's optimism hinges on the expected influx of dollar remittances from the millions of overseas Filipino workers (OFWs) as well as the realization of investors of President Estrada's political resolve to stay in power. 

"Once the market sees the President's strong political position, it is very clear the market will react positively," Mr. Medalla said over the weekend. Mr. Medalla, concurrent director general of the National Economic and Development Authority (NEDA), repeated the standard line of the government that OFW remittances, export earnings in November and December, coupled with the economy's stable fundamentals, should help prop up the peso. 

He said the last two months of the year is the time when OFWs send dollars to their families here, thus boosting the peso's value. Mr. Medalla said the economy has gone through trying times this year, including the fall of the stock market following the jueteng scandal. But while the market tends to react to these news, experience shows the reaction tends to be self-limiting. 

He said this was the same case in May when the market fell following two mall bombing incidents in Mandaluyong and Makati in central Metropolitan Manila. He noted that while the stock market fell, it immediately corrected. Bangko Sentral director Diwa Gunigundo, however, assured the present high interest rates regime is a temporary situation. 

"We have always assured the public that we don't expect this situation to last long. Once the system stabilizes, we will bring down interest rates," Mr. Gunigundo said during the radio-television program JEEP ni Erap last Saturday. He said the central bank had to raise interest rates to keep the peso-dollar exchange rate from spinning out of control. However, he could not say when the present situation will end. 

OUT OF THE QUESTION 

Press Secretary Ricardo V. Puno, however, admitted imposing currency controls similar to what Malaysia adopted at the height of the 1997-98 regional currency crisis was considered but immediately thumbed down. "We're in a very, very different situation from Malaysia. Although I will acknowledge that there have been some proposals, I think that has been dismissed by the economic managers," Mr. Puno said in an interview last Friday. 

He said the proposal, which included fixing the peso-dollar rate, came from various sectors. "It's been raised in a very, very general sense," he said. He said the economic managers also considered the huge foreign exchange reserves of Malaysia, which amounted to close to $40 billion when it imposed currency controls, compared to the Philippines' estimated $15 billion. 

For now, a fixed rate is out of the question. "Unless there are further arguments why it should be done. But I know that it was considered but it was felt that it would be unwise to do it at this time," Mr. Puno added. The continued depreciation of the peso-dollar exchange rate will make life difficult for most Filipinos, but Mr. Medalla hopes this will be "temporary." Mr. Medalla said Filipinos who work for export firms or whose relatives are overseas contract workers will not have it "so bad" since the stronger dollar will keep them afloat. 

"But for those who are not (earning in dollars), well, clearly it is bad. But what we must realize is, most Filipinos have relatively low import content in their expenditures, so the impact will not be that much," he told BusinessWorld. 

Admitting the 10% change in the foreign exchange rate, or to PhP51 from PhP45 in August, will hurt ordinary consumers, he was quick to point out that the import content in the basket of goods of majority of the Filipinos is only about 15%. 

"Assuming that they have about 15% import content in their consumption basket, the impact should be only 1.5% with the change in the foreign exchange rate. Still, these are clearly going to hurt them. But, as I said, hopefully this will be a very temporary thing, and with the normalization of the conditions, we may actually see the return of the peso to levels in previous months," he said. 

NEDA deputy director-general Ruperto P. Alonzo said the correlation between the foreign exchange rate and the prices of basic commodities has been "delinked" in the late 1980s. "Poverty is not that dependent on the peso depreciation because the prices of basic commodities are not following the trend. Somehow, the expectations for a stronger dollar have not set in yet, so the price levels of goods are still stable. But if this crisis continued, eventually, we may see price increases," Mr. Alonzo said. 

He added the economy, like the Filipinos themselves, is "resilient." "If you look at the history of the financial crisis, prices did not go up that much until the peso stabilized. In our 1997 experience, the peso climbed to PhP40 plus from PhP26, but our response was not all that negative if you look at our growth. So, I think we will follow the same path," he said. 

The economy managed a 3.3% growth in 1999, rebounding from a 0.6% contraction in 1998 due to the Asian contagion. This year, the economy is projected to grow at between 4% and 4.5% and even Mr. Medalla himself does not see a need to scale down the projection despite the political and economic crisis facing the country. "Once the political situation has stabilized, the peso will find its real value. We are resilient. During the Asian financial crisis, our problem was financial. How much more now that our problem is only political," Mr. Alonzo said. 

