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.

1 of 2

 

 

 

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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Water woes — just the facts

Introspective By Romeo L. Bernardo

December 15, 2019 | 10:18 pm

First of two parts

The President unleashed a torrent of expletives on the two Metro Manila water concessionaires for supposedly “onerous” contracts. I tried to understand why. After all, this major privatization, undertaken in 1997 during the Ramos administration to respond to a water crisis, was a celebrated case of a working public private partnership and was awarded multiple times for the transparency and design of the bid process and for its success in addressing the core problem of poor water services provision, especially its inclusive business model of connecting millions of poor communities. The concession agreements were subsequently extended during the Arroyo term in recognition of this success and in order to enable more investments in water and sewerage services to be done, pursuant to the Clean Water Act.

So indeed, why? The best I can come up with is this: the President felt he was dealt a bad hand through no fault of his and has not been properly briefed on the background and history of this water PPP.

More specifically, the missteps and inactions of the last administration that have led to:
a) non-investment in raw water that resulted in the water shortage last summer and;
b) non-adjustment in tariff rates in accordance with the contract based on a flawed re-interpretation of the treatment of corporate income taxes (which deviated from the practice over the past 17 years) that has resulted in government losing in international arbitration, which now this administration has to pay.

(See my column: Never waste a good crisis, April 2019, BusinessWorld. https://www.bworldonline.com/never-waste-a-good-crisis-2/).
On top of this frustration for being in the hot seat, the President’s anger may have been driven by certain mis-appreciation of the facts about the water service business.

1) Is water free?
Yes, in its natural state. But to deliver safe drinking water to the taps in our homes require investments in storage and treatment facilities and underground distribution networks. These investments that yield high economic and social returns are not free.

Ask the 3.7 million mostly poor informal settlers who were unconnected to the pre-privatization water distribution system. They had to either take a whole morning going to a natural water source or buy their water by the pail at 10 times the cost of what they are now paying under the multi-awarded “Tubig Para sa Barangay” in the east zone where they were organized by Manila Water Co., Inc. into communities and connected to its network. Add to this, the medicine bills and lost hours of work and missed classes when they’s get sick from dysentery due to poor water quality pre-1997.

The reality is that it takes billions of pesos of investments to bring clean potable water to our homes. And, unlike businesses that have declining costs with volume, water is the opposite. As the concessionaires try to connect farther communities in hilly areas with sparser populations, unit costs go up, especially with increased demand for sewerage service which, incidentally, costs three times that of fresh water to put in place.

What is the score card of the two concessionaires in connecting people and in reducing the wastage from leakages and theft (non-revenue water or NRW)?
Here it is. (See the Table. — Ed.)


To achieve all these, the Manila Water and Maynilad have had to invest P166 billion and P208 billion respectively. Critics like giving out profit numbers of these companies without reference to the huge amounts of their investments. When that is done, the average Return on Invested Capital (ROIC) is around eight to 10 percent annually during the past five years, which is comparable to water concessions in other emerging market countries.

And by reducing the NRW through these massive investments and more efficient management, they have prevented a water shortage despite the failure of past administrations to put up a single new water source. Indeed, not a single stone was turned or shovel lifted, after tying the hands of the concessionaires from making such investments.

The amount of incremental water provided by the two concessionaires by reducing NRW is equivalent to the water output of three Kaliwa dams. The one Kaliwa dam that the last administration has talked about for six years and this one for three, but which has yet to be started, will cost P 12.2 billion using Chinese ODA.

2) Contracts were “onerous”?
The facts are that these contracts were diligently prepared and carefully reviewed by various agencies and professionals in government and expert consultants.

