Full circle

September 18, 2023 | 12:04 am

Introspective by Romeo Bernardo

 

As reported in the news, I have been appointed by President Marcos Jr. as a Member of the Monetary Board. I received this news from Governor Eli Remolona while on a long postponed family vacation overseas. I understand that he, Prime Minister Cesar Virata, and my former bosses in the Department of Finance (DoF) as well as prominent leaders in the private sector and the legislature recommended me. I am most honored, delighted, and grateful for the opportunity to go back to my first love — public sector policy work.

To ensure no conflict of interest, I am obligated to say goodbye to private institutions/corporations and colleagues/friends I worked with. I do so with a tinge of sadness. They are the captains of industry and professional executives who make the investments that generate jobs that improve our people’s lives, and for whom I have the highest respect. At the end of day, they are the drivers of our economy.

Among these institutions is BusinessWorld (BW). I have had the privilege of writing a monthly column for over a decade, as part of our “Introspective” rotating crew (all Board Directors of the Institute for Development and Econometric Analysis, established by dear friend, now departed, UP Economics Professor Dondon Paderanga). “Introspective” featured Dondon together with his fellow professors Raul Fabella, Noel de Dios, Calixto Chikiamco (my Foundation for Economic Freedom co-founder, political economist, and net entrepreneur) and me.

In line with the highest ethical standards instituted by BW founder Raul Locsin to ensure that there is not even the impression of conflict of interest or lack of independence, this will be my last column.

With your permission dear readers, I reproduce below remarks I made on Sept. 14 to introduce Dr. Dante Canlas at the Philippine Center for Economic Development (PCED) 50^th anniversary lecture series on “The Philippine Economy and the UP School of Economics (UPSE): Academics and Policymaking.” Dante and other distinguished former UPSE professors who served as Socio-Economic Planning Secretaries were requested by the PCED to share lessons for scholars, practitioners, and the general public, to upgrade the quality of discourse on and execution of Philippine economic policy making.

In this final column, I will also share some preliminary thoughts on the work ahead for the Bangko Sentral ng Pilipinas (which I believe Dante also shares).

ON THE HONORABLE (SMALL ‘H’) DANTE CANLAS
Let me start with an apology that I cannot be personally present to introduce our featured lecturer. But it is not my fault. As some may know, it is my first day on the job.

I won’t devote much time enumerating the outstanding academic, government service record and awards of our speaker. Many here know of them. They are a matter of public record and downloadable from the web.

What I would like to do is introduce to you the man behind the accomplishments and awards, what we who worked with him and his students know.

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First, Dante as the impervious college heartthrob.

He was already a member of the faculty when I was a student. According to the female students, there were two in the faculty who qualified for the title “crush ng bayan.” One told me that she would sit in front of their classes, doubtless because of their pedagogical skills (not because of their looks daw). Our speaker was thought of as the Harrison Ford of UPSE — Ford as Hans Solo of the original Star Wars, not the old guy in the latest Indiana Jones movie. There was one difference between him and the other “crush ng bayan” I was told. Our speaker had no idea that he was good looking and a heartthrob, and “that made him all the more attractive” (said one who is now married to a faculty member and former top official).

Second, NEDA (National Economic and Development Authority) Undersecretary Dante, as the quiet modest achiever and ideal collaborator.

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I had the good fortune and privilege of being his counterpart at the DoF during the Ramos Administration. We worked with ultra-competent professionals like then Budget Undersecretary Emy Boncodin, then Central Bank (later BSP) Director for Research Say Tetangco, and others. One could not have wished for better teammates, with abundant intelligence, integrity, industry, and zero fanfare and zero ego. This quite efficient technical teamwork allowed our bosses to attend to the more political aspects of economic governance even as we, the most senior technicians, attended to the knitting, including various inter agency committees, debt negotiating panels, and donor conferences.

