Business World
Introspective
With the synchronized recession everywhere, the call of the day even from such pillars of fiscal conservatism as the IMF is "fiscal stimulus." Such policy is seen as a way to counter a slowdown in global demand - which may affect exports, investments, and for countries like ours, workers' remittances - given the limitations of monetary policy in an environment of depressed consumer confidence, constrained financial markets and low interest rates (a potential "liquidity trap").
What is sometimes overlooked is the difference in country situations. As the IMF said, "While a fiscal response across many countries may be needed, not all countries have sufficient fiscal space to implement it since expansionary fiscal actions may threaten the sustainability of fiscal finances. In particular, many low income and emerging market countries, but also some advanced countries, face additional constraints such as volatile capital flows, high public and foreign indebtedness, and large risk premia."
What is appropriate for the US or China may not be appropriate for a country like the Philippines. The US, though at center of the storm, is still owner of the printing press for the world's reserve currency and has the capacity and responsibility for helping pull the world out of a potentially deep depression. The same goes for most countries in the euro zone. China has abundant international reserves as do Japan and many other East Asian countries.
Not so the Philippines. The country has only limited fiscal and debt headroom and still relies heavily on domestic and international capital markets, which continue to be bugged by risk aversion.
Debt-to-GDP ratio, while having been brought down from 78% in 2004 to only 57% last year (as of the third quarter), is still high relative to similarly rated peers and still higher than the lows achieved ten years ago. While recent borrowing by the Bureau of the Treasury had been inspired, it was still six percentage points over US Treasuries, revealing skittishness of investors for Philippine securities.
Government economic managers have been careful to characterize the fiscal stimulus package as manageable, and rightly so, as the markets have not shown adverse reaction so far. As well analyzed by Dr. Philip Medalla, the government can afford a public deficit of 2% to 3% of GDP (P150 billion to P200 billion) and keep its debt ratio on a declining trend - if it has a buoyant tax system (tax effort not declining), if it makes better use of taxpayers' money, and if macro stability and fiscal credibility can be maintained and off-budget deficits reduced.
Philip emphasizes that fiscal stresses over the past three decades have not come from the national government deficit but from surprises from contingent liabilities.
As government talks about a fiscal stimulus - or what they have labeled as the Economic Resiliency Package - to protect growth, it behooves us to remember how fiscal surprises in the past have raised the cost of credit to high levels.
What are the contingent, off-budget risks that the country's authorities should be mindful of and monitor closely (as indeed they do)?
One major category consists of borrowings of government firms guaranteed by the government. The NFA's debts come to mind, the agency being the biggest borrower lately. There are also potential risks in the National Development Corp. (NDC) and other GFIs providing seed money for a P100-billion fiscal stimulus package championed by some groups in the private sector (the Philippine Chamber of Commerce and Industry, in particular).
Other possible sources of contingent risks include the guarantees provided to failing banks, perhaps including a syndicate of rural banks whose business model seems patterned after the Madoff scheme, and the opaque accounting of some GFIs and government corporations.
While the numbers being discussed for the stimulus package are not alarming relative to GDP (around 3%, maybe up to 4%), this will need to be appreciated in view of likely declines in tax collection and tax effort. The dip in performance will trace not only to slower economic activity and lower corporate profits, but will be partly structural in nature - i.e., due to a lowering of the corporate income tax rate from 35 to 30%, exemptions granted to minimum wage earners, and continuing non-indexation of sin taxes.
With elections nearing, Congress cannot be expected to act with much resolve on taxing matters. So, one can imagine a fiscal slow burn becoming incendiary if markets get nervous for any variety of reasons - financial contagion and capital reversal or even political turmoil occasioned by an unwelcome Latin dance.
So by all means, let's get fiscal. But let's do it in a way that is controlled and transparent. The conditional cash transfer program (e.g., grants to the poor provided their children stay in school) delivers an excellent fiscal stimulus because it is not only effective (translates immediately to consumption and GDP increase) but also has the ability to alleviate poverty. Noteworthy is the public confidence in the leadership of the Department of Social Welfare and Development (DSWD) and the sponsorship and technical support of the World Bank, which already has many success stories under its belt (notably, Indonesia and Brazil). By contrast, we should beware of rushing spending on ill-prepared projects that will unlikely result in any activity, and will probably just be wasteful (think fertilizers in 2007 and the North Rail-ZTE project).
