Legislation in aid of investments, jobs, recovery

I am pleased to share with our readers a piece based on our latest report for GlobalSource Partners, a subscriber-based network of independent analysts covering emerging markets. Christine Tang and I, assisted by Charles Marquez and Shanee Sia, are their local partners.

Since the pandemic, President Rodrigo Duterte’s economic team has had its hands full trying to save the economy from slipping deeper and deeper into recession. Part of the job was to convince Congress to give the executive branch spending leeway to fight the pandemic, accomplished through the Bayanihan I and II Acts, while reigning in lawmakers’ clamor for higher stimulus spending, done by capping the supplemental budget for this year to less than 1% of gross domestic product (GDP) and getting both houses to stick to its proposed P4.5 trillion national budget for 2021.

Economic managers needed also to persuade legislators to urgently act on the other elements of the executive’s economic recovery plan consisting of three proposed bills, the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), the Financial Institutions Strategic Transfer (FIST) Act, and the Government Financial Institutions Unified Initiatives To Distressed Enterprises For Economic Recovery (GUIDE).

It has so far gotten the green light of both houses on two of the three, i.e., CREATE and FIST, with the less contentious GUIDE still awaiting the Senate’s nod. Although these bills still have some milestones to hurdle, notably reconciliation of differences between the versions passed by the two chambers, hopes are high that the 2021 budget together with CREATE and FIST, will be done by early Q1, 2021.

Many in the business community are rooting for the House to adopt as closely as possible the Senate version of CREATE to facilitate its quick passage. The Senate version keeps the structural reform thrust of the original Executive and House versions but tweaked to be more attuned to the impact of COVID-19 on MSMEs, hospitals and educational institutions, and the requests of PEZA locators for longer transition periods. It will also provide a needed fiscal stimulus of around P250 billion over the next two years (counting the retroactive application to July 2020), and most crucially, will lay to rest contributory uncertainty over Philippine tax regime deterring  investments due to its delayed passage.

To optimize on its impact in attracting investors many of whom are looking for new destinations due to the disruptions from COVID-19 and the US-China trade and tech wars, it would be ideal to package CREATE with a critical mass of other investment reforms that will demonstrate resolve. But with less than 18 months to go before the 2022 elections, has the window closed?

Many are hoping not. After all, amidst the hardships brought about by the pandemic, the President still enjoys tremendous trust and approval with unparalleled popularity ratings of over 90% which ought to give him immense influence over Congress even at this late stage of his administration.

Moreover, with his economic team’s track record of securing difficult reforms, some decades in the making (e.g., TRAIN, Rice Tariffication Act, Bangsamoro Organic Law, National ID Law), the hope is that more landmark laws can be pushed through the legislative mill in the narrow window between now and election season; realistically, about six months’ time.

While a pandemic may not be a good time to be thinking of structural reforms, there may be an opportunity to ride on the recently signed Regional Comprehensive Economic Partnership (RCEP). The RCEP binds its 15 signatories, i.e., the 10 members of ASEAN, Australia, China, Japan, Korea, and New Zealand, which together account for about 30% of global GDP and 30% of world population, to higher level commitments compared with existing free trade agreements (FTA).

Analyses of RCEP suggest that the agreement’s immediate value lies not in the incremental tariff reductions, which may take up to 20 years to implement, but in the promise of seamless production networks among the members who will be tied to common standards, disciplines on intellectual property, rules of origin, customs processes, e-commerce, and competition policy. Within this framework of stable and predictable rules, the Philippines could aspire to becoming a regional manufacturing and services hub, thereby creating much needed domestic jobs.

RCEP with the lower tax regime under CREATE along with proposed amendments to the Public Services Act (PSA), the Foreign Investments Act (FIA), and the Retail Trade Liberalization Act (RTA) strung together would send a powerful signal of the Philippine’s readiness to welcome foreign capital to help with post-pandemic recovery, offering a light at the end of the current gloomy tunnel.

The latter three bills have been approved by the lower house and are at varying stages of deliberations in the Senate, requiring the executive’s close shepherding to ensure speed. The RCEP too still needs the Senate’s ratification, a process that based on past experiences could take anywhere from one to three years.

Former International Monetary Fund (IMF) chief Christine Legarde used to counsel countries to fix the roof while the sun is shining. But for those who have spent a lifetime incrementally pushing reforms in the Philippines, one ought never to waste a good crisis.

 Priority economic bills

A. Pending the President’s Signature

1. NATIONAL EXPENDITURE PROGRAM. The executive proposed a P4.5 trillion national budget for 2021 with spending priorities focused on pandemic response and recovery.

2. FINANCIAL INSTITUTIONS STRATEGIC TRANSFER (FIST). The executive’s proposal aims to facilitate the disposal of financial institutions’ non-performing assets through tax and other incentives on the transfer of these assets to and from special purpose corporations created under the law. As with CREATE, the House of Representatives adopted the executive’s version while the Senate introduced regulatory and loan coverage amendments.