Preparing, reviewing, approving, and signing authorities for the original contract included: then MWSS (Metropolitan Waterworks and Sewerage System) management led by Dr. Angel Lazaro III, the entire MWSS Board led by Department of Public Works and Highways (DPWH) Secretary Gregorio Vigilar and his Chief of Staff Mark Dumol, Dept of Finance Secretary Roberto de Ocampo and undersecretaries, the Cabinet Level Privatization Committee, the National Economic and Development Authority (NEDA) Board whose secretariat was headed by Planning Secretary Cielito Habito, Justice Secretary Teofisto Guingona and his Usec Presbyterio Velasco, Chief Presidential Legal Counsel Rene Cayetano, Corporate Legal Counsel Oscar Garcia, Executive Secretary Ruben Torres, and, finally President Ramos himself (who is known for demanding CSW — complete staff work). A similar though less lengthy process was followed on the contract extension which was signed by President Gloria Arroyo and Finance Secretary Gary Teves. Additionally, consultants were engaged — the key ones were International Finance Corporation/World Bank (as the principal adviser for privatization), which in turn engaged NERA from the UK (as economic advisers), Sogreah, a French engineering firm (as process consultants), audit firm Punongbayan and Araullo, and lawyers ACCRALAW (led by attorney Eusebio Tan) and Cleary Gottlieb (led by Lee Buccheit) over a period of a year.

The concessionaires were asked to bid on this contract competitively in both 1996 (there were four highly qualified consortia involving the best names locally, and the leading global water companies which bid) and then again in 2007 when the original west zone concessionaire, the Benpres-Lyonnaise des Eaux consortium, went bankrupt and the contract for Maynilad had to be re-bid. The fact that 50% of the original proponents failed is the best demonstration that there was absolutely no guarantee of returns, no sweetheart deal as contended.

Moreover, government tends to review Public-Private Partnership (PPP) contracts with today’s lenses without reference to the context at the time the contracts were entered into. This was done, I suspect by the Department of Justice in the review reported in the news without consulting the many people then who were involved in drafting, reviewing, and approving the contract.

Had they reached out, they would have appreciated the dramatically different situation then versus now in the conditions of the country and the MWSS. Contract terms offered needed to be appropriate to these conditions and global standards and requirements to attract the best qualified bidders.
Let me just cite a few facts:

1.) PPP then was very new. There were only a handful of contracts to serve as precedents in water or even other sectors, and thus the structure was perceived to be high risk considering especially regulatory uncertainty. The Philippines did not have a clear regulatory regime on water and thus had to develop an innovative “regulation by contract” scheme. A big part of the risk mitigation aspects of this depended on a performance undertaking by the Republic as represented by the Finance Secretary, and the provision of international arbitration for dispute resolution.

2.) The Philippines’ credit rating was below investment grade, interest rates on treasury bills were at double digits, our government debt to GDP and budget deficits to GDP were much higher, as was the external debt to GDP, the current account in deficit, while foreign reserve coverage was only two months’ worth of goods and services versus eight today.

3.) The MWSS then was a mess, very inefficient, there was intermittent water supply, very high water leakage and theft (NRW over 60%). It was over-staffed but had low productivity, was highly indebted, and with high technical risks — nobody knew the condition of the pipes, so this added to the risk premium.
Insofar as “onerous” provisions, let me try to respond to some of the points reported in the newspapers.

1.) The contention that “government interference” was not allowed under the contracts. This is completely false. The facts are that at every step, government is involved in rate setting in what is, after all, a public private partnership.
These steps include: a.) in setting the parameters in the concession agreements, b.) setting the service levels for both piped water and sewerage, c.) determining and auditing which expenditures are prudent and efficient, d.) determining the cost of capital that the concessionaires will receive, adjusted to market every five years, and, finally, e.) approval of the tariffs schedules after proper public hearings that derive from steps a.) through d.). The Republic simply undertook in the Performance Undertaking to respect this procedure.

