Is the Philippine economy more vulnerable under Noynoy Aquino?

Turbulence, uncertainty, and volatility characterize the 21st century economy. There are many reasons for this increase – lifecycles of products and technologies have been reduced substantially and rapid product development by competition makes demand difficult to forecast. There is disorder, there is chaos resulting from marketing activities such as promotions and periodic incentives – or business rules that deal with procurement. Inefficient economics leads to high prices of fundamental commodities like cement.

Philippine cement prices said to be among the highest in E. Asia

And there’s nothing that Kris, Jim, Boy, Dingdong can do about it, except maybe do a song and dance number? 😆

CEMENT PRICES in the Philippines are among the highest in East Asia, Board of Investments (BoI) data showed.

The data were made public late on Friday, a week after the 2010 Investment Priorities Plan (IPP) was unveiled with provisions granting incentives to new entrants into the cement industry which the state agency said would encourage competition and thus bring down prices.

Cement here costs roughly $4.56 per 40-kilo bag as of January 2010, higher than the $3.63 average for nine countries in the region according to BoI estimates.

Indonesia has the most expensive cement at $4.62 per bag, followed by the Philippines, whose average price is nearly the same as that in Japan.

The three are trailed by Malaysia, Taiwan, Thailand, South Korea, Vietnam and China.

Among its Southeast Asian neighbors, the Philippines’ cement prices are two-thirds more than Vietnam’s, a fifth more than Malaysia’s, and roughly 40% higher than Thailand’s.

BoI Managing Head Elmer C. Hernandez declined to comment on the figures. Earlier, however, the state agency published the 2010 IPP which now includes the grinding of imported clinker into cement as among the business activities qualified for incentives. The Cement Manufacturers Association of the Philippines had opposed this move, saying it would disadvantage firms with big-ticket investments that produce their own clinker.

But Mr. Hernandez countered that incentives were needed to attract new players into the industry which are hoped to bring down prices via competition.

Sought for comment on the cement price comparison, industry players pointed to high power costs in the country as the culprit.

“We have the highest power rate and coal prices in the region. [These account for] more than 50% of our cost,” Holcim Philippines Senior Vice-President for Sales Eduardo A. Sahagun said in a text message yesterday, adding that transporation costs here are also “very high.”

Holcim Philippines had said it may raise prices in the second half to compensate for the more expensive clinker it has had to import after power interruptions in Mindanao hurt the firm’s production capacity.

The government is ultimately to blame for high product prices, given the “lousy infrastructure” it provides manufacturers, an industry source that declined to be named said. — Jessica Anne D. Hermosa

It is vital to review these statements because these can serve as a precedent for justifying the high cost of commodities and utilities – cement and electricity among others.

Can we attract new players into the domestic industry?

Barring artificial interventions, prices will go down with the introduction of competition. Here’s a simplified explanation of how it works:

If you are the only producer of a good or service, you can price wherever you want. If you price low, more people will want to buy, and you can increase the price and decrease your out put until you reach a maximum amount of profit.

At this point, a monopolistic firm usually has more revenue than price; They could afford a lower price and greater output, but they wouldn’t make as much money. (The quantity of maximum profit is at the point where marginal cost meets marginal revenue).

If another firm enters the market, it can price just a little bit lower than the original firm, and it will get most of the business.

This will cause a price war until each firm is pricing and producing at the point where average costs are at a minimum and neither firm ears profit; cost equals revenue.

As more and more firms enter a market, the price becomes more and more stable. For a good like gold that is the same no matter where you buy it, the price is the same globally because if a firm priced higher, it would loose all its business.

In short, competition causes the price for a good to be such that firms do not earn profit and the price lies at the value of a perfectly elastic demand curve.

http://wiki.answers.com/Q/How_does_competition_affect_price

What’s all the fuss about competition? It boils down to this

Competition makes people do their best. When someone loses in a competition then it makes them strive to win the next time. Society needs to have competition, that is how the world advances and competition is why we are ahead in technology and other areas that need competition. It is everywhere , you cant help it . There is no way you can have a life with out you competing in smallest things like eating quickly or large things like finding out the other galaxies in the world.

For short, competition is here to stay. If we don’t match or do better than our competitors – our companies get hurt, their employees get hurt, their customers get hurt. The gut reaction would be to shy away from competition and close our doors. Unfortunately, that hurts more of us even worse. Sure the employees of the cement companies keep their job – but at higher cost to our pockets! We are employees, too – and there are more of us who are not employees of the cement companies.