Our speaker chaired the Investment Coordination Committee (ICC) technical board with me as his co-chair. The ICC had the difficult task of putting together an investment program to fund enormous infrastructure and social expenditure requirements, at a time when interest payments alone ate up 20% to 30% of the budget and the foreign component a substantial part of export receipts. Mind you, this was when we were still reeling from the debt crisis, with no access to capital markets, and still finding our bearings politically as a nation. I would like to think we got the job done with the support of the donor and financial community which saw the Philippine macro and structural reform program as worthy of support. These reforms included accession to the WTO (World Trade Organization), a comprehensive tax reform program and privatization effort that raised tax and overall revenues to record highs as shares of GDP, breaking up of monopolies and partnering with the private sector in delivering public services especially in power and water, and the creation of an independent monetary authority to replace the bankrupt old central bank. All these led to the country’s eventual exit from IMF (International Monetary Fund) surveillance.

Our speaker was very much on top of putting those programs together and with the Department of Finance, coordinating — one can say lobbying — and securing support of bilateral, multilateral institutions to fund the same. There is a saying that nothing is impossible for the man who does not care who gets the credit. This describes Dante.

Third, for Secretary Dante, it is principles over principal. Given his personal and professional virtues were known by all, it was no surprise when President Gloria Macapagal-Arroyo tapped him, her dissertation adviser, to be her “Economist in Chief.” I was no longer in government then, but from all I know, had she listened to him on a key infrastructure project, the deeply flawed North Rail project, the Philippines would have been spared some $185 million in public money that we had to pay China as a creditor, with nothing to show for it.

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He left government over that issue. What is not clear to me is whether his resignation was accepted as a matter of “loss of confidence,” a prerogative of the President, or whether this was a case of Dante being just ahead of the curve, 2-1/2 years ahead of the Hyatt 10.

Dante knew he owed his principals his best advice — and he gave it even when this may not have been what they wanted to hear and may cost him his job. To have done otherwise would have been a disservice to them, and a betrayal of his principles, of who he is. And ultimately a betrayal of our ultimate principals— the Filipino people.

It is in the best interest of our leaders to listen more to people like Dante. History will be kinder to them if they did.

Finally, may I publicly reveal a fervent wish to be able to work with Dante soon.

ON MY NEW JOB
It is the country’s good fortune that Professor Eli Remolona is heading our central bank during these times of heightened global economic uncertainties clouding the Philippine economic outlook (see my column “A 5% economy?” Aug. 28, 2023 https://www.bworldonline.com/opinion/2023/08/28/541704/a-5-economy/). My now former GlobalSource Partners fellow analyst Christine Tang and I described him as being “preeminently qualified” in our report to subscribers, being personally aware of his deep academic and hands-on experience, dating back to 1986 when he was country risk expert reporting directly to the legendary New York Fed Chairman Gerry Corrigan. Mr. Corrigan was instrumental in helping the Philippines reach final settlement with its consortium of creditor commercial banks at the height of our debt crisis. I was part of the Philippine delegation led by Finance Secretary Cesar Virata, later Secretary Jimmy Ongpin and Governor Jobo Fernandez. Governor Remolona would later be closely involved in crafting what would be the definitive solution to the emerging market debt crisis — the Brady Plan.

Since that period, armed with distinguished degrees from UP and Stanford, he would chalk up impressive experience and credentials in central banking at the NY Fed for 14 years and the Bank for International Settlements (BIS), the central bank of central banks, ending a 19-year career retiring as head of BIS regional office in Asia. Our paths would cross again as fellow board directors in the Bank of the Philippines Islands, even as he was concurrently teaching courses as Director of Central Banking at the Asia School of Business in Kuala Lumpur and in Williams College, Mass., my MA alma mater.

I mention all these to underscore that the country’s financial system is in the best of hands. Supported by a solid monetary board composed of professionals with diverse backgrounds and by the best career officials and staff in the Philippine bureaucracy, we can sleep soundly knowing that monetary policy and financial system supervision can withstand headwinds all around.

I am most honored to join their ranks. And intend to be fully supportive of the Governor’s announced priorities. As he said in his remarks to the banking community on July 28 (see https://www.bis.org/review/r230731f.htm): “(We will) work hard in pursuing our mandate of ensuring price stability, financial stability, and a safe and efficient payment system. We will do this through greater investment in our research and operational capacities to become a more responsive, efficient, agile, and future-ready institution.” He also expressed the intent “to deepen Philippine capital markets and consider a framework for sustainability that includes financial inclusion.”

