Ronald Goseco l January 7, 2023 l The Manila Times
THE year started with great optimism and promise Covid-19 cases were downtrending. Businesses were open with revenge spending and travel on the uptrend. The PSE Index was above 7,200 and the US dollar peso exchange rate was at P 51. So much changed during the year and a quotation from Charles Dickens’ A Tale of Two Cities written over a century ago could not have described the year much better, “it was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was a season of light, it was the season of darkness, it was the spring of hope.”
Today, while Covid-19 cases continue to downtrend, the markets seem to have taken the cue as well. The PSE index is down 10 percent while the peso is currently at P 55 to the dollar. It is even worse in the US markets where the S&P 500 remains down nearly 15 percent and it’s on track for its worst annual return since 2008, the year of the previous global financial crisis. The two major market catalysts that have affected equities and bonds throughout 2022 and remain front and center, are inflation and interest rates. In recent months, the US housing market has softened significantly while manufacturing activity has dropped. Consumer sentiment is declining and investors are growing increasingly concerned that a recession may be just around the corner. Our local economy is tracking the global markets and although we saw a short respite in the local inflation numbers due to the softening of oil prices, inflation numbers as of November remain elevated at 8 percent. This is not the first time in our history that we are experiencing inflation and the market turmoil. It is fascinating how history keeps repeating itself over and over again but most of us do not remember. Perhaps we were not paying attention the first time. The triggers for inflation today are not much different from what they were in the 80s or during the last financial crisis but you could definitely say as Mark Twain remarked,” perhaps history does not repeat itself but it certainly has the same rhyme.”
The 1970s inflation was triggered by events in the US and a war in Vietnam (Ukraine this year) contributed to it. A budget deficit boosted by military spending and social spending programs aimed at fighting poverty (Covid-19 recently) mixed with a tripling in crude oil prices created a similar recipe for inflation; exactly what we are experiencing right now. In November 1979, the price of crude oil surpassed $100 per barrel in 2019 dollars peaking at $125. Today’s crude oil price is at $79 coming from a high of $120 in March this year. Soaring energy prices fueled a wage cost price spiral and widespread price hikes across the full spectrum of economic activity at that time. The only thing different today would be the wage cost increases since wages have remained sticky both here and abroad, but the increase in oil prices has certainly affected all commodities and services. Annual inflation in the US peaked at 13.5 percent in 1980. In the Philippines, inflation racheted upward to more than 14 percent reaching an all-time high of 62 percent in September 1984. It was also during this time that the Central Bank of the Philippines (CBP) started its precipitous decline leading to the creation of a new Bangko Sentral ng Pilipinas (BSP). Apparently at that time, CBP funds from the Monetary Adjustment Account were misappropriated according to senate hearings. conducted in the 1990s. In addition, from the 1970s to 1980, the CBP was also in the practice of setting up foreign exchange hedges for behest dollar loans.
U.S. monetary policy during the 1970s was guided by the Keynesian school of economics. The Keynesians of the 1970s believed that increased government spending and lower interest rates can counter economic downturns in demand that might otherwise become self-reinforcing. The financial crisis of 2008 caused by the financial meltdown as well as the 2020 Covid-19 crisis were addressed with the same vigorous Keynesian solutions with quantitative easing in 2008 and the social amelioration (ayuda) programs in 2020. The end result is the same with history repeating itself. This is the inflation that we are experiencing that was similarly experienced in the 1980s. Once again both the US Fed and our own BSP are engaging the same monetary tightening solutions espoused by the teachings of Milton Friedman who argued that money supply is the primary determinant and cause of inflation. By focusing on limiting the money supply by way of increases in interest rates both here and abroad, central banks are attempting to bring inflation under control. This action comes at a great cost as we are now witnessing the declines in the financial markets. A significant event that also happened this year is the meltdown of the crypto market which was being hyped as an ideology of social change. Hardcore investors argued that crypto will let people trust in technology rather than governments who issue currencies. The FTX fiasco which hit the headlines this November lifted the veil to a massive scam in crypto that is currently still playing out.
As we end the year, we should count our blessings since all is not lost, and if history will indeed repeat itself, then all this shall past. First, Covid-19 cases have significantly decreased globally. In the country, there are less than 20,000 reported cases nationwide. The vaccination rollouts from last year seem to have stemmed what seem like an insurmountable challenge just a year ago. Second, according to the BSP, the Philippine economy is expected to sustain its growth momentum going forward. Domestic demand is seen to remain firm amid the monetary policy tightening implemented by the BSP to safeguard price stability. The policy interest rate hikes will also support the medium term growth outlook as price stability promotes efficient allocation of resources and preserves the purchasing power of households. In fact, just this month, the Asian Development Bank raised this year’s growth forecast for the Philippines on stronger than expected domestic demand spurred by rising employment and a recovery in tourism. Based on their outlook, the ADB revised its 2022 gross domestic product forecast for the country to 7.5 percent. After the global turmoil and the economic recessions that other countries are experiencing, we are actually ending the year in the Philippines in a good place. It is our fervent hope and wish this coming new year that we will remember the lessons of history so we do not repeat past mistakes, preserve what we have accomplished and continue the growth momentum.
*** Ronald Goseco is FINEX Institute Director. His opinions are his own.