The win-lose approach is to ensure that the local cement industry wins – at the expense of Philippine consumers.

If you look at all our spectrum of value producing activities – you can see that these same behavior cuts across a wide swath of our domestic industries – agri – high price of rice; real estate – high price of cement; telecomm high price of DSL/mobile/phone; etc.

Look even further, there’s practically, no competition. If there were competitors – they are very much into collusion. NO EXCEPTIONS.

Have you guys ever heard of interlocking directorships? Try this for size.. Better yet, view the two  lists and see if you see any familiar names: 💡

Philex Mining Board Members Relationships

[gview file=”https://sanamagan.files.wordpress.com/2010/06/philex-mining-corp-px_pm_-board-members-relationships-businessweek1.pdf”  ]

First Philippine Holdings Board Members Relationships

[gview file=”https://sanamagan.files.wordpress.com/2010/06/first-philippine-hldgs-fph_pm_-board-members-relationships-businessweek1.pdf” ]

Maybe, you can even update the names in the KMI mindmap.   😉

[iframe: src=”http://mind42.com/pub/mindmap?mid=e37e71bf-b038-45b7-9f8f-efa973f0fb5f” width=”600″ height=”400″ frameborder=”1″ scrolling=”yes”]

Competition my arse – lutong makaw. 😆

But that’s only part of the picture

Lousy infrastructure – courtesy of a lousy Aquino Constitution

The cement industry points out that energy accounts for more than 50% of its cost. This figure is indeed high and points to a systemic disadvantage – weak infrastructure namely, electricity. For other industries it need not be electricity, it can be water.

And it does not help that the situation is not improving because domestic capital is also absent – and if it were present, domestic investors are not to keen on investing as they are in a rent-seeking mode. This weak infrastructure cannot be addressed by foreign investments not when the rules of the game are too skewed.

If one were to compare the Foreign Equity Policies of the Philippines with other ASEAN countries – it will appear that the Philippines is liberal – as interpreted by our emo politicians when it says “100% foreign equity ownership is allowed in all areas except those in the negative list under the Foreign Investment Act 1991 as amended.
As a general rule, there are no restrictions on the extent of foreign ownership of export enterprises with at least 60% export.”

However, investments which are NOT EXPORT-ORIENTED take a different track and are covered by the Foreign Investments Negative List. Here are the relevant parts of the list:

LIST A:
FOREIGN OWNERSHIP IS LIMITED
BY MANDATE OF THE CONSTITUTION AND SPECIFIC LAWS

Up to Twenty-Five Percent (25%) Foreign Equity

14. Contracts for the construction and repair of locally-funded public works (Sec. 1 of C.A. 541, LOI 630) except:

a. infrastructure/development projects covered in R.A. 7718; and
b. projects which are foreign funded or assisted and required to undergo international competitive bidding(Sec. 2(a) of R.A. 7718)

Up to Forty Percent (40%) Foreign Equity
17. Exploration, development and utilization of natural resources (Art. XII, Sec. 2 of the Constitution) 4

18. Ownership of Private Lands (Art. XII, Sec. 7 of the Constitution; Ch. 5, Sec. 22 of C.A. 141)
19. Operation and management of public utilities (Art. XII, Sec. 11 of the Constitution; Sec. 16 of C.A. 146)

Foreign participation in public utilities such as power are limited to only 40% foreign equity. Which means unless there is a local counterpart who can match the 60% the foreigner cannot participate – ergo, no improvements.

Isn’t it obvious that any citizen who can’t match the 60% can’t get into the deal. Not 0%, not 5%, not 10%, not 15%, not 0.2%, not 30% – but 60% – which further means if your last name doesn’t sound like a Sangley mestizo or a konyo – chances are you cannot meet the requirement of the FINL – and the Aquino constitution. Don’t you feel like your electricity rate is being hostaged because the dude who can afford the 60% will not front the money?

But then, that’s HIS money – and none of our business. We ought to have the opportunity to look for an alternative – BUT, we don’t. The Aquino constitution has skewed the playing field in favor of the local economic elite, kept competition out and subsequently caused an inefficient economy plagued by a wide disparity between rich and poor, and a shrinking midde class.

We stick to this paradigm, even as the rest of East Asia has moved and wonder why cement prices are high?

What is it about Cement

Cement is an important indicator. It is like the canary in a mine. The rise and fall of cement will reflect the public construction, and private construction. This was demonstrated in 2009 when the cement industry took a hit.

