Condor’s forecast is based on an unfair and inaccurate comparison between Argentina and the Philippines.

The wishful thinkers in the opposition are making a big to-do about the prediction of the California-based Condor Advisers Inc. that the Philippines is on the verge of a social revolt that would lead to a government collapse.

Condor’s forecast is based on an unfair and inaccurate comparison between Argentina and the Philippines. The investment risk analysis firm prides itself in having accurately predicted a default in foreign debt payments and social unrest in Argentina.

Condor’s president, Jephraim Gundzik, was quoted as saying that “just like Argentina, the Philippines’ eventual public-sector debt default will be the result of social revolt and government collapse.” He told the firm’s clients, which includes the largest mutual fund companies and hedge funds in the US, that “unless another large capital loss is appealing, investors should consider Argentina’s default as an example of what can happen in other emerging-market countries, and not as an isolated and resolved event.”

Gundzik compared the Philippines to Argentina before its default which he said was characterized by weak governance, weak government legitimacy and low popular support for the presidency.

He said that in the Philippines at present, like in pre-default Argentina, the public sector debt stock has become unsustainably large. Argentina’s attempt to tighten fiscal policy came far too late to extricate the country from its debt trap. The tighter fiscal policy in pre-default Argentina, instead of reducing the fiscal deficit, resulted in reduced economic growth, making default inevitable.

I asked a political analyst who is familiar with South America, particularly Argentina, to comment on the Condor report. He said that Condor’s claim that “there are similarities between pre-default Argentina and the Philippines today” is quite inaccurate. He added that there is no basis for the observation that one of the key reasons economic growth slowed down in Argentina was the “gathering social revolt there.”

He said what happened in Argentina was that “mobs paid by the opposition party were let out on the streets to create disturbances that led to the resignation of then-president Fernando de la Rua in December of 2001.” He stressed that what happened “was staged and was not a popular uprising.”

He noted that Condor “refers to weak governance and weak government legitimacy and low popular support as a cause for Argentina’s economic decline.” He stressed: “This was not the case. What happened was that Argentina pegged its peso throughout the 1990s at 1 peso to the US dollar and continued this artificial valuation even when the country no longer had the reserves to back that value up. As a result, when it had to devalue in early 2002, the Argentine peso lost almost 200% of its value. That is when the economic decline set in and some 50% of the population fell below the poverty level. Of course, one can argue that economic policy is part of governance but in this particular case, it was a case of the governed going along with what the governing class decided because it was convenient for everyone concerned. No lack of legitimacy or unpopularity here.”

He clarified that what happened in Argentina was a partial default. Argentina defaulted on its foreign debt to private creditors but not to public creditors like the IMF and the World Bank.

In strictly economic terms, the situation in pre-default Argentina was very different from the situation that the Philippines faces. He said: “The Philippines has a fiscal crisis, no doubt about that. Argentina then did not only have a fiscal crisis, no doubt about that. Argentina then did not only have a fiscal crisis. It was on the brink of a bank run and was threatened by the IMF with a suspension of credits in the pipeline if it not take certain measures to bridge its fiscal gap.”

He pointed out to some of the differences between the situation in the Philippines and pre-default Argentina including the fact that the Philippines has a total foreign debt equivalent to 50% of its GDP in contrast to Argentina’s total debt which then stood at 50% over its GDP. He said that only 10% of the Philippine external debt consist of short-term maturities while Argentina’s short-term debt is 90% of the total.

He stressed that the Philippines has not defaulted on any part of our foreign debt while Argentina defaulted on its $100 billion private debt of a total of about $140 billion “although its restructuring plan for the defaulted private debt has already been accepted by 76% of its private creditors.”

He said that unlike pre-default Argentina the Philippines has a functioning banking system and even the private sector in Argentina has a very limited access to credit and bank depositors still have not regained their trust in the banking system.

He said its important to note the foreign exchange reserves of the Philippines is about equal to that of Argentina “despite the fact that their economy is much larger than that of the Philippines.”

He said: “What happened to Argentina was the slow erosion of the economy due to wrong policies. The process began in the mid-1980s and deepened during the 1990s. The same thing probably started in the Philippines earlier. These developments are not generated by any one administration at a given time.”

The wishful thinkers in the opposition will not be happy with his conclusion that despite the economic challenges faced by the Philippines and Argentina, this expert does not see any “spontaneous combustion” in the two countries any time soon or in the future.

Alvin Capino, ABS CBN News, March 29, 2005