B. For reconciliation in Bicameral Conference Committee

3. CORPORATE RECOVERY AND TAX INCENTIVES FOR ENTERPRISES (CREATE). (https://taxreform.dof.gov.ph/tax-reform-packages/p2-corporate-recovery-and-tax-incentives-for-enterprises-act/)

C. Approved by the House of Representatives; Pending Second Reading in the Senate

4. AMENDMENTS TO FOREIGN INVESTMENTS ACT. The proposal seeks to exclude the “practice of professions” from the coverage of the law and to reduce the number of direct local hires of foreign investments in SMEs from 50 to 15.

5. AMENDMENTS TO RETAIL TRADE LIBERALIZATION ACT. The proposal seeks to lower the $2.5-million minimum paid-up capital for foreign retailers, among others. The bill approved in the lower house set the threshold at only $200,000.

D. Approved by the House of Representatives; First Reading in the Senate

6. GFI’S UNIFIED INITIATIVES TO DISTRESSED ENTERPRISES FOR ECONOMIC RECOVERY (GUIDE). The two main features of the proposal are to (a.) increase the capital of three government financial institutions, namely, Land Bank, Development Bank of the Philippines and Philguarantee Corp. to enable them to assist in pandemic recovery efforts, and (b.) mandate the two banks to set up a special holding company to assist strategically important industries in various sectors.

7. AMENDMENTS TO PUBLIC SERVICES ACT. The proposal seeks to amend the 84-year-old law to exclusively designate as “public utility” the distribution and transmission of electricity and waterworks and sewerage systems. Under the Constitution, a public utility can only be operated by firms that are 60% owned by Filipinos. The aim is to allow more foreign participation in other public services (e.g., in telecommunications and transportation) to enhance competition, improve service quality and lower the costs to consumers.

E. For ratification by the Senate

8. REGIONAL COMPREHENSIVE ECONOMIC PARTNERSHIP (RCEP). (https://asean.org/asean-hits-historic-milestone-signing-rcep/)

 

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations. He is a Board Trustee/Director of the Foundation for Economic Freedom, the Management Association of the Philippines and the FINEX Foundation.

2021: Big bounce back year?

 

With esteemed financial practitioners and good friends, BDO Capital Pres. Ed Francisco and ING Bank President Hans Sicat, I was recently asked to be a panelist in a Philippine Daily Inquirer 35 Anniversary forum.  That question, the title of this piece, was posed by our moderator, Business Editor Tina Arceo-Dumlao. 

Save for minor variations, we gave similar answers which i paraphrase thus: “Yes, we will see some bounce back, but largely due to base effects from the depressingly low level this year, and we won’t be seeing the Philippine economy back to 2019 levels until 2022 at the earliest.  The recovery shape won’t be a V, may not even be a Nike swoosh or a U, but more like a “dirty L” (Han’s depiction) with features of a K, uneven across industries, firms and the populace.

Characterizing the crisis as unprecedented and whose impact is sudden, severe and globally synchronous, I was the most pessimistic among us three. I echoed what we wrote for GlobalSource Partners of a bounce back to only 5 pc next year, after a severe contraction of 9.5 percent this year.  Moreover, that medium term growth is unlikely to recover to the 6 to 7 percent range of the recent past 7 years, and more likely to struggle at 4 to 5 percent, closer to the long-term growth record of the Philippines.

I mentioned the following reasons for my pessimism:

1.     Risk of more infections and stricter quarantines, possible second or third waves:
Notwithstanding success in flattening of the infection curve recently that has allowed some easing of the longest and strictest lockdowns.

 

This is thanks to the notable augmentation of DOH efforts by heavy hitters Secretary Charlie Galvez as National Task Force Chief Implementor, Secretary Vince Dizon as his Deputy, the three other czars (for testing, tracing and quarantine facilities) and Presidential Adviser Joey Concepcion.  They have also commendably mobilized the massive support of the private sector, too numerous to enumerate here, in what everyone appreciated to be an existential national undertaking.

 

However, major gaps exist including execution of a more digital tracing system, much delayed payments by Philhealth to labs and hospitals and vaccine procurement where the Philippines is unfortunately at the end of the queue.

 

An expert I consulted considered that only 25 to 50 percent of our 108 million population are likely be inoculated by the end of 2022, a good two years away; quite understandable considering how massive and unprecedented such an undertaking is with enormous uncertainties on the approval process, which vaccines will work, for how long, inadequate cold chain and other logistical infrastructure and willingness of people to queue up given concerns over unknown long term side effects.  The fairly recent controversies regarding the anti-dengue vaccination program of the last administration is a further dampener.  

 

This all means that physical distancing as a policy to prevent a resurgence in sickness will need to remain in place, especially in dense metropolitan areas that also account for a large share of output, as well as continuing constraints in public transportation and fearful public behavior.  Which brings us to the next concern.

                                                      

2.     Lack of domestic demand 

a.     Household consumption which accounts for 70 percent of GDP has dropped sharply, notwithstanding Government cash transfers and wage subsidies in the hundreds of millions.  A World Bank survey in August revealed that 24 percent of household heads employed in February were no longer working in August and of those still working, 57 percent reported reduced or no income.  A separate BSP consumer survey also showed that the share of households with savings dropped from 38 percent to 25 percent.  Meanwhile, latest consumer and business sentiments showed negative indices, meaning pessimists outnumber optimists.

