A recent news item says that more pilots have been leaving the country for greener pastures overseas. Philippine Airlines, Inc. (PAL) has lost about 20% of its pilots over the last three years and more are about to fly the coop. This is an alarming development in our continuing brain drain. Even our best trained and highest compensated professionals are packing their bags. A desperate policy resolution from the Philippine Overseas Employment Administration limiting the number of pilots who can work for international airlines has failed to stem the tide.

Things have apparently gotten worse since. Over the weekend, at least 23 international and domestic PAL flights have been cancelled due to the fact that there were no pilots to fly PAL planes. Eight more flights were cancelled today.

Apparently, a critical number of PAL’s A320 Airbus pilots resigned and immediately left for more lucrative posts overseas, without giving sufficient notice or allowing for enough time to bring replacements on board. This prompted PAL management to threaten legal action against the fleeing aviators, citing flagrant violations of their training and employment contracts. Unfortunately, going to court won’t solve PAL’s woes. The judicial process will just drag on without addressing the fundamental reality that PAL cannot compete with the wages and perks being offered by other airlines in the Asia-Pacific region and the Middle East. Market forces are at work here which will not bend to PAL’s will.

A restrictive employment covenant in their employment contracts may prevent some of these aviators and other skilled workers from transferring to competitors abroad. This is a common enough clause in contracts for so-called “mission critical” workers, or those who are considered integral to an industry’s sustainability. But this will not solve the problem. PAL cannot seek judicial enforcement of every agreement that may be breached by its pilots. And under settled cases, the employer has the burden of proving that the restriction is valid and reasonable and does not impose an “undue burden” on the employee. It can be convincingly argued that working in the Philippines constitutes an undue burden.

Sadly, this goes beyond mere inconvenience and embarrassment. It’s a major setback for the air travel and tourism industries. And it actually places the flying public in grave danger as PAL and other airlines might be tempted to allow underqualified or raw pilots to handle its planes.

This trend has grave implications, not the least of which is its effect on domestic air travel safety. With our best pilots and flight engineers gone, can the airlines ensure that the riding public is given a safe ride ? We foresee turbulence ahead for the airline industry.

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The unprecedented drop forced officials to temporarily stop trading, also a first for the PSE.

The “circuit breaker rule” was imposed after the main index fell by 10%. The trading floor imposes an automatic 15-minute halt to trading if the PSE index falls by at 10 percent. The rule is designed to calm down emotional selling. To no avail, as sellers dumped shares after the break in a frenzy of panic-selling.

According to BusinessWorld, the total value of all 241 firms listed on the PSE was P7.98 trillion at the start of the year.

As of yesterday this was down to P4.75 trillion, or a 60% loss in value, much of it in the last few months of global financial turmoil.

Alejandro “Ali” Yu, president at RS Lim and Co, was quoted as saying:

There was a massive selldown across the board. There’s no other word for it but a bloodbath.

PSE president Francis Lim acknowledged:

This is the first time in history something like this happened. It’s really because of what happened to global markets last Friday. It’s not surprising.

Shares of the country’s second largest bank by assets, Banco de Oro, dived 24% after it reported a third-quarter net loss of P1.3 billion, primarily due to provisions for its exposure to bankrupt Lehman Brothers.

The worst is yet to come, as fearful investors threaten to drag the global economy closer to recession.

Analyst Dr. Carl Weinberg, of High Frequency Economics, said in New York:

If the fall in markets has its origins in the fear of an international recession, then the coming week will be very bad. The economic calendar is full of indicators that will be uniformly atrocious.

The problem with fear is that it’s highly contagious, like a virus infecting markets worldwide. You can’t stop it. Reason will not prevail in collapsing markets.

The average Filipino won’t feel the effects of the impending crash, at least not immediately, as only a miniscule part of the population are market players. But a few months from now, as we enter what could possibly be a prolonged recession, there will be economic dislocation and restiveness. Not even OFW remittances will save us, as the economies which hire our workers will themselves be the hardest hit.

There is little we can do except brace ourselves for more turbulence.

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According to blog site Innovation Journalism, the shock waves throughout the U.S. and global economy and the fallout from the most colossal financial calamity since the Great Depression has only just begun.

The government urged the public to prepare for a “worst-case scenario” amid the steady negative impact of the US financial implosion on markets elsewhere in the world. For the Philippines, an already difficult situation is about to become worse.

Press Secretary Jesus Dureza said the country would not be insulated from the global financial crunch despite its supposedly sound economic fundamentals, particularly in the banking system. That’s understating the problem. Not only will we “not be insulated” but we stand to bear the brunt of the blow in our part of the world.

