By Walden Bello

These are very trying times for the economy. Our fiscal situation is out of control. And now we have a flight from the peso and from Philippine stocks. The administration has said that what we have is a temporary loss of confidence owing to "unusual" political developments, like the "Kawal" media coup announcing "massive disaffection" within the military.

This is a classic case of denial.

The peso breaching the 56:1 barrier is simply an acceleration of the downward trend of the last year. There are a number of reasons for this acceleration, including the dumping of Philippine stocks. It is estimated that some $100-150 million worth of speculative investment left the country in the first days of February. Part of this was a response to fears of a political crisis, part to normal speculative activity. Unless decisive measures are adopted to deter capital flight, the chances are great that the peso will breach the 60 to 1 dollar barrier before the May elections and could in fact drop to 57 before February is over.

Our political leaders bear a grave responsibility for the current situation. We have in electoral competition the party of the "ins" that refuses to bring up the economic issue since it has brought us to a fiscal impasse and the party of the "outs" that does not wish to articulate an economic program since its presidential candidate has little grasp of economics.

But the politicians bear o­nly part of the blame. Perhaps equally responsible are our finance technocrats. They have had seven years since the Asian financial crisis of 1997 to put in place a set of capital controls like mandatory deposits, taxes from stock market exit transactions, and taxes o­n significant foreign exchange transactions to protect us from capital flight. We had the examples of Malaysia using capital controls to successfully control speculative capital in 1998, yet we have done nothing. Over the last few years, more and more countries have adopted such mechanisms. Our methods of defense against speculative outflows, like using our dollar reserves to prop up the peso or increasing bank reserve requirements, remain weak. They will prove to be fragile fences in the event of a real speculative stampede—which is a very real possibility if it becomes clear that Fernando Poe, Jr., will win the presidency. Then we will see not o­nly foreign capital heading for the exit but also local capital in search of security.

The Standard Chartered Bank of London has suggested that the Philippines faces an Argentine scenario where the fiscal situation goes out of control and the country defaults o­n its debt. That may well be so in the medium term. The greater worry is that in the short term, we may face a "Brazilian scenario"—one that is o­ne akin to the o­ne in Brazil during the electoral campaign of 2002, before President Lula (Luis Inacio da Silva) came to power. There, foreign capital was leaving the country out of fear of Lula’s pro-people policies, bringing down the value of the Brazilian currency, the real. To stop the bleeding, Lula promised the International Monetary Fund that he would, if elected, continue the previous government’s stringent contractionary program, the main element of which was a promise to achieve a budget surplus equivalent to 3.75 per cent of the gross domestic product. In return, the IMF agreed to give Lula access to the remaining $24 billion of a stabilization loan it had negotiated with the outgoing regime.

The consequence has been, after Lula’s victory, the maintenance of austerity measures that have negatively impacted o­n the welfare of ordinary Brazilians and prevented the new government from innovative expansionary policies to get the economy moving. Ironically, the first year of a populist government saw hardly any rise in the gross domestic product and record unemployment of 13 per cent of the work force. Not surprisingly, this has alienated the new government from significant sectors of its popular base.

We are inviting the same sort of external intervention in the Philippines, wherein capital flight is stanched o­nly by external intervention by a force that requires whoever wins the elections to agree to a contractionary stabilization program that will force us to get our finances in order at the cost of economic expansion. Such an intervention could take the shape of an offer of an IMF "rescue loan." It could also take the form of the Philippines’ being blacklisted in international capital markets, depriving the government of access to dollars to augment its foreign currency reserves to counteract a run o­n the peso.

If this happens, if we lose a la Brazil de facto control over our economic policy, then the consequences would be disastrous. Loss of control over economic policy-making is something we must avoid at all costs, for every time this has happened in the past-- whether it was under Marcos (the installation of the World Bank cabinet headed by Cesar Virata) or under Cory Aquino (the adoption of the IMF policy of making payment of the foreign debt the country’s top economic priority)--the cure has proven worse than the disease.

At this point, it is probably whistling in the wind to demand that the two grossly irresponsible factions competing in the elections produce the no. 1 need of the country today—an economic program that both addresses the fiscal crisis and generates economic expansion. This being a given, we must protect ourselves from a destabilizing capital flight that could lead to loss of control over economic policymaking by enacting capital controls now. The mechanisms are there. They have proven successful in stemming flight in other countries—Malaysia, China, India, Chile, to name a few. Let’s install them before it is o­nce again too late.