 

b.     Investments have also plummeted.  Reports indicate that firms have underutilized capacities with poor earnings prospects, with certain conglomerates mulling further cuts in capital expenditures next year. The World Bank July 2020 firm survey showed that 15 percent of over 74 thousand respondents had permanently closed down, 40 percent had temporarily suspended operations (evenly split between voluntary and by government mandate) and job losses had been extensive with 48 percent of firms having laid off workers, especially in education, food services, and construction.  (Uncertainties related to post 2022 national elections are a further reason for firms to “wait and see“).

 

We also need to be mindful of “scarring”, output losses that are permanent due to damage to medium-term supply potential such as bankruptcies, lower labor force participation from skills mismatch, impact on human capital due to disruptions in school attendance and health services, and obstacles to resource allocation such as supply chain disruptions.

 

3.     Policy constraints.

a.     Monetary policy has been timely and vigorous in providing the needed liquidity shot in the arm. But there are limits to monetary policy in lifting demand especially when interest rates are already at low levels, what economists call “pushing on a string “.  

 

Data thus far validate this. The BSP as of October 27 had already injected P1.9 trillion into the financial system through its set of accommodative policy actions. But banks have understandably been cautious, mindful of their fiduciary responsibility to depositors who provide the bulk of their loanable funds.  At the end of Q3, net domestic credits to the private sector increased by only 1.4% yoy compared with a 12% growth in M3. Meanwhile, monies parked in the BSP’s deposit facilities stood at over P1.2 trillion as of end October compared with less than P400 billion at the end of the first quarter. 

 

The one area where the BSP can perhaps be more aggressive is in arresting the further appreciation of the peso, the only currency in our region that appreciated vs the dollar, by doing even more market interventions.  This will help our exporters, OFW families and support overall aggregate demand. 

 

b.     Fiscal policy.  Spending so far has been “middle of the pack” versus other countries.  The DOF‘s announced policy to “keep our powder dry “, is meant to ensure that we do not compromise needed  future access to finance.  Already, programmed deficits for the next two years are estimated at 7 to 9 percent of GDP, two to three times normal prudent levels, and there is much uncertainty on how long this plague will last. 

 

 

 

 

 

 

 

Moreover, I believe current spending has been constrained not so much by the size of the budget, but by limitations on a) distribution of income and wage support absent a national ID system that will enable “ayuda “with minimum of leakages and b) slow releases and execution of projects, as shown in the poor disbursements of capital outlays.

 

The soon to be signed CREATE bill which lowers corporate income taxes and rationalizes fiscal incentives will also provide immediate stimulus equivalent to over P250 billion in the next two years. This does not count the favorable effects this long delayed   structural reform will have in generating more investments, both foreign and local.  

 

(I congratulate Secretary Dominguez and Secretary Chua and the sponsors of the bill for bringing this landmark reform to the finish line, building on the efforts of their predecessors, who publicly -supported this bill).

 

Against this dour prognosis I also mentioned some green shoots which we all wish will bring early spring: 1) unveiling of several vaccines and their much earlier roll out in rich country trading partners which will have some trade, remittance and investment spillovers to us, 2) robustness of our BPO sector which has nimbly adopted working from home thanks also to our telco service providers, 3) surprising resilience of remittances which only declined by 1.4 percent in the year to September, 4) some evidence of “revenge spending” by those in the upper leg of the K curve, 5) accelerated investments all around in digital technology. 

 

I ended my remarks by saying, despite having a good track record in forecasting output growth, this is the one time I would love to be terribly wrong.  And quoted noted economist John Kenneth Galbraith: “The only function of economic forecasting is to make astrology look respectable”.  

 

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations. He is a Board Trustee/Director of the Foundation for Economic Freedom, the Management Association of the Philippines and the FINEX Foundation.

 https://www.bworldonline.com/2021-big-bounce-back-year/

Good news, lingering doubts

 I am pleased to share with readers our Oct. 27, 2020 post to subscribers of GlobalSource Partners (globalsourcepartners.com), a New York-based network of independent emerging markets analysts. Christine Tang and I are their Philippine Advisors.

Amidst a succession of GDP growth downgrades, most recently by the IMF, we are watching three developments this month that signal better prospects heading into 2021.

1. Remittances have surprised on the upside. Monies sent home have expectedly declined but not as much as anticipated. After plummeting by double digits in April and May year on year, the inflows rebounded in June and July, each by nearly 8%, then slipped again in August but only by 4%. For the six-month period since the pandemic started (from March to August), remittances fell moderately by 5% year on year, bringing the year to August decline to only 2.6%. This is good news considering that in our last outlook report, we were expecting a 7% contraction for the year. (The ADB and the World Bank forecast double digit drops in remittance inflows earlier in the year.)

What appears to be driving the stronger than expected remittances are inflows from countries that have large Filipino migrant populations (US and Canada) where the respective governments have also provided generous fiscal support, including wage subsidies (e.g., US, Singapore), and/or have managed the outbreak relatively better (e.g., east Asian economies). Too, despite the bust in cruise tourism, remittances from seafarers have also performed better that expected due to improved trade volumes in 3Q.