UNENVIABLE POSITION 

But for De La Salle University economist Ponciano S. Intal, Jr., life will be more difficult for the country's economic managers, who are tasked to set the direction of the economy amid the political uncertainties. "I would not want to be in the position of Secretary Medalla and the rest of the economic managers. Their task to project a positive attitude is tough under the circumstances," he said candidly. 

"Given the uncertainties, there is definitely a possibility (that things will be more difficult). It all depends on whether or not the Monetary Board will increase interest rates further for a month or two. (Otherwise) we will see that managing the macroeconomy will be tougher," he added. 

Mr. Intal said the economic managers cannot allow the peso to decline dramatically because of its significant implications on inflation and the "political economy." "But, on the other hand, by raising significantly the interest rates, they are actually derailing a nascent recovery and the danger is, you've got to have investments if you want to have sustained recovery. And by raising interest rates, that means you are moving towards a kind of a recession," Mr. Intal said. "It is really a no-win situation for our macroeconomic managers," he concluded. 

So how long can a recuperating economy take the blows? Not for long, according to economists and bankers, especially in the light of the peso free- fall and the rising interest rates. Foundation for Economic Freedom chairman Calixto Chikiamko warned in a television interview of a forthcoming recession, saying the economy cannot take the peso skidding further away. 

Technically, a recession -- or a drop in the economy -- takes root when a country's gross national product (GNP) falls for two consecutive months. So far, the economy has been growing, albeit at a lower rate. "The economy will be in trouble once the peso reaches PhP60," a foreign bank official, who requested anonymity, said. But with the speed at which the peso has gone down -- losing PhP1 a day since the jueteng scandal erupted -- anything can happen. Projecting how it will perform towards the year-end may be too long a view to take, even as earnings from overseas Filipino workers in time for the holidays may provide some psychological comfort. 

The currency has lost more than 20% of its value since last year, and 7% since the latest controversy against the President snowballed into a move to get him out of power through whatever means. Moves to defend the currency through an increase in interest rates is not helping solve the problem, contrary to what the central bank believes, the bank official said. "Recent actions made by the (central bank) is taken by the market as a sign that more tightening is to come. That, in itself, will be taken negatively by the market," the bank official said. 

For University of the Philippines economist Solita C. Monsod, jacking up interest rates to address the peso's weakness is a "sure-fire recipe" for hurting the economy. "The peso cannot plummet more than it has fallen. With or without interest rates, it would have gone down," Ms. Monsod said. For Peter Yeates of Hong Kong & Shanghai Banking Corp. (HSBC), increases in interest rates will certainly slow down lending activities in the financial system, despite the fact "people need to borrow." 

But it seems lending had slowed even before interest rates started to go up. A bank trader, who requested anonymity, said since early this year the absence of creditworthy borrowers have prompted banks to go easy on their lending activities. Likewise, bank deposits or placements with the central bank's reverse repurchase facility continued to rise. Meanwhile, unlike in 1998, when Cebu (central Visayas) businessmen sought out Bangko Sentral officials for dialogues regarding the soaring interest rates, the Cebu Chamber of Commerce and Industry (CCCI) does not expect the Monetary Board to respond to their plea for the government to stop raising the interest rates in defense of the peso. "No, we don't really expect them to respond. We know that the problem is not financial. It's political," said Sabino R. Dapat, CCCI president. 

The chamber issued last Thursday a manifesto, urging the government to "save business and the economy" by minimizing intervention in the financial system and allowing the peso to seek its own level. The chamber warned that defending the peso by increasing lending rates "is putting business in a slowdown mode and will pull down our economy into a recession." Cebu, Inc. co-chairman Efren S. Valiente said he expects the peso to continue falling until a solution to the political crisis is found. "It was very obvious last Thursday that the fall of the peso is no longer caused by global concerns but by our domestic problems. The peso fell even as the US and regional markets were very quiet," he said. 

Financial executive Ruben Almendras said he believes the peso will reach PhP60 if the political crisis continues. "Sixty pesos should be the maximum. Beyond that, it will topple the government just as the rupiah toppled Suharto," he warned. Seaweed exporter Benson U. Dakay, on the other hand, believes the weakening of the peso is artificial. "I believe this is artificial. When the political situation improves, it will correct to PhP45. But on the other hand, I don't believe the situation will improve in the short term because the President will not step down," he told BusinessWorld. 

Mr. Dakay, whose seaweed exports have high local content, are among those exporters who have benefitted from the fall of the peso in terms of making bigger profits. But he said the weak peso has also increased the value of his dollar loans. Another exporter, who asked not to be named, complained that he is having difficulty setting the price for next year. "I don't know what exchange rate to use," he said.