The economy is already starting to contract. Government economic experts said that economic growth would likely fall to 4.3 percent this year and 4.2 percent in 2009. This is a significant drop from the claimed 7.2 percent growth of last year.

The Ibon Foundation predictably blames flawed government policy. But it gives us some sobering facts which merit deeper consideration:

The government overplays the so-called decoupling effect where the Philippines is supposedly much less dependent on the US market. On the contrary, developments in the US will still have a severe impact on the local economy as the US remains one of the country’s top exports and investments partners. Third-party partners such as South and East Asian markets are also finally linked to the US ambit.

Drops in US consumption and investments will be deeply felt as the largest part of Philippine exports directly or indirectly goes to the US. Around 20% of foreign investment in the country comes from the US. Further, some 20% of exports already directly go to the US but a large part of exports to Japan, China, Hong Kong, South Korea, Taiwan and Malaysia which take up another 50% of exports, are actually components for assembly into products whose final destination is still the US. Slower growth in third party countries that depend on the US and which the Philippines deals with will also have adverse effects on Philippine exports manufacturing.

Even the vaunted local information technology (IT)-enabled industry will be likely hit hard because of its considerable dependence on the US market, further aggravated by the continued peso appreciation. The US is an overwhelming presence in the business process outsourcing (BPO) sector and accounted for nearly 90% of total BPO exports revenue and over two-thirds of foreign equity in 2005. The impact will be most felt in the National Capital Region (NCR) where an estimated 80% of BPO employees are located.

Naturally, slow global growth will restrain overseas deployments and lessen remittances which constitute our traditional buffer against financial cataclysms. The global financial crunch could also result in further cuts in the salary and benefits of OFWs as employers react to the crisis.

Already, Filipino domestics are fearful of losing their jobs.

But a former financial adviser of President Gloria Macapagal-Arroyo warned that the much-feared collapse of the country’s financial system could happen because of “our own doing.”

According to Corazon Guidote, former presidential consultant for investor relations:

Panic in the market creates rumors. It triggers stampede which is what’s happening in the US and Europe now. The emotional contagion which began in the US is now spreading like wildfire across the globe. Confidence is the best defense in a market like this. The best way is to stay calm and ride (out) the storm.

Good advice. If we panic now, we’re dead meat. But we have to brace for the worst. Which will not be long in coming.

Sad Christmas for OFWs’ families.

The worst is not over, says the Inquirer. In fact, the economic plunge is just beginning and we’re a long way from the bottom.
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First, investment bank Lehman Brothers , a firm founded in 1850 and which survived the Great Depression, two world wars and every market upheaval before and since, went belly-up over the weekend. Then rival Merrill Lynch was sold to Bank of America for a fraction of its value of just a few months ago.

American International Group (AIG), one of the world’s largest insurers, was effectively bought by the U.S. Federal Reserve for a bailout amounting to US$ 85 billion to forestall its impending bankruptcy. AIG is the mother company of the local Philippine American Life Insurance Company (Philamlife). It’s often been said that when the U.S. sneezes, the Philippines catches a cold. Well, when the U.S. gets a cold, we get pneumonia.

Investment funds immediately began pulling out of emerging markets, in anticipation of more volatility and turbulence in the global financial system. Including, naturally, the Philippines, not the most attractive investment milieu to begin with as compared to our neighbors.

According to BusinessWorld, market expectations prior to the Lehman news were already pessimistic. Foreign investors have been dropping local stocks. Analysts expected share prices, already down 32% in the first half, to continue falling for the rest of the year.

With the domino effect caused by the convulsions on Wall Street, the local stock market index has fallen some 8.7% in just two days since Monday, and the Peso has hit a 16-month low, closing at P47.20 to the U.S.$. The top two domestic banks with the largest Lehman-related exposure, Banco De Oro and Metrobank, have been scrambling to set aside funds to cover possible losses. The Banko Sentral ng Pilipinas was quick to assure the public that the banking industry remained adequately capitalized and that it has prepared a facility to aid distressed banks. The global credit crunch has come home to roost.

In the view of many analysts, we should brace for more capital flight and rough times as the crisis is just beginning. Less investments mean less business activity, leading to an inevitable contraction of the economy. Growth targets for the year will not be met. Credit will be tight, as lending institutions will adopt stricter loan requirements. Jobs opportunities will continue to shrink. In short, there won’t be enough money to go around.