Nevertheless, there are still significant downside risks moving forward with several host countries facing a resurgence of COVID-19 (including the US and in Europe) that risks keeping unemployment high for longer, and the prospect of continuing low oil prices weighing down oil exporting economies, particularly in the Middle East which host many overseas Filipino workers.

At the same time, remittances may come under renewed pressure as fiscal packages are downsized or withdrawn following sharp increases in public debts, more businesses closing shop especially in the service sector where many overseas Filipino workers, and possible waning of momentum in global trade amidst continuing geopolitical uncertainties. Moreover, despite better than expected dollar remittances, the peso’s over 4% appreciation so far this year reduces the support to domestic consumption.

2. After a dramatic speakership fight at the House of Representatives early this month that provoked a televised presidential rebuke and necessitated the calling of a special session of Congress to pass the 2021 national budget, the Lower House under a new leadership quickly approved the spending bill that is expected to be sent to the Senate today. Considering the President’s certification of the bill as urgent for the government’s continuing struggle against COVID-19, expectations are that a new appropriations law will be ready by the start of next year.

Yet, while the P4.5-trillion (22% of GDP) budget, which is 10% above this year’s approved budget (excluding supplemental funds under the Bayanihan Act), appears on paper to be responsive to the COVID-19 crisis (with proposed spending priorities for health, infrastructure development, and post-pandemic adaptation), a lingering question is how well the executive can implement the plans and programs. Reports indicate failures at the height of the pandemic to distribute allocated social amelioration funds both fully and in a timely way. Also, out of the P140-billion supplemental budget approved in September, the budget department reported that releases have only totaled P4.4 billion with P46.2 billion pending approval of the Office of the President and the remaining P89.4 billion still awaiting requests from the concerned departments. Given fiscal authorities’ relatively conservative stance in the fight against COVID-19, underspending a limited budget would be tragic especially in the face of the pandemic’s disproportionate impact on lower income groups.

3.  Now into the eighth month of varying lockdown stringency, the Philippine government is finally attempting in earnest to open the economy. After flip-flopping last month, it has proceeded to reduce distancing protocols for public transport to maximize the share of the economy allowed to open under the latest guidelines (about 65% per the planning secretary vs. only 50% effectively if those who are allowed to work have no means of getting to work). It has also allowed more age groups to leave homes, reduced curfew hours, and eased tourism restrictions including allowing outbound travel and local hotels to operate at 100% capacity. The decision resulted from a full cabinet meeting early this month and was taken subject to the conditions that everyone observes the minimum health standards and that hospital capacity remains below the 70% threshold (the latest occupancy rate is 52% in Metro Manila).The move to open up the economy is being done at a time when there appears to be some plateauing of the COVID-19 infection curve, with the doubling time lengthening since late August and the reproduction number falling below 1. The caveat however is that since Oct 16, testing has dropped significantly as the Philippine Red Cross (PRC) stopped accepting the state insurance agency’s credit for non-payment of about P1 billion in arrears. Prior to the suspension, the PRC was conducting about a third of the 30,000 tests done on average per day. Too, challenges remain in isolating individuals who have tested positive for the coronavirus as well as in contact tracing, critical functions for successfully suppressing the virus per the experience of other countries. Hence, while it is good news that the government has finally taken the tough decision to “dance” with COVID-19, diligently planning the steps for opening the economy while managing health risks, many harbor lingering concerns about implementation, the Philippine’s Achilles heel. 

 

The President’s UN speech

I am pleased to share with readers excerpts from a post my GlobalSource Partners (globalsourcepartners.com)  co-author, Christine Tang,  and I released to subscribers recently.

Last week, critics of President Rodrigo Duterte finally found something to thank him for. In his first address to the United Nations (UN) General Assembly since assuming the presidency four years ago, the President asserted the Philippine’s territorial sovereignty over disputed areas in the West Philippine Sea/South China Sea (WPS/SCS). The dispute with regional giant China, was the subject of an international arbitration case initiated by the previous administration in 2014 but which was awarded to the Philippines only in 2016, a few weeks after President Duterte took office.

While the President had over the years avoided openly confronting China on the issue, his UN speech struck a different tone. “We firmly reject attempts to undermine it,” he said of the arbitral award which “is now part of international law, beyond compromise and beyond the reach of passing governments to dilute, diminish or abandon.”

The President’s unexpected outright assertion of the Philippine’s rights has been interpreted variously as:

1. There is no change in foreign policy. The President’s spokesperson explained the statement simply thus: “It’s the first time that the President spoke in UN General Assembly. So it’s the first time that the President was able to say what has been his consistent position all along.” Observers note that even China may not give the speech much attention knowing that the Philippines has never really turned its back on the Hague verdict and in fact, the assertion has no real effect on the situation in the WPS/SCS.