If I may be allowed to add, aside from its conventional usage, financial inclusion should also cover banking regulatory policies that give primacy to job creation and poverty elimination. For example, to enable our banks to continue to lend so we will have secure and affordable energy to fuel Philippine development — a subject I have written on in this space, most recently: “It’s not easy being green: Balancing energy security and decarbonization for an emerging economy,” in November 2021 (https://www.bworldonline.com/opinion/2021/11/07/408820/its- not-easy-being-green-balancing-energy-security-and-decarbonization-for-an-emerging-economy/).

Financial inclusivity can also be brought about by reducing regulatory and other costs that cause Philippine banks to have the highest operating cost ratios (mandated lending, reserve ratios, etc.). Lower costs mean greater ability to take on risk and reach broader markets. Similarly, arbitrary caps on interest rates reduce inclusivity and access, as banks ration limited funds and exclude marginal clients, driving them to the unregulated grey market that charges much much more.

 

Romeo L. Bernardo was principal Philippine adviser to GlobalSource Partners (globalsourcepartners.com). He has served as a board director in leading companies in banking and financial services, energy, telecommunications, education, food and beverage, real estate, and others. He had a 20-year run in the public sector, including stints in the Department of Finance (Undersecretary), the IMF, World Bank, and the ADB.

globalsourcepartners.com

romeo.lopez.bernardo@gmail.com

 

A 5% economy?

 

August 28, 2023 | 12:04 am

 

Introspective By Romeo L. Bernardo

I take no delight in having been right and was unsurprised when the disappointing second quarter gross domestic product (Q2 GDP) annual growth number of 4.3% (from 6.1% in Q1) came out. Together with a few other private macro watchers like Anton Periquet (Chairman and CEO of AB Capital) and Philippine Institute for Development Studies (PIDS) Senior Fellow Margarita Debuque-Gonzales, we forecast a less optimistic growth of around 5% for this year, and over the medium term.

At a public forum in the UP School of Economics last week, honorable Professor Philip Medalla, unshackled by public office, was also less sanguine. Analysts who earlier were more optimistic hurriedly adjusted their forecast downwards by as much as one percentage point.

But not government.

Planning Secretary Arsi Balisacan — recently awarded Most Distinguished Alumnus by the UP Alumni Association (UPAA) — in a related lecture reaffirmed that their 6-7% is still achievable this year. Attributing the underperformance largely to government underspending, especially on capital outlays, he said that the government economic team — made up of himself, Finance Secretary Ben Diokno, and Department of Budget and Management Secretary Amenah Pangandaman — committed to do catch up spending for the second half.

I am vigorously rooting for the government to succeed in this.

I am also somewhat skeptical that this can be done speedily given the structural nature of the bottlenecks in government’s execution capacity. This impediment was underscored in a question that UPAA Lifetime Achievement awardee, engineer Rene Santiago, posed to Secretary Balisacan, noting the very low absorptive capacity of the Department of Transportation (at around 30% of disbursements) and the Department of Public Works and Highways (at 50%-60%). With inputs from him, Christine Tang and I identified the roadblocks for both (official development assistance/general appropriations act) ODA/GAA-financed and private-public partnership (PPP) projects which I excerpted in my column last April, “Infrastructure Anyone?” (https://www.bworldonline.com/opinion/2023/04/30/519979/infrastructure-anyone/).

These include: 1.) right of way delays; 2.) lack of a national inter-modal framework to serve as a basis for identifying, selecting, and prioritizing projects that will yield the highest economic returns for our archipelagic country; 3.) non-implementation of contracted user fees and charges; 4.) the problem that is the Department of Transportation and Communications (despite its having a very qualified and competent head, Secretary Jimmy Bautista); and, 5.) third-party challenges that hold up progress, from project preparation to award, especially for PPP.

While I would like to be optimistic that these can be overcome, it may be Panglossian to believe so, at least in the short run. Of course, government can choose to prioritize spending magnitude over quality, which may boost growth for 2023, but at high cost beyond.

THE MEDIUM TERM
Like Anton Periquet and Maggie Gonzales, we are also not optimistic that the Development Budget Coordination Committee’s forecast GDP growth of 6.5% to 8% for the balance of the administration’s term is likely, for several reasons.

 

First, there is the still depressed global growth due to several factors including the persistence of recession risks in the US, the war in Europe, and China’s reeling from a real estate bust, its poor COVID management, and the trade tensions with the US and its allies.

