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Philippine Business Magazine: Volume 8
No.1 - Cover
Misreading The Times
Estrada's downfall caught even the savviest
of market pros flat-footed. One such authority narrated his experience
to the Asian Wall Street Journal, excerpts of which are reprinted
below
By Anton Periquet
I thought I had it all figured out - the capital markets
would force President Estrada out before the end of his six-year
term. There was no way that an open economy in the 21st century
could withstand, much less support, a character like Estrada. So
day after day I watched anxiously as frustrated investors marked
down Philippine assets and gave up on the country. I had seen this
before back in 1986, as a guileless graduate student who could only
marvel as battered peso assets doubled and redoubled after Marcos
was deposed. Little did I suspect that fate would be kind enough
to grant me a second chance to reap more than just an academic lesson
from the experience.
Yet I was caught flat-footed when Estrada fell from
power on 19 January, less than half way into his term. History had
indeed repeated itself in the form what is now universally called
"People Power." But the market pros, like the ex-president's
coterie of Rasputins, were caught napping. Both the peso and the
local stock market were on their knees just before it happened -
so ripe for the picking. Where did I go wrong?
Investors began to turn cool on the Philippines in
May 1999, long before the infamous BW scandal nearly shut down the
stock exchange last year. The trigger was the government-aided sale
of the much-coveted PCI Bank by its owners to the politically-favored
Equitable Bank. Shortly after, the exodus of foreign capital began.
Balance of payments data tell it all. In 1999, Estrada's first year
in office, the economy registered a massive current account surplus
worth 9% of its GDP, thanks to booming electronics exports and OCW
remittances. Yet the peso lost 4% of its dollar value that year,
as nearly the entire surplus was lost to capital flight. With local
investors themselves losing heart, the equilibrium just wasn't sustainable.
The pattern continued through 2000, as the president
became more brazen in his economic adventurism. Yet among the chattering
classes - many of whom had already placed their savings in dollars
- few appeared to challenge the popular premise that Estrada would
survive his term. Most experts envisaged the economy muddling through
to his exit in 2004.
"Muddle through?" I asked myself. With due
respect, the experts appeared to be clinging to a 1980s model of
economic reality that was now obsolete. Could an open economy simply
"muddle through" in this hi-tech age of perfect information
and capital mobility? Surely, as the capital employed sought better
returns elsewhere, it would eventually starve of liquidity and go
bust - bust unless Estrada was ousted. So was there a financial
opportunity here?
And so it was when an estranged friend broke ranks
last October and exposed the president for pocketing kickbacks from
illegal gambling. Under siege, Estrada played the class card, painting
the brouhaha as a bourgeois conspiracy to bring down a pro-poor
president. The ploy worked, as the star-struck masses stood by the
hero, but the financial markets began to buckle. Something had to
be done to clear the president and calm the markets. Hence the impeachment
trial, whereby Estrada agreed to place his fate in the hands of
the nation's supposedly impartial 21-man Senate.
"He's finished," I thought, with the only
unknown being timeframe. I stuck my neck out on "late February"
shortly after the Senate had promised to deliver a verdict. Like
most Filipinos, I expected the Senate to acquit the president regardless
of the evidence. Then I thought all hell would break loose in the
streets, causing the financial markets to panic one last time. This,
I thought, would be the time to bet the farm. For shortly after,
through some combination of social, military, diplomatic, and financial
pressure, Estrada would fall.
Then it all happened. Late on a Tuesday evening, 16
January, thousands of mobile-phone wielding college students and
young professionals who had been following the trial on TV took
to the streets after the senate voted to suppress vital evidence
against the president. Text messages clogged up the nation's four
million mobile phones, beckoning all to gather around the EDSA Shrine,
the spot where the people had assembled to oust Marcos fifteen years
ago.
It was half past midnight when I drove by with my
wife, for research purposes as well as to be counted. At 2:30 a.m.
I returned home, putting the crowd at no more than 10,000. "It's
early days," I explained in a memo to investors the next day,
replete with the authority of one who had been there before. It
took a rigged election, a three-week simmering period and a foiled
coup attempt to get a million people out to the streets back in
1986. What we must first see is the usual buildup - civil disobedience,
a major bank-run, and a final attack on the peso.
But just two days later, on a Friday afternoon after
the markets had shut, the Estrada Government collapsed from a wave
of defections among the military and cabinet. Vice President Gloria
Arroyo was sworn in as president the very next day and both the
shares of PLDT traded overseas and the peso shot through the roof.
Without doubt the markets would open higher on Monday. I had missed
it. Where did I go wrong? Why didn't the people wait until the economy
was closer to collapse?
As I strolled through the carnival-like atmosphere among the one
million people celebrating at EDSA that Saturday, I had decidedly
mixed feelings. I was outwardly disgusted at myself, an experienced
finance professional, for missing the turn the second time around.
Yet I was also quietly cheered by the realization that my own model's
now-obsolete predictive abilities meant that not just the capital
markets had changed in this seemingly luckless nation of 80 million.
The Filipino had grown up. Perhaps it wasn't too late to buy.
Anton Periquet is Managing Director and Head
of Research of Regis Partners, Inc., the Philippine equities arm
of the Deutsche Bank Group
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