In an industry report released in September 2009, Business World Online reported that

the Cement Manufacturers’ Association of the Philippines (CEMAP) said demand for cement, as reflected by total consumption, grew by a measly 1.6% to 13.2 million metric tons (MT) in 2008 compared to a robust 11.1% growth recorded the previous year.

The lower turnout was on account of a slump in public construction, while construction activities in the private sector slowed, CEMAP President Ernesto M. Mr. Ordoñez said.

“The -0.4% growth in public construction and, similarly, the 8.2% hike in private construction in 2008 were lower than those of 2007. This slowdown in construction activity in 2008 explains the slide of demand for cement,”Mr. Ordoñez said in the industry report.

The gross value of public and private constructions grew by 29.2% and 13% in 2007, respectively, according to the CEMAP report.

“Such low demand showed that the industry’s capacity was under utilized,” Mr. Ordoñez said.

The industry official said the 13.2-million MT in cement demand last year used only 57.4% of kiln capacity rated at 19.547 million tons (dry process) per year.

If fully utilized, Mr. Ordoñez said the industry’s kiln capacity could produce an equivalent of 23 million tons of cement.

Growth in production and sales of cement slowed to 2.46% and 0.29% last year from the previous year’s 8.44% and 7.14%, respectively.

“The year 2009, marked by the global financial crisis, saw us at CEMAP rallying our local industries, as well as our ASEAN (Association of Southeast Asian Nations) and Asian counterparts, to guard against the deterioration of our markets caused by undervalued and substandard imports,” Mr. Ordoñez said.

CEMAP has joined local business groups the Federation of Philippine Industries and the Philippine Chinese Chamber of Industries in the “Buy Pinoy – Buy local” campaign.

I’d love to buy Pinoy but Pinoy products are expensive and are shabbily done. The good Pinoy products – if you ask about the price, you can’t afford it.

It’s hard for another Pinoy of limited means to swallow when there are better products that cost a lot less.

However, even if we import the  cheaper cement of South Korea or Taiwan – the high tariff rates of the Philippine government to ensure protection of the cement industry – keeps the price of cement high. Strong lobbying by the industry will not reduce consumer demand to reduce the tariff rates either.

Pretty tight spot huh?

Cement Production, Construction Activity and Demand For Offices and Housing

The slowdown in cement was due to a decrease in construction activity which was due to a decrease in demand for public and private buildings.

The demand for private buildings can be for residential or commercial use – and these can be from both domestic and foreign.

However, since the Aquino constitution forbids foreigners to own private property – even for residential purposes and/or corporate HQ purposes – then who exactly is left with the burden to purchases the excess inventory.

The question is – does the domestic market have the purchasing power? Quite obvious it doesn’t. Fortunately, the OFWs keep on remitting forex – and the lack of domestic purchasing power is masked by the infusions of remittances. These poses risks as global markets change and OFW remittances are affected.

In turn this leaves the economy more vulnerable than ever.

Now given an Aquino administration that has protectionist leftist ideologues and protectionist elements of the oligarchy in its core, doesn’t bode much for the Philippines.

The anti-corruption measures certainly makes the case for improving efficiency by removing the layers of corruption. But, as has been pointed out time and time again – the wrong economic policies took us to this route in the first place, corruption just aggravated the matter. For short, increasing efficiency does not translate to improving effectiveness.

Where to Philippines? Nowhere again?

Until these flaws in the Aquino constitution are removed, widespread poverty is here to stay in the Philippines, prices of commodities are high, and the pockets of the Aquino administration’s circle of families, friends/ and supporters – they very same thing they accused the Arroyo administration of doing.

Noynoy speaks about “hindi ako magnanakaw”. The thing is Noynoy has shown a continuous lack of introspection which makes him flip flop on a variety of issues – and muddle it at best.

When he says “hindi ako magnanakaw”, am hearing “mga kamaganak at kaibigan ko lang ang nanakaw in my behalf” – in terms of lousy high-priced utilities, lack of choices, lack of job opportunities – that benefit only the companies owned by Aquino supporters – AND not all companies – domestic or foreign.

But I don’t think Filipinos will ever figure that one out – they are too busy with Wowowee, Kris Aquino, Boy Abunda, Jim Paredes, and Leah Navarro.

Well you might as well get entertained – because the next six years are going to be one hell of a bumpy ride – and YOU my friend, are the carabao on which the oligarchs have put the yoke.

Enjoy your servitude, you asked for it, you got it.