Then, consider that pre-pandemic, we were already at the peak of the credit cycle, largely due to long-running benign inflation and being “forever QE,” thus having both low interest rates and abundant capital (and with no way to go but to slow down).

Third, there are the adverse effects of COVID scarring, especially on the labor force (e.g., resistance to going back to the office, jobs mismatches) and a learning crisis.

 

Fourth, we have constrained fiscal resources and headroom, with public debt-to-GDP now at 60% from 40% pre-pandemic, and a highly elevated deficit-to-GDP of 7.3% in 2022, targeted to be pruned to 6.1% this year, and a primary budget deficit of 5.6% last year, targeted to go down to 3.6% this year.

Then there is the still high inflation as the continuing Ukraine-Russia war and the emerging El Niño phenomenon have an impact on food markets (e.g., India and Vietnam restricting rice exports), aggravating the decades-long hopelessly dysfunctional Department of Agriculture and Department of Agrarian Reform coupled with political resistance to agricultural imports from impacted sectors and rent seekers.

All this, together with still ongoing US Fed monetary tightening and the resulting elevated global and domestic interest rates, have a consequent negative impact on private investments and consumption. An emerging sustained “twin deficit scenario” (fiscal and foreign exchange) flagged by Prof. Medalla, also implies a likely wider interest rate premium on Philippine loans and securities.

Then there is the absence of any obvious new growth drivers to complement two old reliables, OFW remittances and BPO (business process outsourcing) earnings, whose future growth is challenged by an already high base compared to decades ago. Generative AI also poses a medium-term threat to BPO, especially for routine work, unless we can rapidly upskill our workers.

 

Finally, despite highly acclaimed roadshows by President Marcos Jr. and his economic team and prominent business leaders, there has been so far limited conversion to foreign direct investments — thanks to a miserable NAIA airport matched by a bureaucracy stuck in neutral. (Overheard from a foreign investor and tourist: “I won’t ever go back — spent more time at the airport than the beach.”)

Anton Periquet is even forecasting medium term growth of 4.5%, “a return to GMA era trajectory where foreign investment was absent and fiscal constraints prevailed.”

 

IMPACT ON FISCAL SUSTAINABILITY

A low medium term growth scenario, say of under 5%, has implications on fiscal sustainability. This can fuel a downward spiral of low revenues, high budget deficits, high interest rates, low public capex spending, thus even lower GDP, and potentially an expansive public debt-to-GDP ratio that makes us vulnerable to risks from financial shocks. Prof. Medalla even flagged the risk of a “perfect storm if perception of the Philippine government as a borrower were to go back to what it used to be.” This is well analyzed in a PIDS paper by Margarita Debuque-Gonzales, Justine Diokno-Sicat, et al (https://www.pids.gov.ph/publication/discussion-papers/fiscal-effects-of-the-covid-19-pandemic-assessing-public-debt-sustainability-in-the-philippines).

Thankfully, Secretary Diokno and his team are well aware of this, and are thus pushing for reforms that can tame spending and raise revenues, including: 1.) the reform of military pensions; 2.) tax measures such as new taxes on the digital economy and on junk food (though unpopular and regressive), and further reform of VAT to limit leakages; 3.) the privatization of government assets and operations, notably the big ticket Philippine Amusement and Gaming Corp. (better known as Pagcor); and, 4.) expenditure reforms including revisiting the expensive and flawed “free tuition in SUCs” (RA 10931), and streamlining of government bureaucracy.

These are all highly political. With resolve, strategic and skillful management leveraging of the President’s high approval rating, and with closer coordination with legislators via LEDAC (the Legislative-Executive Development Advisory Council), they are achievable. A column I wrote last month elaborates on some of these actions for the next 365 days. (https://www.bworldonline.com/opinion/2023/07/25/535716/marcos-2-0-year-2-to-dos/)

 

Romeo L. Bernardo is principal Philippine adviser to GlobalSource Partners (globalsourcepartners.com). He serves as a board director in leading companies in banking and financial services, energy, food and beverage, real estate, and others. He has had a 20-year run in the public sector, including stints in the Department of Finance (Undersecretary), the IMF, World Bank, and the ADB.

romeo.lopez.bernardo@gmail.com