Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017

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I Forecast Right Or Wrong (Part I)

          I can already foresee that I will be eating humble pie when I meet some of my colleagues who attended an economic briefing I gave late November 2016 to the leading lights of the Trust and Asset Management Association of the Philippines. The year 2016 ended with a foreign exchange rate closer to P50 to $1 than the forecast I gave of P48.50 to $1.  I told the audience then at the Tower Club that, although at the time the exchange rate was already hitting P50 to $1, I expected large flows of dollars into the country as Christmas approached in the form of remittances from Overseas Filipino Workers who have always shown greater generosity to their relatives during the festive Season.  It is clear that I overestimated this generosity and more importantly, underestimated the great expectations of investors all over world about the strength of the U.S. economy under a Trump Presidency.  Talks about three rounds of interest rate increases in the New Year also did much to draw capital to the U.S., away from emerging markets like the Philippines.

         With this rather serious error in forecasting, should I give up telling business people and other decision makers about what I think the economic future will be?  Should I listen to the harsh criticism of a leading Brexiter, Michael Gove, who remarked during the EU referendum campaign that “the people of the country have had enough of experts with organizations with acronyms saying that they know what is best and getting it consistently wrong.”  Modesty aside, I have been getting it more right than wrong over the last forty years of making economic forecasts. Even assuming that I have been wrong too often, I will not give up forecasting.  As John Llewellyn,  former head of forecasting at the OECD, replied to Mr. Gove in an article in the Financial Times (December 16, 2016), the reason that there are so many economic and financial forecasts is that people not only want them and need them, they also pay for them.  The best economic forecasts tend to be the ones produced by organizations with the necessary computing power, and forecasting teams who provide the underlying data and spell out their assumptions.  Users are thereby able to understand how the forecast was arrived at.”

         As many people in the Philippine business community know, the organization I work for has the acronym CRC (Center for Research and Communication) which is now a think tank affiliated with the University of Asia and the Pacific.  CRC has at least five holders of Ph.D. in Economics who are steeped in model building and econometrics, assisted by an array of millennials who have been using computers since they were in grade school.  These are the people I rely on when I make forecasts about the Philippine economy and its various sectors, industries and regions.  I never fail to present the underlying data and to spell out the assumptions I am using.  That is why it would be imprudent for business decision makers to throw the baby with the bath water.  To quote the punch line of Mr. Lewellyn, “Discrediting rational, fact-based analysis and those who use it to forecast, creates a vacuum; and with that comes the following implicit injunction:  ‘Because these experts do not know what they are talking about, anyone’s view is equally valid.’ “

         In fact, even the ordinary man in the street relies a lot on some form of forecasting.  As Mr. Llewellyn observed:  “…it is feature of the human condition that we are interested in what the future will bring.  We rely on forecasts in daily life more than we might think.  Before we leave home in the morning we listen to a weather forecast to decide what clothes to wear and a traffic forecast to decide what route to take to work. By opting not to take a, raincoat and taking the car, say, I am forecasting, albeit implicitly that it will not rain and the traffic will be manageable.”  I bet that last December 24, there were millions of Filipinos who were consulting their favorite TV  or radio channels for the weather forecast about the typhoon that devastated large areas in Bicol and Southern Luzon.  Thanks to these forecasts, thousands could be evacuated to safety.

         And so as an incorrigible forecaster, let me begin the year with the forecast that having reached P50 to $1 at the end of 2016, the foreign exchange rate will be maintained at more or less the same level during the whole of 2017.   I agree with those who are even bolder in forecasting the stock market (like my friend Mike Oyson who heads BPI Securities) that the index will break the 8,000 ceiling again in 2017.  My underlying assumption for these two daring forecasts—which I share with topnotch Asian financial analyst Jim Walker of Asianomics—is that President-elect Trump will disappoint the optimists who expect him to give a big boost to growth and employment in the U.S.  In fact the U.S. economy could face another recession, making the promise of three rounds of interest rate increases unrealistic.  With the uncertainties to be faced by the U.S. under a Trump leadership, there will be a scramble among investors to look for safer investment havens, among which will be the emerging markets of Asia, of which the Philippines will be one of the most attractive in 2017.  In a provocative report entitled World War Three, Jim Walker gives the Philippines an “Overweight” classification for stock market investors, together with other Asian emerging markets like South Korea, Taiwan and Vietnam. (To be continued.)