Our saving grace, as always, is the expected surge in OFW remittances as the year ends. But even this ever-reliable lifeline will likewise decline, as hard-hit countries which require our services will be facing difficult times too. Guess where they’ll cost-cut first.

No one really knows where this will all lead to. But one thing’s sure. It will get worse before it gets better.

Former U.S. Federal Reserve boss Alan Greenspan gives his take on recent events:

Let’s recognize that this is a once-in-a-half-century, probably once-in-a-century type of event.

There’s no question that this is in the process of outstripping anything I’ve seen and it still is not resolved and it still has a way to go…

We will see other major financial firms fail but this does not need to be a problem. It depends on how it is handled and how the liquidations take place.

And indeed we shouldn’t try to protect every single institution. The ordinary course of financial change has winners and losers.

Citi CEO for Southeast Asia Piyush Gupta, as quoted by BusinessWorld, gives a gloomy outlook and warns investors to be cautious:

The markets are going to stay turbulent until next year. Be thoughtful and cautious. It’s not the time to take undue risk because a lot of things can go wrong. With wild market swings a constant threat, investors should put their money where there is a guarantee the initial investment will be recovered.

It’s the time for principal protection. Look for stuff where the principal is safe It’s a very difficult market, both on the fixed-income side and the equities side. That goes without saying that stock markets are particularly not a good place to park money for now. Take this as an opportunity to wait. It’s better to err on the side of caution.

Asian markets tumble as financial fears deepen.

Gold prices jumped as investors looked for safe havens from stocks.

Nicholas Kristof tackles issues of corporate governance and CEO compensation (which is seldom tied up to long-term performance). Lehman Brothers CEO Richard Fuld took home nearly half-a-billion U.S. dollars in total compensation between 1993 and 2007, then promptly drove the bank into the ground.

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1. More Oil Price Increases – a worldwide trend with no let-up in sight. I get a fever every time I go to the gas station. Unleaded is now P60.00 plus per liter at the pump and rising weekly. Crude hit a new record high of U.S.$ 143/barrel and keeps climbing. It will get worse in the last quarter as winter approaches. I fear we will hit the nightmare scenario of U.S. $ 200.00/barrel sooner than predicted.

2. Food prices and other basic commodities will increase - a no- brainer. The effect of rising energy costs, combined with other factors like increased demand and diminished production, will drive up the inflation rate, which in Metro Manila has reached double digits. Expectedly, food will exhibit the steepest price increase. The negative impact on overall income due to inflation will naturally lead to a drop in personal consumption. Which will in turn slow down the economy etc., etc. ad nauseum.

3. The crime rate will rise – another no-brainer. Crime, particularly violent ones against persons and property, is sure to shoot up, as prices escalate, people lose jobs due to cut-backs and a general slowing down of the economy and public services and government subsidies shrink. Expect more bank robberies and other vicious crimes as the year-end holiday season approaches. People are hungry and desperate.

4. Inward remittances will drop - Wage remittances from OFWs will likewise fall. The host economies of Filipinos abroad are also facing hard times and employment opportunities will be affected. I just hope this negative trend will be offset by the projected growth in the domestic services sector.

5. The Peso will continue to depreciate against the U.S. Dollar – A direct result of the rise in oil prices, as the demand for dollars will likewise increase. The silver lining is that our exports will become more attractive to outside buyers. Also, the monetary value of OFW remittances will appreciate.

6. GMA will stay in power – The anti-GMA forces are spent and in survival mode, just like the rest of us. Everyone is just trying to stay alive. The continuing series of crises and national disasters, both natural and man-made, has played into Mrs. Arroyo’s hands, as it has stalled the momentum of the oust-Arroyo movement. The opposition is also in disarray, with presidential hopefuls and other pols already jockeying for position in 2010, and paying less attention to issues against Malacañang.

7. Manny Pacquio will kick another opponent’s butt before the end of the year – Make hay while the sun shines, as the old saying goes. He will likely go against Edwin Valero or Ricky Hatton, probably the former, for an easier time. Valero, according to boxing pundits, is even slower than David Diaz despite his formidable record (24 wins, all by knockouts) . The only problem for Pacquiao would be going back to the 130-lb. super featherweight class. As he has shown in thrashing Diaz, he’s quite comfortable as a lightweight.

I’d be very glad to be proven wrong, except for the one about Pacquiao.

As former NEDA director Cielito Habito says, the year is only half way through, and unfortunately, things aren’t exactly looking up. Hold on to your belt; it may need a little more tightening.

Oil prices hit new peak above US$ 145.00 a barrel.

