Bernardo M. Villegas
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Roubini Is Coming To Town

            You better watch out, Nouriel Roubini is coming to town.  He knows which economies are sleeping and he knows which economies are awake.  Fortunately for us, in  a report that came out in  Roubini Global Economics last July 2012, he included the Philippine economy among those that are definitely "awake" when he said that the Philippines was  "upgrade ready."  Whereas he may not be exactly optimistic about the advanced economies, he is definitely bullish about emerging markets like the Philippines.  In fact, two years ago he already suggested that the BRIC acronym be changed to BIIC, removing Russia and substituting Indonesia instead.  Who exactly  is Nouriel Roubini?

      Thanks to the largest Philippine investment bank, First Metro, one of the most credible economic forecasters during these times of crises is coming to town.  Nouriel Roubini was one of the few economists who foresaw the Great Recession that started in 2007. I must confess that I was among the majority of economists who in 2006 regarded the dire predictions of Roubini as highly improbable.  On September 7 of that year, Roubini, a professor of economics at New York University, spoke to an audience at the International Monetary Fund in Washington, D.C.    He forcefully issued a warning that many in the audience considered as highly unlikely, if not absurd.  As is reported in his best-seller "Crisis Economics" which he co-authored with Stephen Mihm, he had predicted that the U.S. economy would soon suffer a once-in-a-lifetime housing bust, a brutal oil shock, sharply declining consumer confidence, and inevitably a deep recession.

          To tell the truth, I was one of the skeptics who reacted negatively to reports of his predictions.  Towards the end of 2006, I was beginning a two-year stint as a Visiting Professor at the IESE Business School in  Barcelona, Spain.  The Spanish economy was still in its glory days, having outpaced all the European countries in GDP growth for more than ten years.  There was still much euphoria about the "Iberian tiger."   All the major sectors were booming, especially construction and real estate.  Roubini would have been laughed out of a room of business people if he had predicted that Spain would suffer a crisis in which its unemployment rate would reach 25% and would be on the brink of bankruptcy three or four years down the road.  In fact, the optimists in Spain still predominated even as the sub-prime crisis was already wreaking havoc on the banking systems of the U.S. and some European countries in 2007.  To their credit, Spanish banks were not involved in sub-prime lending.  It was the real estate bubble, an oversupply of housing units, that brought Spain down.

          On the other side of the Atlantic, the Great Recession was unravelling.  The predictions of Roubini at the IMF talk were actually happening.  Let me quote from the book "Crisis Economics" what Roubini told the unbelieving audience:  "As homeowners defaulted on their mortgages, the entire global financial system would shudder to a halt as trillions of dollars' worth of mortgage-backed securities started to unravel.  This yet-to-materialize housing bust, he concluded, could 'lead...to a systemic problem for the financial system,' triggering a crisis that could cripple or even take down hedge funds and investment banks, as well as government-sponsored financial behemoths like Fannie Mae and Freddie Mac.  His concerns were greeted with serious skepticism by the audience."  To further establish his credibility, let me continue to quote from the book:  "Over the next year and a half, as Roubini's predictions started coming true, he elaborated on his pessimistic vision.  In early 2008 most economists maintained that the United States was merely suffering from a liquidity crunch, but Roubini forecast that a much more severe credit crisis would hit households, corporations, and most dramatically, financial firms.  In fact, well before the collapse of Bear Stearns, Roubini predicted that two major broker dealers (that is, investment banks) would go bust and that the other major firms would cease to be independent entities.  Wall Street as we know it, he warned, would soon vanish, triggering upheaval on a scale not seen since the 1930s.  Within months Bear was a distant memory and Lehman Brothers had collapsed.  Bank of America absorbed Merrill Lynch, and Morgan Stanley and Goldman Sachs were eventually forced to submit to greater regulatory oversight, becoming bank holding companies."

          Because of his accurate reading of the signs that preceded the Great Recession, some pundits have referred to him as the "prophet of doom."  Actually, the label is undeserved.  He is not at all fixated on doomsday.  He just calls a spade and spade.  In contrast with the extreme free-market economists, disciples of the late Milton Friedman, he was realistically aware of the shortcomings of western capitalism, especially as regards the financial sector.  Actually, his deep insights into these weaknesses can help both policy makers and industry leaders to formulate strategies that can help avert future crises.  His book Crisis Economics comes out with very valuable suggestions on how to restore vitality to the markets of the advanced countries.

          What is the future that he foresees?  The Philippine business community will have a chance to listen to what he has to say about the U.S., Europe, Japan and the emerging markets in the Philippine Investment Summit organized by First Metro Investment for Wednesday, January 30 at the Makati Shangri-La Hotel at 2 to 5 p.m.  Expect Mr. Roubini to be brimming with strategic information about the global economy because he will be coming to Manila after the annual Davos Forum.  As I wrote above,   he is bullish about some emerging markets, including the Philippines.  As one of the panelists (among the others are Manny Pangilinan, Montxu Aboitiz, Hans Sicat, Alberto Villarosa, Secretary Cesar Purisima, Francis Sebastian and Roberto Juanchito Dispo of First Metro Investment and Michael McDonough, Senior Asia Economist of Bloomberg), I am already expecting that he may not be very optimistic about the U.S. economy after reading an article he wrote for the Financial Times last January 3, 2013 in which he said: "The deal reached in Washington on New Year's day prevented the US economy from falling off the so-called fiscal cliff.  However, given the dysfunctional nature of the American political system, it won't be long before there is another crisis.  Two months, if fact.  If no action is taken by March 1, $110 billion of spending cuts will commence.  At about the same time, the US will hit its statutory debt limit, known colloquially as the debt ceiling."  Fortunately for the Philippines, the high GDP growth of 7 to 8% that I expect for 2013 will be mostly fueled, not by the external sector, but by domestic engines of growth. Anyone interested in the Philippine economy should not miss what Roubini--an economist with a deep and penetrating analytical mind ahead of the curve--will say about the Philippines in the midst of a global economy still struggling to recover from the Great Recession. Those interested in attending the Summit may get in touch with Pinnacle with email address ed.gallinero@tpgi.org.   For comments, my email address is bernardo.villegas@uap.asia