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It’s the economy

Is there a looming economic crisis? Things have turned from good to bad lately.

There is a serious, if not severe, rice crisis. It is not because of the so-called rice traders. Supply is really short.

The best indicator is the sharp rise in rice prices, by 30 to 50 percent, in the first nine months of this year. The price increase is not just in absolute pesos. Rice inflation is also shown in the lower quality of rice one buys. The rice you can buy with P50 a kilo today is not the same delicious and sumptuous rice you could buy eight months ago at P50 a kilo. Even if the state-owned National Food Authority releases all its rice stocks in one blow, rice prices will remain at high levels. Why? Because the rice shortage is real and not speculative.

With the rice shortage, there is rising popular discontent. Rice, after all, is 20 percent of the consumer budget. Together, all food, rice included, is half of a household’s budget. And food items have shown the highest price increases.

The average Filipino is hurting. A battle-scarred politician, President Duterte knows and feels that. That is why when he faced Presidential Adviser Salvador Panelo for a 90-minute téte-a-téte Tuesday, he did not sport that famous buoyancy of mood and braggadocio he usually has whenever he faces tv cameras. The President looks tired and harassed. Being a true politician and leader, he feels the pulse of the nation. And he seems helpless, for now.

“The Philippines’ macro-economic fundamentals are facing some challenges,” notes Margarito Teves, a former finance secretary and who has an MA in economics. “These include a weaker peso (P54 to one dollar), a higher inflation rate of 6.4 percent in August (the highest in nearly 10 years), a larger trade deficit of $3.7 billion in May, and a balance of payments deficit of $455 million in July.”

More dollars are going out of the country than amounts coming in. A big BOP deficit is indicative of heavy importations, heavy debt servicing, capital flight, and divestment from the Philippines.

The inflation rate is the highest in ten years (and rising); the value of the peso against the dollar is at its lowest in 12 years; the stock market index has fallen 22 percent from its January all-time high of 9078 on Jan. 29, 2018; economic growth rate has stagnated at 6 percent per year (we used to grow 7-plus percent five years ago); and President Duterte’s popularity ratings are down 10 percentage points. These are signs that Duterte’s main problem is the economy, not drugs.

“The resulting higher prices of food, particularly rice, transportation, and other goods and services are hurting businesses and consumers alike,” complained Teves, during a recent speech before the Management Association of the Philippines.

Other indicators of stress are the mixed first half revenue and profit results of the big Philippine corporations whose businesses are a proxy for Philippine growth.

Profits of Ayala Corp. disappointed in the first half of 2018. Net income rose only 7 percent to P16.1 billion on revenues of P134.52 billion which was up 21 percent. Profits were boosted it said by the “solid performance of its real estate, telecommunications, and power businesses.”

While P16.1 billion seems big, it is not, considering Ayala Corp.’s size, scale and breadth of businesses.  On a good year, P16 billion is the profit of only one Ayala Corp. subsidiary, Bank of the Philippine Islands. Usually, revenue and profit increases are in high double digits.

In the first half of 2018, Ayala Land had profits of P13.5 billion, up 18 percent; Bank of PI P11.03 billion, up 6 percent; and Globe Telecom P8.7 billion, up 25 percent, in the first half 2018.

AC shares have fallen 10 percent in value since January this year, from P1015 on Jan. 3, 2018 to P910 as of Sept. 7, 2018.   In July 2018, AC placed 8.8 million shares for sale at P916 per share, raising P8.07 billion but at a 1.08 percent discount.

JG Summit’s first half profits also disappoint. JG net income fell 32.8 percent to P9.8 billion.

SM Investments Corp. net income grew 9 percent in the first half of 2018 to P18.1 billion. Consolidated revenues rose 12 percent to P204.9 billion in the first half from P183.2 billion in the same period last year.

“We are encouraged by the results of the first half, driven by the strong performance of retail and property, particularly the residential business. Our results show the strength of the economy and consumer sentiment but we remain vigilant about inflationary pressures. We are optimistic that consumption will remain resilient,” SM President Frederic Dy Buncio said.

SMIC’s property business contributed the most to consolidated net income at 45 percent, this was followed by banks with 33 percent and retail with 22 percent.

Among the big companies, San Miguel Corp. seems to have bucked the trend of slowing, if not declining profitability. The beer, food, power, petroleum and infrastructure conglomerate hauled in P35.5 billion in recurring income during the first half of 2018, 27 percent up from the same period last year.  

This makes San Miguel doubly more profitable than Ayala whose executives were educated at Harvard. 

SMC President Ramon S. Ang finished engineering at FEU, the school of Philippine tycoons (think Henry Sy, Al Yuchengco, Lucio Tan, Andrew Gotianun).  Says RSA: “FEU has competed and can compete with the brightest of graduates from UP, Ateneo, La Salle, and Harvard.”

What is the lesson from these anecdotal corporate stories?

When crunch comes, it is not what you learned from the best Ivy League schools, it is what experience and incredible guts that will carry you through hard times.

As an executive, President has substantial experience and incredible guts. I am sure he can survive the current economic thunderstorms.

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Topics: Inflation , Rodrigo Duterte , Economy , Ramon S. Ang , Henry Sy , Al Yuchengco , Lucio Tan , Andrew Gotianun
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