2. This is a reversal in foreign policy; the President is pivoting away from China. Per this view, it is about time that the President reversed course on his overly pro-China stance considering that the Philippines has little to show for all the efforts to curry its favor. Data from the finance department show that despite promises of substantial Chinese financing for strategic infrastructure projects, the amounts of actual loan agreements signed pale in comparison with Japan. Too, reports suggest that online gaming activities are at risk of disappearing as China clamps down on gambling-related money transfers at a time when the sector is already facing increased domestic regulatory scrutiny. Online gaming has been a major source of domestic economic growth in recent years, bringing in fresh investments in the property sector and hundreds of thousands of Chinese tourists/workers to cater to a predominantly Chinese market. What’s more, critics claim, China’s continuing belligerence in the WPS/SCS may be seen in reports of militarization of the artificial islands it constructed and of Filipino fishermen being driven away from their traditional fishing grounds.

3. This is not about the territorial dispute per se but about access to COVID-19 vaccine. Per this view, the President, who has pinned hopes for an economic recovery on the discovery of a vaccine soon, is just hedging his bets, not knowing which country will be the first to secure regulatory approval for a vaccine against COVID-19. Having obtained China’s commitment to give the Philippines access, he is now trying to repair ties with the West and the entire speech, written by seasoned diplomats, is intended to project the President as one who stands for the rule of law or as he said, “the majesty of the law.” To this end, the speech also denounced “interest groups” that he said have “weaponized” human rights to discredit his fight against “illegal drugs, criminality and terrorism.” In proposing “open dialogue and constructive engagement” with the UN, a body that he had repeatedly scolded in the past for its officials’ criticisms of alleged human rights abuses under his administration, the speech may be seen as a means of softening the President’s strongman image internationally, raising the odds that vaccine assistance will be forthcoming.

4. In the same vein, a broader view argues that it is not just about the vaccine but other goodies from the West that an overly pro-China posture may impede. The speech is thus a reaction to recent parliamentary actions in both Europe and the US: the former, asking the European Commission to suspend the GSP+ trade privilege enjoyed by a quarter of the Philippine’s exports to the region; the latter, a proposed Philippine Human Rights Act in the US Congress that would suspend US security assistance to the Philippines pending reforms to strengthen human rights protection. The latter also brings to mind actions taken by the President at the height of the pandemic prompted perhaps by the pro-US military establishment, i.e., the suspension of the termination of the visiting forces agreement with the US and the granting of absolute pardon to an American serviceman for the killing of a Filipino transgender woman in 2014.

5. The above, taken a step further, could also mean that the speech is in fact not about foreign policy but the President playing to a domestic audience, both military and civilian, at a time when the pandemic and government’s response have taken a toll on his popularity and he himself is considering end of term uncertainties (not to mention woes of four of the Philippine’s last six presidents). Surveys show that Filipinos are generally trustful of the US and distrustful of China, with a majority favoring more forceful assertion of the country’s rights in the WPS/SCS. The same mindset characterizes the military which has over the decades forged close ties with US forces and is generally suspicious of China. This posturing of standing up to China, it is argued, would improve the President’s domestic image. Moreover, the argument goes, if the President were thinking of succession planning as he must be, the speech would deprive the opposition of a hot-button issue that could be used against his anointed, potentially, daughter and Davao Mayor Sara Duterte who recently found herself at the center of a controversy involving Facebook’s deletion of over 100 mostly China-based fake accounts campaigning for her presidency in 2022.

So which one is it? It seems to us that the motivations behind the speech are not mutually exclusive and the question is to what extent the President can walk the talk when it comes to dealing with China.

We had previously likened the Duterte administration’s China pivot to a pendulum swinging from an overly pro-US stance under the previous administration to an overly pro-China stance, looking forward to the day when it would return to center. We do not think that that day has arrived; but one can never tell with this President. In the meantime, the President can bask in the more favorable reviews given his speech domestically, something that has been sorely missing since the pandemic, and continue to work on strengthening his hand in the run up to the 2022 election.

 https://www.bworldonline.com/the-presidents-un-speech/

COVID-19 and the economy

Introspective

I am pleased to share with readers excerpts from recent posts to subscribers of GlobalSource Partners (globalsourcepartners.com), a New York-based network of independent analysts, mostly former finance and central bank officials. Its subscribers are “investors and business leaders including asset managers, traders and analysts, investment bank economists, private equity investors, corporate CFO’s, and multilateral officials.” Christine Tang and I serve as their Philippine Advisors.

THE STICK FOR NOW (JULY 22)
President Rodrigo Duterte has found himself caught between a rock and a hard place. On the one hand, COVID-19 cases are rising, with data from the Department of Health (DoH) showing the seven-day average positivity rate for daily tests close to 12% compared with a little over 6% a month ago and with experts estimating the reproduction number in Metro Manila rising from 1.2 to 2. On the other hand, quarantine measures have taken their toll on the economy, with survey data from the trade department showing that most of the country’s largely small businesses are either closed (26%) or in partial operation (52%), and with the finance secretary earlier calling for more easing of quarantine restrictions to revive economic activity.

Left in a bind, the President’s interior secretary, a former army general and member of the COVID-19 task force, has proposed using the police in house-to-house searches and transferring those suspected of carrying the coronavirus to government isolation facilities; an idea that was immediately met with strong public criticism. Stepping back from this proposal, President Duterte instead warned the public yesterday to wear masks and practice social distancing, or face arrest. He called on local government officials and the police to do their duty in enforcing quarantine rules set by the national government or face possible charges of negligence and removal from office.

