Politics

Confidence is an economic asset

3 Mins read
LUCREZIA CARNELOS-UNSPLASH

BEHAVIORAL ECONOMICS relates emotion such as optimism (or its opposite) with economic decision-making. Does confidence in the economy and the political leadership translate into a positive lift in activities such as acquisitions, mergers, foreign investments, and consumer spending?

Traditionally, a new administration is welcomed by a surge of optimism reflected in the rise of the PSEI. Occasionally, such confetti of confidence (coinciding with the honeymoon period) is withheld with a “wait and see” caution from economic players in the private sector. Characterizing the accomplishment of the first 100 days as the selection of a team of the best and the brightest is a good start. (What are your priorities, Sir?)

Still, signals such as the torpedoing of negotiations in the pipeline for new capital expenditures or mergers are red flags in terms eroding confidence in the rule of market economics and the role of the private sector. Regulatory and legislative agencies can be seen as too eager to join the fray.

One phenomenon in economics is the beneficial effect of rising stock or property prices. Economists explain the increase in discretionary consumption in a bull market as the “wealth effect.” When yet unrealized profits accumulate in one’s asset portfolio, the feeling of wealth sets in, even when the cash from selling such assets has not yet been realized. This leads to consumer exuberance and spending on cars, condo units, couture clothes, jewelry, and foreign trips. After the worst of the pandemic, this exuberant consumption has been called “revenge spending.”

The feeling of being wealthy can drive consumption, even when fueled by bank borrowings and credit cards, all on the presumption of cashing in eventually on the rising value of one’s assets. The impact on GDP of the wealth effect is real.

What if the stock market is on a downward trend and seems to be looking for lower levels of support — do investors feel poorer and experience an opposite “poverty effect”? Will the investor sell in a panic and cut his losses? Even when he cashes in, he will still feel poorer. His reference point is the peak of the market when he could have sold.

Signs of the poverty effect, whether psychological or real, are hard to miss. They are even more pronounced at the time of high inflation and depreciating peso value against the US dollar.

Investors are taking a “wait and see” attitude, keeping cash on the sidelines. This is not always a safe policy. Idle cash can lose its value with inflation and the depreciation of the currency. “Living on interest” (LOI) is no longer a viable investment decision. Even rising interest rates are eroded by inflation.

Are purchases being postponed, waiting for better times? Christmas spending is moving closer to the holidays themselves, and the gift lists are shrinking as well as the budgets for them. Gift recipients of the past plead — Don’t give me gifts anymore so I don’t feel guilty when I don’t reciprocate.

Is there a way to shake off the feeling of confidence erosion and economic drift resulting in the poverty effect? We are not discounting here real poverty and increase in unemployment. A recent survey shows inflation to be the biggest concern. But confidence in the economy is beyond numbers.

Preventing the poverty effect in taking root entails showing more than GDP numbers and the usual economic metrics like inflation under control and the peso rallying versus the dollar.

There is an emotional component here. It’s a sense of belonging to the club of successful emerging economies. Visible leadership and improving the optics of someone in charge of economic recovery contributes to a perception of confidence.

A daily dose of good news, even if initially boring, can start us believing that things are finally going right. This can highlight such jejune things as airports being inaugurated, new branches of fast-food outlets announced, rising OFW inward remittances celebrated, and more speeches on the economy among business groups from the cabinet and person on top.

It means changing the dominant news narrative from pre-departure and arrival speeches to infra projects in the pipeline.

Confidence in the economy needs to be built up after the pandemic. And not just the removal of the face mask. We need to join the group of rising economies rather than the ones with high-risk indices. It’s time to show that the business climate here is hospitable to the private sector… or at least not hostile to it.

Tony Samson is chairman and CEO of TOUCH xda

ar.samson@yahoo.com