The Economy & The Corona Impeachment: A Trip Down the Rabbit Hole

A couple of months ago my colleague benign0 raised the interesting speculation that the entire point of the Aquino presidency, from the point of view of those who installed him in office, was to ensure that “the family crown jewel,” the Hacienda Luisita estate in Tarlac, remained in the hands of the Cojuangco clan until at least 2014 and preferably forever.  That hypothesis seemed plausible at the time, and even more so after the hasty filing of the impeachment case against Chief Justice Renato Corona immediately following the Supreme Court’s unanimous ruling to finally distribute the plantation to its serfs.

Despite the precedent set by President Aquino’s own mother in using the highest office of the land to defend the family farm, the explosively controversial nature of the Corona case – its timing, the rushed passage of the Articles of Impeachment through Congress, accusations of threats and strong-arm tactics to compel Congressmen to sign them, and the unprecedented, even for this country, savagery of the media campaign against Corona prior to the beginning of the trial – was more than a little mysterious at first, and here’s why: Noynoy Aquino is President not, as he would like to think, by the grace of God, but by the grace of the big business interests of this country who are doing rather well as he dithers away harmlessly in Malacañang. Although the overall economy under Aquino’s distracted watch has steadily declined to embarrassing levels, there is a rather surprising aspect of stability to it that, if cultivated or at least left alone, might actually result in something resembling economic progress, as market expert nonpareil John Mangun recently pointed out: Given the economic uncertainty in much of the rest of the world, the Philippines, while perhaps unimpressive, is a comparatively safe haven; public and private debt levels are reasonable, the currency is relatively stable, and thanks to a consumption-driven economy, local companies are pulling in good revenues, even if their profits dipped a bit last year. The stock market here has gone completely nuts, to put it mildly:

PSE Performance. There's lots more where this came from at Mangun on Markets.

On top of that, the Philippines moved up a few notches from last year’s ranking in the recently released 2012 Index of Economic Freedom. While the economy is not so great for the average Filipino, the short leg of the J-curve works just as well if not better than the long one for the kingmaker class here, which is why it seems so odd that they would permit their Malacañang OIC to risk serious political and social instability to pursue CJ Corona’s ouster with such reckless aggressiveness. Bear in mind the healthy stock market which illustrates big business’ comfortable circumstances was achieved in spite of – or perhaps because of – Aquino’s doing essentially nothing; his doing something which would threaten those circumstances, as the impeachment case clearly does, shouldn’t be tolerated. So why are the vested interests not only openly supporting it, but taking an active, hands-on role in it?

We begin our trip down the rabbit hole with a look at the sorry financial condition of Hacienda Luisita: According to a Newsbreak investigation published just before the May 2010 elections, Hacienda Luisita Inc. (HLI), the corporation formed to manage the estate after the development of the stock-sharing scheme by which the Cojuangco family was able to avoid distributing the land to the tenants, was broke as of 2008, the year of the company’s most recent disclosure filing with the SEC. At the time, HLI reported liabilities of Php 1.34 billion and a capital deficiency of Php 773.6 million. Most of those liabilities were to other companies held by the Cojuangcos, primarily the seven that comprise the Tarlac Development Corporation (Tadeco), which owns 67% of HLI (the tenant-farmers purportedly own the remaining one-third as part of the stock distribution plan). Given that the legal wrangling over the plantation’s future has rendered it virtually non-productive, it is a reasonable assumption those liabilities and cash shortfall have deepened in the three years since.

On top of the Php 1.34 billion that is known, San Miguel Corporation (the conglomerate of Aquino’s estranged uncle Danding Cojuangco) advanced two payments of Php 300 million each to HLI to purchase sugar, which for reasons unknown SMC did not take delivery of; in the meantime, the interest on the loan has ballooned HLI’s debt to SMC to around Php 1.5 billion. While the collateral put up by HLI has not been disclosed, the only real asset HLI could use in the SMC deal is its land; at the 2008 property valuation favored by HLI and Aquino’s supportive Supreme Court Justice Ma. Lourdes Sereno (Php 2.5 million per hectare), that amounts to about 200 hectares. Other parts of the 4,915 hectares of the Hacienda that have not been converted to commercial or industrial property already are said to have been used as collateral for other loans, most through RCBC, which holds 184 hectares of the 500 converted from agricultural land by Luisita Realty and Luisita Industrial Park Corporation.