While the President seems to be responding to the general lack of discipline in observing the most basic quarantine rules, the problem of rising COVID-19 cases may be more directly correlated with inadequate contact tracing and lack of incentives for exposed individuals to self-quarantine. As it is, exposed people with mild or no symptoms may not know that they have been infected while those who suspect themselves infected but are only mildly symptomatic or asymptomatic may not have isolation rooms at homes or may choose to forego testing as they may not be able to afford the income loss from being quarantined. Compared to providing subsidies (the carrot) to suspected carriers to stay home, the threat of arrest (the stick) seems to be a far inferior solution, even putting frontline policemen at risk of contracting the coronavirus, and may even create an incentive to avoid being tested or to hide if feeling unwell.

This puts the upcoming debate over the proposed stimulus bill (Bayanihan 2), expected to start when congress opens next week, front and center. As it stands, fiscal managers maintain that the Constitution bars the executive from proposing a larger than P140-billion stimulus while the lower house of congress remains adamant in passing an outsized package worth P1.3 trillion. There were rumors early on of a middle-of-the-road package brokered by Malacañang; whether or not true remains to be seen.

In addition to Bayanihan 2, the financial community is also looking forward to several bills being proposed by the economic managers, including the Financial Institutions Strategic Transfer Act or FIST and the Government Financial Institutions (GFIs) Unified Initiatives to Distressed Enterprises for Economic Recovery or GUIDE Act. These are intended to keep banks’ nonperforming loans under control by proactively providing a legal framework for dealing with distressed assets and by directly assisting distressed firms through capital increases for GFIs. While banks’ non performing loans (NPLs) remain low based on latest data, the lesson from history is that these will rise after a lag (Chart 1). That said, we think NPLs this time around are unlikely to reach the record levels of the 1980s and ‘90s thanks to stronger macroeconomic fundamentals, monetary policy accommodation that has kept interest rates low and the peso stable, and better capitalized banks.

WHERE TO PHILIPPINE PESO? (JULY 10)
During Wednesday’s pre-State of the Nation Address (SONA) that focused on the Duterte administration’s economic achievements this past year, one chart in particular caught our attention. Presented by Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno, the bar chart shows the Philippine peso alongside eight other east and southeast Asian currencies, with the peso standing out as one of only two currencies that has appreciated against the dollar this year. (Chart 2) Moreover, it topped the other currency, the Japanese yen, in terms of the rate of appreciation. Close competing currencies like the Indonesian rupiah, the Thai baht and the Malaysian ringgit have all depreciated by around 4%.

Why is the peso relatively stronger despite the more aggressive policy rate cuts by the BSP so far this year?

1. Governor Diokno provided one of the reasons, which is the Philippine’s comparatively robust external position. Gross international reserves at the end of May shot up to $93 billion from below $88 billion at the end of 2019. The latter amount per IMF assessment is over twice what the country needed to cover short-term foreign exchange needs, including for trade and debt repayments, and is among the highest in the region. (Chart 3)

2. Expectations about the country’s current account balance have changed. At the start of the year, the consensus forecast was that the current account will remain in deficit of around $9 billion (2.2% of GDP); this forecast has now turned positive or a current account surplus of $0.7 billion (0.2% of GDP). The shift is mainly driven by improved outlooks on the trade in goods deficit, with forecast double-digit contraction in imports outpacing projected fall in exports. The collapse of trade during the lockdown is quite evident in the 53% and 43% drops in imports and exports, respectively in April-May that saw the cumulative five-month trade gap shrink by over 40%. The difficulty of restarting economic activity with local COVID-19 infections still rising is likely to mean more modest import recovery ahead and a better current account position; notwithstanding expected declines in remittances and tourism earnings.

3. Although risk-off sentiments have led to a withdrawal of portfolio investments by over $3 billion in the year to May, dollar inflows from foreign borrowings, both public and private, have provided offsets. Government in particular raised the share of external financing in its higher borrowing program to minimize the risk of higher domestic interest rates. In the year to May, government’s external debt has risen by more than $5.2 billion following increased borrowings from multilateral lenders and a $2.3 billion global bond issuance. Additionally, a number of private firms, banks and nonbanks, have also decided to tap the external commercial bond market, bringing in more dollar flows.

Back in May when we were preparing our quarterly report, we had forecasted the peso to depreciate and approach P52/$ by year end. Yet since June, it has gone the other way and has consistently fallen below P50/$ since late June. Indeed, the peso may continue to linger below P50/$ in the near term given the current economic environment and additional planned external borrowings ahead by several private firms; but we do not think it can appreciate much more from current levels. We expect the BSP to intervene in the event, especially with certain sectors calling for a more active foreign exchange policy to weaken the peso to help overseas workers and their families. Too, we recall that Governor Diokno, in his past life in the academe, had advocated for the BSP to adopt a deliberate competitive exchange rate policy to support the export sector.

As it is, the peso had already appreciated by over 5% in real effective terms as of June. With these in mind, we think that when imports start firming up later this year, the peso will likely reverse course to settle above P50/$ by year end.

