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.
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