The Philippine economy is vulnerable – it’s share of the crumbs can get even smaller. At the height of the global recession – The Philippines survived because it was used to having crumbs, before, during, and after the recessions – it couldn’t tell the difference between famine or fest – because it never had fest.

Second next to Japan right after WWII – yeah right, courtesy of American infrastructure and investment – not due to Filipino ingenuity or policy. Eto talagang Pinoy – mahilig mang-angkin ng trabaho ng iba – the Philippines has this annoying habit of  taking credit for the results of work done by others.

In the end when its time for execution, the results will be there for all to see on who really did the grunt work of shaping up to become competitive. As of June 2010, All Headline News reported that Philippines Placed 92nd On Global Index Measuring Attractiveness As A Business Destination

Manila, Metro Manila, Philippines (AHN) – From 82nd spot, the Philippines tumbled down to 92nd spot among 125 nations in the World Economic Forum Enabling Trade Index. The index measures the attractiveness of a country as a business destination.

The criteria for the ranking are international and domestic market access, border administration, efficiency of import-export procedures ad transparency of border administration. The index ranked Manila 64th for market access, 74th for border administration, 100th for domestic market access, 56th for customs administration, 55th for import-export procedures and 119th for transparency of border administration.

Among members of the regional bloc, the Association of Southeast Asian Nations, only Kampuchea had a lower ranking than the Philippines. Kampuchea was in 102nd spot in the overall ranking.

Singapore topped the index, which was released Thursday ahead of the World Economic Forum on Sunday in Ho Chi Minh City.

The Philippines had a higher ranking in the World Economic Forum’s Global Competitiveness Index for 2009-10 at 87th place. However, it was actually a slip from the previous year’s 71st spot. The bases of the Global Competitiveness Index are the 12 pillars, namely: institutions, infrastructure, macroeconomic stability, health and primary education, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation.

The majority of Filipino citizens always had crumbs   (there has never been a bonanza  bother – no matter what Arroyo.. or Aquino tells us for that matter) – that’s what happens to wallflowers who don’t have the balls to competethey never get the girl.

One thing about achieving success in a competitive environment – no one gives it to you, you have to earn it.

Don’t just be efficient, be effective.  Don’t just work hard, work SMART.

Don’t remain protectionist and isolationist – embrace diversity and reap its dividends while learning to step from the landmines. No one said it is easy.  It is full of risk – but then, it is also full of reward.

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8 comments

  1. […] This post was mentioned on Twitter by AntiPinoy.Com, Cont.Est.Agent. Cont.Est.Agent said: Is the Philippine economy more vulnerable under Aquino? | Anti … http://bit.ly/aHktlE […]

  2. oh how true. You find a cheap Pinoy product, but it’s of too low of standard. You want to buy the best, you can’t afford it.

    And Pinoys always have to settle down for what they can afford (“pag nasira, puede naman palitan”) instead of what they can buy once and (almost) never replace.

    It’s not only the cement but also on almost all products you can buy here.

  3. I should tell this to my mom and her constructor friend. No wonder they’re groaning under the expenses of building materials these days. I even wonder if we’ll have enough money to finish our house.

    These days, I laugh at the “Buy Pinoy” initiative. It’s for me another misguided patriotism drive. How can you buy Pinoy when Pinoy sucks? You might even risk your life buying it.

  4. boombox · ·

    Great post Bong..

    I remember way back then here in Iligan where 3 major cement plants play aggressively with their cement prices.. Cement are cheaper back then.. and construction firms was so booming back in 1989-1996

    Two of the plants were formerly Filipino owned by Alcantara Group of Companies and but they sold it after the 1998 Asian Crisis..
    Namely Iligan Cement Corp. (ICC) which is now in the hands of Lafarge Cement of France.
    Alsons Cement Corp. (ACC) which is now renamed and became part of Holcim Cement of Switzerland

    and the Mindanao Portland Cement Corp which was bought by ICC few years ago since they didn’t make good market at all. But at least these companies are in the hands of management of foreign owners not with oligarchs running this country. These foreign companies does not have the “pwede na” quality at all.

