US and Europe approaching recession?

Investment bank Morgan Stanley said that the US and Europe are close to a recession, which contributed to another round of stock market declines today. A recession does not necessarily mean zero growth or negative change in output. It simply means a general slowdown in economic activity — GDP growth, investment, job creation, household spending, and other macroeconomic variables. Unemployment rises as a consequence.

The continuing financial turmoil in the banking sector plus heavy public debt burden in many big European economies  add more uncertainty and volatility to the global economy. These are definitely bad news. We hope that a different breed of entrepreneurs will use these uncertainties to create wealth somewhere.

Foreign debt service of the Philippine government

We showed last week the domestic debt service, today we will show the foreign debt service, both for regular liabilities only. The assumed liabilities are not that big these years.  We did not include details of the big items under the foreign debt securities here, which are the biggest loans and have high interest rates, about 8 percent p.a. on average. We also did not show the breakdown between principal and interest payment. Check the DBM website, link given below, to see the original table, which is 9 pages long.

The good news is that foreign debt service next year will only be one-half of the level this year, and almost one-third of the level last year. It should be due to maturing debts that have been paid, and possibly due to stabilizing interest rates.

Debt service for other government and multilateral loans like JICA, ADB and WB are either flat or slightly increasing.

Gold approaching $2,000 an ounce

Just two weeks ago, we wrote here, “Gold edging towards $1,700 an ounce”. Last week, it has topped the $1,800 mark. While platinum and silver also showed rising trend in prices recently, they did not exhibit the fast rise in prices of gold. The continued uncertainty in the debt and financial market worldwide seems to be moving in step, in direct proportion, to the trend in gold prices.

Since among the biggest economies of Europe like France, Italy and Spain, are wobbling between economic stagnation and depression, ie, between a near-zero growth to negative change in output, by virtue of their high public debt like what is happening in the US, the financial uncertainty seems to be rising instead of mitigating. Gold and a few other commodities and currencies are the new destination for many investors who want to see some stability, or at least lower losses, for their investments. A $2,000 an ounce price for gold is not far from today.

NLEx-SLEx link as next PPP project

Linking the two busiest expressways of the country, the North Luzon Expressway (NLEx) and the South Luzon Expressway (SLEx) is a big, ambitious and highly necessary project. Because between these two is the sprawling Metro Manila and all the heavy traffic associated with the metropolis. By-passing the big city via an elevated skyway therefore, will greatly reduce traffic below, at least temporarily, while facilitating the seamless movement of people, goods and services between the northern and southern provinces of Metro Manila.

While the original proponent, Metro Pacific Tollways Corp. (MPTC), has the advantage of producing the technical and financial specifications first, other construction firms will be allowed to compete with it and match or offer even a better deal for the government and the public. Whoever will win among the competing construction and tollway companies is a secondary concern for the public. Their primary concern is that such road link should be started soon and hence, can be used soon.

Domestic debt service of the Philippine government

Debt service obligation of the government is composed of its regular liabilities, meaning debts accumulated in the process of its regular operations, and assumed liabilities, or those debts by government corporations, government financial institutions and other agencies, which can no longer be serviced by these government enterprises, and were assumed by the national government through the Department of Finance (DOF).

Assumed liabilities are not big these years, they used to be big sometime in the late 80s to 90s. What are big are the regular liabilities, and here are the numbers. We did not show the breakdown among Principal, Interest and Redemption from the sinking fund. Check the link given to see the original table from BESF 2012.

Almost one-half trillion pesos a year on average from 2010 to 2012, these domestic debt are indeed huge. We will show foreign debt service next.

First PPP Project soon

The Philippine government through the Department of Public Works and Highways (DPWH) will soon award the first Public-Private Partnership (PPP) project ever since the policy was announced at the start of the current administration. It will be a nearly P2 B road link between Daang Hari in Cavite to the South Luzon Expressway (SLEx).

Cavite and southern Metro Manila are expanding fast in both population size and the volume of economic activities. Infrastructure projects like this will help facilitate such economic expansion. And judging from the big number of interested construction companies, 18, that expressed interest to do the work, this is an indicator that more big infrastructure projects will attract more players.  We hope that other PPP projects will soon be started too.

Open sky policy to more Asian cities

The Philippine government’s “pocket open sky” policy allows foreign airlines to have more flights to other international airports outside of Manila or NAIA, in exchange for more flights and seat entitlement by Philippine-based airlines to have more flights to those countries. This is a good move as this will bring in more foreign visitors, traders and investors, the same way that more Filipinos working or visiting or investing abroad will have more choices in their flights. The immediate effect of such open sky policy and airline liberalization and competition policy is a reduction in plane fare as more foreign budget airlines get into the country and Philippine-based budget airlines also penetrate more foreign cities, especially around Asia.

Executive Order (EO) 29 was signed by the President last March to pursue this policy. Asian countries that have availed this renewed policy are Malaysia, Sri Lanka, Papua New Guinea. Soon will be Vietnam, Indonesia, Taiwan and Japan.

Market corrections

Some good news today, many Asian stock markets have rallied to close higher. Significant declines are reaction to perceived high risks in the future. Significant increases are realization that the perceived risks are not that high after all. These ups and downs are market corrections to perceived risks and opportunities in investment.

Here’s the picture again of the huge sell-off last Monday. Data from CNN.

Credit rating, outlook and debt ratio

Another round of sell-off in stockmarkets in the US, Europe and Asia. The level of economic and financial uncertainty is high worldwide. Standard and Poor’s and its credit rating system is becoming a household term these days.

Yesterday, we got some good data from WSJ online edition. You may see the full table with chart here, http://graphicsweb.wsj.com/documents/DebtGDP_1104/index.php.

We created 2 separate tables from the original WSJ graphics. Table 1 is for the big economies of North America and Europe, below.

Of the 7 economies here, 3 have negative outlook – Italy, US and Spain – meaning another downgrade is possible as certain fundamental problems remain unaddressed.

Table 2 is on the rich and emerging economies in the Asia-Pacific, below.

Although Japan and New Zealand have AA credit ratings, only them have negative outlook as of now. The Philippines has a high debt/GDP ratio of 47 percent this year, although the IMF thinks this ratio is going to decline in the next few years. They should be assuming that the denominator, GDP, should be rising faster than the rise in government debt.

Finally, here is a chart also from the same WSJ graphics. We selected the biggest economies in their respective continents — US for North America, Germany for Europe, and China for Asia.

Germany and China are projected to have a declining debt/GDP ratio, although China’s ratio is far too low compared to the 2 other economies.

Philippine government debt, 2010-2012

The world is  watching what are going to happen in the public debt of the US and many European governments now and the next few months. Let us see the public debt of the Philippine government.

There you go. The public debt is rising by around P400 B (or P0.4 T) per year: P4.21 T in end-2009, P4. 64 T end-2010, P5.05 T by end-2011, on to P5.52 T by end-2012.

These are not good figures because the Philippine government is following the path of many governments like the US and Europe, and these governments are now suffering from heavy debt burden.