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.

https://www.bworldonline.com/covid-19-and-the-economy-2/

COVID-19 concerns

Introspective

I am pleased to share with readers recent posts to GlobalSource Partners subscribers (globalsourcepartners.com) written by Christine Tang and me on the recent BSP cut in policy rates and on our concerns on public transportation and the T3 ( test, trace, and treat ) program.

SURPRISE RATE CUT
The Monetary Board (MB) unexpectedly cut policy rates by 50bp, bringing the key overnight borrowing rate to 2.25%. It is evident from its statement that the MB is worried about economic growth. Banks are not lending as hoped, with monies parked in the BSP’s deposit facilities rising from a little over P800 billion in end-April to over P1.2 trillion in the first week of June. Notwithstanding multilateral agencies’ updated GDP forecasts this month that are only slightly below government’s low-end -3.4% target, we think our more pessimistic -7% growth forecast in our May 26 report remains appropriate especially given the difficulties we’ve observed of restarting the economy under distancing protocols.

RESTARTING ECONOMIC ACTIVITY
Most areas in the country, including Metro Manila, were eased out of enhanced community quarantine (ECQ) into a more relaxed general community quarantine (GQC) at the start of June. Since then, activity has steadily picked up under carefully calibrated policies to maintain distancing protocols at the industry level while keeping the elderly at home (see Chart 1). However, two particularly problematic areas where solutions require a level of organization and management largely absent in the concerned public institutions have highlighted key constraints to jumpstart domestic demand.

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First on the supply side, the government has set a general one-meter physical distancing protocol that applies to, say, factories, workplaces, and retail outlets, which has the effect of capping output of these businesses below potential. Nowhere is this more evident than in public transport, particularly on Metro Manila’s roads where high congestion and jam packed commuter rails and public utility vehicles already have daily headaches pre-COVID-19. Public transport services, mostly operated by private firms, have been allowed to resume under GCQ but are strictly regulated, e.g., less than half the carrying capacities for mass transit (rails and buses), traditional jeepneys banned, and motorcycle backriding (riding pillion) prohibited. The limits to vehicles’ load factors coupled with unadjusted fares have made operating the vehicles uneconomical which, according to experts, have effectively reduced available public transport to only about 20% of capacity. Even with the current low demand, supply gaps are evident in people resorting to walking or bicycling or missing work altogether.

Experts worry that without a more balanced approach to handling health risks and organizing public transport, including government entering into roughly P30 billion worth of service contracts with private sector providers, the supply gap will only increase as transport demand rises over time, especially if Metro Manila is able to transition into the less restrictive “modified” GCQ (mGCQ). This supply gap has broader adverse repercussions on transportation in general (private cars clog up available road space, safety of bicycling on motor vehicle lanes), labor supply (longer waiting/commuting time, less productivity, not being able to get to work), incomes and consumption demand, and overall economic activity, including school opening.

The other worry, which is of greater concern, is the sheer difficulty of interpreting data on COVID-19 infections and thus, the inability to raise confidence in the government’s ability to contain infections. Health experts have traced the problem to one of governance in the public health system, an issue of leadership as well as the result of decades of underinvestment in the health sector. Contemplated solutions have now moved to involving the private sector which is expected to have the better organizational and management skills to handle T3. Without much improved capacity for T3, every new COVID-19 breakout will only instill more fear among people and leave them with little choice but to protect themselves by minimizing activities outside their homes and postponing discretionary spending, which will not hasten economic recovery.

As it is, a lot of uncertainty still surrounds the coronavirus and its different strains as well as the timeline for vaccine development, with recurrence of infections in some people raising concerns about the durability of immunization. With the much-awaited vaccine possibly still year(s) away and time ticking on finding solutions to address the problems locally in health and transportation, our -7% GDP forecast for 2020 may yet turn out optimistic.

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.

https://www.bworldonline.com/covid-19-concerns/

Is it the end of the world as we know it?

Introspective

I am pleased to share with readers excerpts from a recent report and Zoom forum appearance connected with, what else, coping with COVID-19.

Following is the executive Summary of the May 26 quarterly outlook report that Christine Tang and I wrote for subscribers of GlobalSource Partners (globalsourcepartners.com) called “Is it the end of the world as we know it?”

Only a handful of countries can claim to have been prepared for the COVID-19 pandemic. The Philippines is not one of them. When local transmission began, the government resorted to the only tool it had to contain the outbreak: the lockdown hammer. It used this to close government and business, offices and schools, and even public transport. The economic cost was enormous, at P1.1 trillion, or 5.6% of GDP, for the 45-day lockdown.

In this time of extreme uncertainty, when past data offer little guidance for the future, and policy responses are evolving quickly, forecasting becomes even more of an art than science. For this forecast exercise, we started with the Q2 lockdown, then visualized the economy under a “new normal,” and likely outcomes from government efforts to avoid a second wave of infections on one hand, and to revive the economy on the other.

The outlook is quite grim: a sharp contraction of 7% this year, with GDP not expected to rebound before 2022. Indeed, with masking directives, distancing protocols, borders closed, and police checkpoints everywhere, the hit R.E.M. song from the 1980s (“It’s the End of the World as We Know It”) continually replays in our heads.