    I even got interested in Cement industry when I got OJT in ICC last 2008.. Understanding also how cement is produced and its process amazed me.. Nakapasok pa nga ako sa lutuan ng semento (rotary kiln) during the maintenance shutdown. 😀

    Industry here was really alive during the days of Ramos Administration.. Industrial ports here in Iligan Bay are filled with bulk carrier vessels from different countries.. All attributed how Cement is part of economic success to be partnered by Steel and Mining industries.. I guess may punto din talaga ang cement plants ngayon since their production operations rely on Coal for firing during the cement production.. even if they have alternative sources such as rice hulls, used tires and sawdust for firing pero iba parin yung coal talaga…

    I could just imagine if we could at least become major exporter of cement but I guess the spark of it is becoming to dim in the dark.. (Hopefully not….)

  5. Even in the food industry, the buy pinoy is de-mystified when you start putting the products among others straight up beat it in quality. Hell, even pinoy made appliances have completely slipped the quality end for the sake of moving it out to consumers with a justifiable price.

    This is certainly one element that continues to pervade the pinoy stupidity in society. By competing, you get a clear distinction of what is what and why certain values are desired.

  6. ulong pare · ·

    … daaaaaang

    … i never consider flipland economy as a “legit economy” in comparison to our asian neighbors…

    … ukay-ukay, surplus/used/abused and defcuktive cars/trucks, spoiled/expired products, i.e. corned beef&spam, diluted drugs from tsekwaland, bombayland, ‘merka, etchastera, etc are not economic yardstick… :mrgreen:

    … hay naku, flips… puro kayo mga gung gongs… 😈

  7. Hyden Toro · ·

    A President who was elected on the premise of his parents; with the help of the SMARTMATIC and Philippine Media owned by the Oligarch Lopez family is doubtful, that he can do a good job.
    His track records as a Public Servant are not even applealing. He did not excel in anything, except in his name as Aquino.

    If he let others do the work for him. Those people will work for their own interests. He has no economic plans to solve our problems. The Media shielded him from debating. Because he has no good knowledge of where we are. He just wore the yellow shirt and put the nonsense EDSA on the forefront.

    The stupid Filipino voters, presumably voted for him. Wheather it was SMARTMATIC or the dumb Filipino voters that voted for him. It makes no difference for us now. We are all in deep trouble. We have a General, who cannot lead. No plan on how to win the battle. Just waiting for other people to win the battle for him. This is our dire situation.

  8. Another case of ” adapt or perish”

    protection? protection against what?

    Below is a 2002 article:

    Editoryal – Matitigok ang local cement industry
    (Pilipino Star Ngayon) Updated March 22, 2002 12:00 AM

    LABAN sa mga Pilipino at isang paraan para tuluyang patayin ang local cement industry. Ito ang lumulutang na katotohanan at magiging bunga kasunod ng ginawang pagtanggal ng P20.60 porsiyentong buwis sa mga imported cement. Nag-asal Hudas ang Tariff Commission sa mga lokal na kompanya ng semento. Sa halip na proteksiyunan ng Tariff Commission ang mga local na industriya ng semento, kinandong pa ang mga dayuhang manufacturers at lumihis sa itinatadhana ng Republic Act 3800 o Safeguard Measures Act.

    Maaaring magsara ang pabrika sa pagdagsa ng mga imported cement gaya ng nangyari sa apat na malalaking pabrika ng semento – ang Mindanao Portland Cement Corp., Titan Cement, Rizal Cement at Lloyds Richfield Corp. Mula pa noong 1998 ay naramdaman na ng mga local cement manufacturers ang epekto ng pagdagsa ng mga imported. Pinapatay na sila unti-unti hanggang sa tuluyang magsipagsara. .

    I believe in survival of the fittest.
    This RA 8800 says the state shall promote the competitiveness of domestic industries.

    Again rather than paraphrase; below is an excerpt of RA 8800;

    http://www.chanrobles.com/republicactno8800.htm

    REPUBLIC ACT NO. 8800
    “THE SAFEGUARD MEASURES ACT”

    AN ACT PROTECTING LOCAL INDUSTRIES BY PROVIDING SAFE IN MEASURE TO BE UNDERTAKE IN RESPONSE TO INCREASED IMPORTS AND PROVIDING PENALTIES FOR VIOLATION THEREOF.

    CHAPTER I
    GENERAL PROVISIONS
    Section 1. Short Title. – this Act shall be known as the “Safeguard Measures Act.”

    Sec. 2. Declaration of Policy. – The State shall promote the competitiveness of domestic industries and producer based on sound industrial and agricultural development policies, and technical resources. In pursuit of this goal and in the public interest the State shall provide safeguard measures to protect domestic industries and producers from increased imports, which caused or threaten to cause serious injury to those domestic industries and producers.

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