The inflation rate hit 11.4 percent in June from a year earlier—the fastest rate recorded in 14 years—due largely to the substantial increase in the cost of rice and other food products, the National Statistics Office reported.

“June inflation rose to a double-digit on account of the unprecedented jump in world oil prices,” Governor Amando Tetangco Jr. of the central bank, Bangko Sentral ng Pilipinas (BSP), told reporters. “As a result, domestic pump price increases triggered large price buildup across wide commodities and services groups.”

The June inflation rate exceeded the BSP forecast of 10.4-11.2 percent and the 9.5 percent recorded in May.

The Catholic Bishops’ Conference of the Philippines sees a tide of bitterness and unrest rising among the poor.
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His question is relevant as the world reels from the oil and food crises, which will get worse before it gets better. The Philippines will surely be one of the hardest hit, as crushing poverty combined with the continually rising prices of basic commodities will result in a potentially explosive social cocktail. President Arroyo, an economist herself, understands this all too well. This must keep her up nights, as it does many of us.

Diamond tells us to consider the number “32”.

To mathematicians, 32 is an interesting number: it’s 2 raised to the fifth power, 2 times 2 times 2 times 2 times 2. To economists, 32 is even more special, because it measures the difference in lifestyles between the first world and the developing world. The average rates at which people consume resources like oil and metals, and produce wastes like plastics and greenhouse gases, are about 32 times higher in North America, Western Europe, Japan and Australia than they are in the developing world. That factor of 32 has big consequences.

To understand them, consider our concern with world population. Today, there are more than 6.5 billion people, and that number may grow to around 9 billion within this half-century. Several decades ago, many people considered rising population to be the main challenge facing humanity. Now we realize that it matters only insofar as people consume and produce.

The estimated one billion people who live in developed countries have a relative per capita consumption rate of 32. Most of the world’s other 5.5 billion people constitute the developing world, with relative per capita consumption rates below 32, mostly down toward 1.

Consider further the case of the Philippines. In the Philippines, the gross national income (GNI)per capita is approximately $1,420. When compared to the GNI per capita of the United States, which is about $44,970, it is easy to tell that the economy of the Philippines is very, very poor. Extrapolating our per capita income to that of the U.S. in determining the relative consumption factors of both countries, we find that our consumption factor is approximately 1 while that of the U.S. is around 32 (I’m aware this is inaccurate, and is in fact a conservative figure, since the population of the Philippines is 80 million while that of the U.S. is 300 million, but lets make this assumption for now).

In other words, individual Americans consume thirty-two times as much as individual Filipinos.
Put another way, a single American consumes as much as 32 Filipinos.

Viewed from this angle, the fixation on population growth and environmental depredation in the developing world as major contributing factors to the world crises, particularly on the part of Western-trained economists and policy makers, smacks of hypocrisy and is simply wrong. As pointed out by Diamond’s article, yes, population growth is a problem for us, but its not a burden on the whole world, because Filipinos consume so little. This holds true for the rest of the developing world, in relation to the advanced countries.

Likewise, the United States is historically the world’s largest greenhouse gas emitter, though it was recently overtaken by China. As far as environmental policy is concerned, the U.S. and other rich countries are not as progressive as some of those belonging to the so-called Third World. The U.S. refuses to even ratify the Kyoto Protocol.

As consumption factors increase, particularly among the emerging economic giants like China and India, the crises will be sure to worsen. But the best solution, and the only way to cope long-term, is to lower world consumption rates to a sustainable level. This will happen, according to Diamond, whether we do it willingly or not, simply because our present rates are unsustainable.

But the lead should be taken by the U.S., where waste has become a way of life. As pointed out by Prof. Diamond:

Real sacrifice wouldn’t be required, however, because living standards are not tightly coupled to consumption rates. Much American consumption is wasteful and contributes little or nothing to quality of life. For example, per capita oil consumption in Western Europe is about half of ours (U.S.), yet Western Europe’s standard of living is higher by any reasonable criterion, including life expectancy, health, infant mortality, access to medical care, financial security after retirement, vacation time, quality of public schools and support for the arts.

In other words, less consumption (and consequently, less waste) will enhance, rather than diminish, the quality of life for the global community.

Newsweek’s Ruchir Sharma says economic analysts these days impulsively attribute all major trends to the “Chindia” factor. However, the myth has again transcended the truth. And nowhere is this more apparent than in the discussion of oil. In the oil front, the United States is still the 800-pound gorilla of that market; it consumes nearly 25 percent of the world’s total output, compared with just 12 percent for all of Chindia.

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Other Websites: Oil Condition Monitoring by Hydac Australia