We have been seeing a lot of a chart from the Economist, showing the Philippines ranking 6th among 66 emerging market economies in terms of public debt, foreign debt, cost of borrowing, and reserve cover. The assumption has been that the government has the fiscal space to do whatever it takes to counteract a recession. Yet fiscal authorities have been quite restrained on the subject of fiscal stimulus. Indeed, fiscal authorities have a tough balancing act ahead. What they choose to do — and we think they have room to maneuver — will matter greatly for how well the economy will emerge from this crisis.

It appears that even President Rodrigo Duterte is suffering from lockdown fatigue. As soon as the ECQ in Metro Manila was “modified” to let some businesses partly reopen, he invoked presidential exemption and flew home to Davao. Indeed, nobody expected the ECQ to last this long, nor how slow the government would be to ramp up infection testing. We have had no word on how the pandemic may have affected Duterte’s approval ratings, but we may expect them to follow economic and social indicators. The deeper and longer the economic downturn, the greater the risk of more populist measures, and fear of a lame-duck presidency. Indeed, political analysts say the constant presence of Senator Christopher Go at the president’s side during his regular COVID-19 press briefings is a sign that succession planning is ever on the president’s mind.

Following are my remarks as a reactor in a Stratbase Zoom roundtable on PPP post COVID-19, held on May 29.

In a book titled Momentum that Toti Chikiamco and I co-wrote with three others friends last year — Dondon Paderanga, Raul Fabella and Noel de Dios — a number of our old columns talked about PPP (public-private partnership) and the circumstances under which it is the ideal mode for project development and implementation. I was delighted to see that one of my columns there was posted by former PPP Center chief Phil (Pecson) or perhaps earlier by predecessor Cosette (Canilao) in the PPP Center site. The title of the column is “The Great Infrastructure Debate.” (You can read it at https://ppp.gov.ph/in_the_news/the-great-infrastructure-debate/ or you can get a copy of our book published by FEF.)

It talks about the pros and cons of PPP vs using the GAA and concludes that “given the huge infrastructure requirements of the Philippines it should not be PPP versus ODA but rather PPP AND ODA”

I further noted that “the lively debate may have been driven by the sudden change in public policy, yanking without compelling reasons several projects at advanced stages of preparation to an ODA or tax funded mode after these have been prepared for a PPP bid over many years. This has raised concerns over the consistency and stability of government policies from many capable local and global players who have invested substantial resources to bid for these. Included in these are five regional airports and Kaliwa Dam.”

Had the administration pursued these projects, these would likely have already been completed and serving the public. Especially the much-delayed bulk water project.

But that is water under the bridge, pardon the pun, and we need to move on. And as a policy advocate, like Stratbase guys, I believe that we should “never let a good crisis go to waste.” What is possible to do in the remaining time?

This is what I wrote in a column last week as one among key reforms that can be done for the third phase of PROGRESO, the recovery “bounce back” phase.

“More reliance on PPP, including bringing to the finish line projects that have been under protracted negotiations. This can help rebuild damaged investor confidence. It will also help conserve now stretched fiscal resources. Government also needs to assure stability in regulation for existing PPP and enact the long pending PPP bill in Congress.”

This will also build on the working public-private partnership now taking place in coping with this crisis, most notably in the 3 T program — testing, tracing and treatment — and in helping the most vulnerable members of society cope. Something no less than the President acknowledged warmly, including with unexpected kind apologies.

Senator Grace Poe, Congressman Edgar Sarmiento, and FEF President Toti Chikiamco identified good candidates for future PPP reform and collaboration:

1) In the area of mass public transportation: PUV service contracting, and public infrastructure to support the same.

2) Open up the economy to more competition in PPP by amending the outdated Public Services Act and passing the long delayed PPP bill.

3) Bid out public health projects in various regions for services based on outcomes.

Let me also add:

4) Water projects are one of the most cost-effective public health interventions governments in developing countries can do. Peso for peso, I bet it can save more lives from prevention of deaths of common water borne diseases — dysentery, gastroenteritis, schistosomiasis, cholera, etc., vs other public health interventions, eg. the high economic cost of lockdowns to prevent mortality from COVID-19.

Incidentally, handwashing, the most potent tool vs COVID-19 together with wearing face masks, is only possible if there is water.

In this connection, I end with a wish that the limbo state of affairs in which the MWSS Water Concessions are trapped with the setting aside of the international arbitral award due to idiosyncratic regulation of an earlier administration, is sorted out soonest. This will send a clear signal, especially at this time, that the Philippines is open for investments. And that the concessionaires can continue to provide us with affordable, secure water service as they have been doing for over two decades. Something that could not be delivered by MWSS pre-PPP.

You will forgive my bias since I was involved in it as Undersecretary of the Department of Finance with oversight for Privatization in 1996. MWSS privatization, in my view, remains the best infra PPP case in terms of service delivery and mobilization of financial capital (debt and equity). Concessionaires achieved these outcomes due to their performance anchored on a credible concession contract which is now being reviewed.

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.

https://www.bworldonline.com/is-it-the-end-of-the-world-as-we-know-it/

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