In addition to the at least Php 2.84 billion in outstanding debt, HLI was also ordered to by the Supreme Court to pay the farmer-beneficiaries of the land distribution Php 1.33 billion it received from the conversion of the aforementioned 500 hectares plus the sale to the government of 81.5 hectares for the controversial SCTEX Luisita extension and interchange, bringing HLI’s total tab to a minimum of Php 4.17 billion, for which the company has no funds to pay.

Those funds would have to come from the sale of the estate to the government under the land reform program, which sets the price at somewhere between Php 12 and Php 70 per square meter, which would net HLI something between Php 565.8 million and Php 3.3 billion – at best HLI comes up Php 870 million short; a plausible estimate, assuming a property price of about Php 40 per square meter and a debt figure somewhat higher than the Php 4.17 billion, is a deficit of Php 2.3 billion. If HLI could convince the Supreme Court to allow at least the same price at which the government expropriated the tract for the SCTEX (Php 98.79/sq. meter), it is possible the company could meet its debt obligations – but it would still have negative assets of around Php 284 million, and still be faced with buying out the 33% stake owned by the tenant farmers.

The loss of HLI to its tenant farmers would result in obvious losses to the component companies of Tadeco – and presumably, their creditors – to SMC, and to RCBC, but where does the Lopez Group of companies fit into all this? Why would they take the extraordinary step of assigning attorneys from their flagship company, ABS-CBN Broadcasting, to manage the impeachment for the prosecution? The exact stake the Lopez Group has in Hacienda Luisita’s continued existence may never be known – but openly rejecting the network’s status as an independent media entity (tenuous though that reputation may have been until now) implies the stake is big enough to be worth the incredible gamble. No other explanation makes sense; supporting the President’s drive to oust Corona on simple moral grounds is not a very good business decision. Doing so to prevent a significant financial loss or to obtain a significant financial gain would be, however, if either of those two things were significant enough to justify the risk of losing the case.

But in fact the risk to the bigger financial system might just be enough, from the Lopez point of view. Because of the interlocking nature of relationships and obligations in the Philippines’ close-ended corporate sector, the write-off that would be taken as a result of HLI’s collapse, while not (as far as we know, anyway) that large in real terms – something on the order of $90-$120 million – would be spread around. Market leaders like SMC, RCBC, and (presumably) the Lopez Group’s First Philippine Holdings would all simultaneously take a hit, and equity investors being the kind of people they are, those stocks would see a bit of downturn – particularly if more than one or two of the affected companies or large investors has to sell a portion of their own holdings to cover a sudden shortfall. Enough to trigger a market panic? I wouldn’t think so at this point, but the success of the market so far has been based on rather nebulous foundations, positive though they appear to be, the sort which has a nasty habit of collapsing under a sudden shock.

So does that mean the best outcome would be to remove Corona from office? With respect to the Hacienda Luisita issue, the question is irrelevant; taking him to task for a collegial decision of the Supreme Court only would have worked – maybe – had the Administration been able to cow him into resigning, which they obviously tried very hard and failed to do. The longer the case goes on, the less attractive an investment prospect the country becomes for the people who have been keeping the stock market humming along; development and the day-to-day work of the government stagnates, and the stress on society increases, which discourages consumption. Business slows, and all the conditions that equity investors have been so far willing to overlook – declining GDP and GNI, slowing industrial output, anemic government spending – suddenly become a lot more noticeable.

And even if Aquino gets his way and delays or even stops the deconstruction of HLI, or forces the Supreme Court to decide on a high land valuation that will oblige the farmer-beneficiaries to sell the land back to the Cojuangcos anyway, it will only delay the inevitable. That would certainly not be the end of the farmer’s fight for the land, and though HLI would be free to operate more or less ‘normally’ for some period of time, that would not magically make it a sustainable or solvent business. The idea that it could somehow “get its finances in order” by 2014 as the President once suggested is laughable; the Hacienda has posted a profit once in the last 11 years, it’s not going to start doing so now. Better then, to let it fail; get it over with, and get on with the business of governing. Continue the impeachment trial if Corona must be tried, but do so on the basis of real impeachable issues, if there are any, and not to forestall an economic loss that cannot be avoided no matter what is done.

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  1. #1 by costa concordia the new financial class war? . on February 13, 2012 - 8:02 pm

    Aquino could even have played hardball with the court in exchange for a favorable decision on Luisita, but he did not.

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