Crisis as Opportunity to Create an Army of Innovators 1 of 3

The goal of any government is growing wealth for its citizens and strength for the country. For the Philippines, this goal translates to a sustained 7% GDP growth per annum (that I derived in Posts #13 – #14). No administration has ever attained this goal in a sustained manner.

The best way to do this is by releasing Filipino hard work and creativity in the Philippines – which they exhibit in abundance overseas – by creating an army of innovators funded by their own repatriated funds. Paradoxically, the present financial crises may provide a unique opportunity to achieve this based on a convergence of conditions.

First, only investors with ‘belief’ or some residence in the Philippines can be expected to invest (like those of the Ayalas or of MVP of First Pacific). The financial crisis and its aftermath (like more regulation especially of the so-called shadow banking system) means that “hot” money will be hard to find in the future especially for investment into the Philippines.

Professional overseas investors already add a country risk premium of, say 5%, to project returns in US$. This risk premium compensates for overall expected systemic issues like fiscal deficits, peso devaluation, and general poor economic management. Given attractive opportunities in competitor countries like China and India, Indonesia, Malaysia, and even Thailand (with its coups but with a credible King), this eventually adds up to 25% expected returns which is tough to meet.

Second, there is a race between the US and the Philippine economic managers as to who will perform worse in growth and inflation. I think our economy will perform better than the U.S. on both counts. This will translate to a stronger peso vis the US dollar in the medium term.

Investors are already at a loss as to which asset class to invest and are parking in US$. There may be a brief window where Filipinos holding assets in US$ may consider other investment classes. We hope they will consider naturally hedged investments in the Philippines. There are such investments (which we will identify in Part 2 of this post) that the smart money has already pre-positioned themselves. And there is much more if the government goes pro-active and innovative.

Pro-action and innovation is possible in our government. Three years ago, I heard Secretary Durano mention that tourism development efforts will be concentrated in selected areas in Bicol, Visayas and Mindanao. The strategy included modernizing infrastructure like airport terminals and promoting only specific attractions like scuba diving and eco-tourism in pre-defined countries. His approach was corporate and acknowledged resource constraints. He implemented his plan and just lately announced that, with strong growth, the tourism sector has openings for 22,000 jobs that the sector has difficulty filling.

Third, as in Post #61 – #63, our Bangko Sentral is in a poor capital situation and cannot fight another rapid peso appreciation. It is interesting that, in yesterday’s paper (5/31/09), the BSP has already pushed back and say that there is only so much that monetary policy can do and growth the shared responsibility of the private sector and the rest of government. We noted the same in our Post #35 – #36.

The BSP must push for government to pay up on the legally mandated capitalization of P50B. As it stands, the BSP needs much more as it bloated its assets in the past two years. In fact, given the government violation of the terms of R.A. 7653, the BSP must sponsor and amendment that raises more capital on a new schedule. The amendment must cement its independence so it can really become the gold standard. In the modern world, the Monetary Board must be organized as a constitutional body like say the Supreme Court or the Commission on Election. Members’ terms extending beyond the term of a President and remuneration set independent of the Executive. The release of its financial statements must be freed from COA audit as that violates the spirit of independence. True independence for the BSP transforms its role to be like the gold standard (See Post #61- #62). We can have a peso that Filipinos can save and invest in for the long run.

We must use the convergence of the three events to convince Filipinos to invest in the country because it makes economic sense. There is a lot of anecdotal evidence that, like Indonesia, there is a lot of Filipino money kept overseas for safekeeping because our government managers have not been able to keep the Philippine economy free from (controllable) boom-and-bust cycle.

A curious coalition of Filipino saver-investors, entrepreneur-tycoons, and government bureaucrats can push for changes in institutions and in legal frameworks to avoid this cycle. There are already new leaders who understand the need for these changes. Let us help them have the will that make us wealthy and the country strong. Let us help them come together.

(Click here for Part 2 of 3 and here for Part 3 of 3.)