THANK you for the kind comments on my ANC interview and column last week on GCash and the greenshoe. I am happy many found it informative and helpful. One venture capital fund in Singapore told me they made their analysts and associates watch it so they would understand how the greenshoe works. Was disappointed that some who watched or read it said they would do this or that as my main point was it is too early to tell if it will be sufficient or not, and to wait for the one-month stabilization period to decide
I was told a former business gossip columnist more adept at intrigue than insight referenced my interview in part of his diatribe against GCash. He considered the post-listing price to be a failure and added my interview as one of the examples of concerted cheerleading of the stock. He provided a reference to my YouTube interview where you can watch my nuanced message and see my point which he missed, which was not to cheerlead or criticize the initial public offering but what to look for to see whether the price will sustainably stabilize or not. Indeed, shortly after his and others’ fevered posts, GCash closed above offer price yesterday and the day before, but waited for the end of the stabilization period to find out if it worked. If sustained, that is good for investors and our stock market. Then analyze why stabilization worked or didn’t. Versus premature and biased or erroneous post-mortems.
Now let’s get to our other conundrum. What is the bigger problem, rising interest rates or a weaker peso to dollar exchange rate? Sadly, to use a witty reply, the answer is yes. For me the short-term answer is the opposite of the long term one, which is another dilemma. I really dislike the American cliché that the choice or situation is like being between a rock and a hard place. I find that such a boring and unimaginative metaphor. I prefer the one from Homer’s “Odyssey” of being “between Scylla and Charybdis,” or my favorite, which is used in Denmark, of choosing between the plague and cholera.
Higher interest rates hurt as borrowers, which are most businesses, and many individuals need debt and credit to operate and invest. That makes not just the cost higher and the returns lower (the same revenue with higher debt costs means less income) but usually has the multiplier effect of lowering the valuation metric (like the PE ratio) as an investor will pay a lower value if long-term profitability and margins are reduced for a sustained period and not just a blip. Also, the return demanded from equities increases as the relatively less risky return from debt investments increases, which means a lower valuation. For example, if inflation is 5 percent and you can get 7 percent from a long-term debt investment you are ahead, assuming exchange rates stay stable. So how much more return will you expect from an equity investment if you can get 7 percent relatively risk-free given the uncertainty in the base equity price? Whether it comes from dividends or capital gains when selling?
One usually raises interest rates to either fight inflation by cooling down the economy or to defend the currency. For those not old enough to remember, look up Jobo bills and see what interest rates the Central Bank paid in the mid-1980s to bring inflation and the weakening peso under control. Being a young adult then, I didn’t fully comprehend what it meant, but I knew the effect — a lot of pain and hardship to end the peso slide and runaway inflation. It was painful but necessary shock therapy.
What about tolerating a weaker peso instead? In most Third World countries that built their industry and manufacturing base like Japan in the 1950s until the Plaza Accord in the mid-1980s, and more recently China, South Korea and even now Vietnam, they actually promote a weak local currency and constantly depreciate it in an organized and modest manner to keep their manufacturing exports competitive.
Alas, we have the opposite mentality and overtly since 1986 when we were initially forced and now voluntarily continue to adhere to a leave it to markets, laissez-faire, no industrial policy which has reduced our minuscule manufacturing base to nearly nothing makes it very dependent on imports. Plus, a belief in a strong peso since the American time. Except for food manufacturing, what little is left like semiconductor assembly is not even manufacturing as we import all the inputs, assemble it, then export it. We export semiconductors but sadly import everything needed to assemble them. So, all we export is labor, whether overseas Filipino workers going abroad, business process outsourcings and semiconductor assembly. The latter is really sad as we started this in the 1970s but never built our plants to manufacture the components unlike Taiwan and South Korea, which now have trillion-dollar market cap companies in this industry like Nvidia, Taiwan Semiconductor, SK Hynix and Samsung Electronics. Also dating from the 1970s, our garment exporters relied on quotas, and when that regime ended, so did our industry. In Asia, why did Indonesia, Vietnam and Bangladesh continue to have a robust garment and shoe export industry? They built factories that made the textiles, buttons, dyes and so on to supply the inputs for garments and shoes while we kept importing all the inputs.
Being a practically import-everything, even food, economy that pays for this by exporting labor and borrowing, what has the Bangko Sentral ng Pilipinas (BSP) decided in the short term? Defending the peso is the more critical short-term goal versus keeping interest rates from going higher. I can see many of you saying, but the peso is still getting weaker. My sad answer is it would be worse if the BSP did not raise interest rates and may need to continue to do so. That is the short-term choice, and the dilemma they face. Eventually as I have previously written and said in interviews, monetary policy cannot take the place of fiscal policy. You need both to be sound. Time to sadly but painfully start addressing the latter for both the short term and long term. The latter by finally engaging in comprehensive and inclusive industrial policy. Time to bury our naïve 40-year ideological belief in markets and the like. Getting industrial policy right is very hard, and there will be constant changes and mistakes. We are witnessing what not having it nor long-term policies and planning results in.
Underperformance when times are good and being the worst hit when times are bad.
The author is an independent director of the state-run Maharlika Investment Corp.
