THESE days, when everyone and his favorite sili vendor seems to have an opinion on the state of the national economy, it’s important to take a step back and look at the occasional hard, unemotional analysis of actual empirical data.
And now that the rice situation seems to be stabilizing and inflation is widely predicted to be just about under control, the economic debate has shifted to the depreciation of the Philippine peso against the suddenly and inexorably powerful US dollar.
The focus on the peso’s performance against the dollar is not trivial. After all, with the local currency breaching the P54:1 level this week, overseas workers may be overjoyed, even if importers are going to take a major hit in order to buy the goods they need; the peso started the year at slightly below P50 to the dollar, for a fall-off of around 8 percent.
Of course, not everything about the economy can be read through the lens of macroeconomic data. There are also other factors always in play, especially political events and influences and perceptions of weaknesses and strengths that do not appear as historical, comparative or quantifiable economic trends.
But the fact remains that such data are just about the only things economists can agree upon, when they attempt to predict the direction of any given economy like the Philippines. And this is where this week’s report by the Japanese securities and financial services company Nomura shines.
The analysts of Nomura have brought back what they call their Damocles Index, which lists countries most at risk of a currency crisis. According to Nomura, the index uses eight common indicators to assess the risk of any given currency, which they applied to emerging economies (including the Philippines) which have been buffeted by currency turmoil in recent weeks.
Nomura looked into specific countries’ import cover, short-term external debt/exports ratio, foreign currency reserves/short-term external debt, broad money/FX reserves, real short-term interest rate, non-foreign-direct-investment gross inflows (one-year and three-year), fiscal and current account and current account and real effective exchange rate deviation to come up with their current list. A score above a threshold of 100 (the highest being 200) was seen as a signal of a potential exchange-rate crisis.
The Japanese analysts claim to have an excellent record of predicting currency crises, having successfully forecast the 1997-1998 Asian financial crisis, the 1998 Russian upheaval and the current problems besetting the currencies of Argentina and Turkey, both of which are red-flagged in the latest Damocles Index report. And if you’re interested in what Nomura thinks is the likelihood of a similar, impending crisis happening in the Philippines, here’s their prediction:
Zero. Zilch. Nada.
According to the MarketWatch Web site, Nomura explains that it would be “foolish” to make exaggerated claims about its index’s predictive power. However, “used in a broader assessment of the global, economic, political and institutional landscape, it can help better assess risks,” MarketWatch said.
And the main reason why I’m reporting about Nomura’s index is because I suspect it will not be “sexy” enough for the gloom-and-doomers who somehow seem to dominate local economic journalism. Unlike the statements of that University of the Philippines economics professor who predicted this week that the country has already plunged into “hyperinflation” with a 6.4 percent increase in prices of selected goods last month.
But going back to Nomura’s index, it’s important to note that while some of the countries that it red-flagged have already been experiencing currency problems against the strengthening dollar, some others didn’t make the list based on the data available. As MarketWatch noted, the country most at risk (with a score of 175) was Sri Lanka, which has only fallen 5.5 percent against the US currency in 2018. In the Asean region, the country most at risk was Malaysia (62), with Vietnam (35) being the only other emerging market in the region making a presence.
All the other countries where currency turmoil has been reported are present, of course, like Argentina (down 50 percent against the dollar year-to-date), Turkey (down 41 percent), South Africa (fallen into recession) and India. However, the index also included countries that you never heard were at risk of having problems against the US currency, like China, South Korea, Israel and Taiwan in its above-zero group.
There’s more. Apart from the Philippines, Nomura listed as among the countries with zero risk of experiencing currency upheavals Brazil and Indonesia, two countries that are repeatedly reported to be problematic in that regard. Rounding up the list of “zeros” are Bulgaria, Kazakhstan, Peru, Russia and Thailand.
Of course, as Nomura already pointed out, it’s wrong to make real-world economic predictions based solely on data because economies simply don’t act that way. The political woes of the government of President Recep Tayyip Erdogan, for example, are being blamed for Turkey’s currency problems for the most part, events that have nothing to do with the movements of its macroeconomic indicators.
The interplay of politics and the economy and the perception of upheavals in both, I believe, is also being exploited by the opponents of President Rodrigo Duterte in order to create an atmosphere of uncertainty and doubt in the future of the Philippines under his administration. Typical of this is the laughable attempt to claim that the economy is in fact retreating, after some damn fool attempted to subtract the official inflation figures from the gross domestic product.
And economists themselves hardly agree on anything, not even on the interpretation of data that they all possess. But as for me, I would much rather listen to the economists of Nomura, who have an excellent track record in data analysis and big-data trend-spotting than some fake economist with a political science degree who advertises his ignorance in gullible fly-by-night publications just to register his vote against his own country’s economic progress.
No comments:
Post a Comment