This is Part One of this column. The second and concluding part will cover other supposed “onerous conditions” relating to recoverability of the corporate income taxes from tariffs, the extension of the contract, and the possible consequences of government terminating the contract unilaterally.
For those who wish to understand the subject more fully, I would refer you to:

1. “The Manila water concession: a key government official’s diary of the world’s largest privatization,” by Mark Dumol
http://documents.worldbank.org/curated/en/118971468776361965/The-Manila-water-concession-a-key-government-officials-diary-of-the-worlds-largest-water-privatization
2. Built on Dreams, Grounded in Reality: Economic Policy Reform in the Philippines by National Scientist and Prof. Emeritus Raul Fabella, https://asiafoundation.org/resources/pdfs/BuiltonDreamsGroundedinReality.pdf
3. Tap Secrets: The Manila Water Story by Virgilio C. Rivera, Jr.,
https://www.gwp.org/globalassets/global/toolbox/case-studies/asia-and-caucasus/cs_450_tap_-manila.pdf
4. The video tape of the Senate Hearings of Dec. 11, Chaired by Senator Grace Poe. In this link: https://www.facebook.com/sengracepoe/videos/845201489268434/





Romeo L. Bernardo is Vice-Chairman of the Foundation for Economic Freedom and GlobalSource Partners Philippine Advisor. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations and was a Trustee of the MWSS from 1995 to June 1996, six months before award of the concessions.

romeo.lopez.bernardo@gmail.com

Momentum: questions and introspections

November 10, 2019 | 8:49 pm

ON Oct. 23, my three co-authors and I launched our book titled Momentum: Economic Reforms for Sustained Growth.

Our book editor, noted veteran journalist Roel Landingin, explains what it’s all about: “In this collection of newspaper columns published from 2008 to 2019, five of the country’s leading economic commentators — Romeo Bernardo, Calixto Chikiamco, Emmanuel de Dios, Raul Fabella and the late Cayetano Paderanga — put forward observations and recommendations on some of the most intractable problems facing economic progress in the Philippines. But the essays do not always dwell on economic analysis and prescription: they also delve into broader themes ranging from motorcycle riding, US China rivalry; Mark Twain, basketball and working in government among others.“

Why the title Momentum?

In the welcome remarks of the evening, Foundation for Economic Freedom President Toti Chikiamco explained on our behalf:

“Truth to tell, we kicked around a few ideas. Prof. De Dios suggested ‘Wokenomics,’ derived from the current urban slang, ‘Woke,’ which means to be awake and always conscious of perceived injustices. However, after a few discussions and several late night dinners, we settled on the more prosaic but more apropos ‘Momentum,’ with the subtitle ‘Economic Reforms for Sustaining Growth.’”

“The word is appropriately ‘Momentum’ because the Philippines has broken from its boom and bust cycle in the past. It’s cruising along at 5-7% GDP growth, which is among the fastest in the region, and no doubt due to reforms in the past. The big question now is: how to sustain and even accelerate economic growth?

“We hope this book supplies the answer. It’s a curated collection of the author’s articles in BusinessWorld, which they wrote as members of the board of IDEA, or the Institute of Development and Econometric Analysis, the economic research organization that the late Dondon Paderanga founded and where he invited us to be board members. This book is also a loving tribute to our late friend Dondon.

“This book was made possible by friends and supporters. I don’t have to cite them, but they know who they are. They may not exactly espouse the same ideas as the authors, but they share with us a love of country and desire to keep the momentum of economic growth. Thank you again. We promise to distribute the book as widely as possible, perhaps enter it into the public domain after a certain period, to enrich the discourse on the economic direction of the country.”

At the launch at the Fairmont Hotel in Makati, we were most honored by the attendance of such public sector luminaries as former President Fidel Ramos, former Prime Minister Cesar Virata, Central Bank Governor Ben Diokno, Chief Justice Artemio Panganiban, Monetary Board Member Philip Medalla, Representative and Professor Stella Quimbo, Competition Commission Chair Arsenio Balisacan, Senator Serge Osmeña, former Secretaries Gerry Sicat, Roberto de a Ocampo, Gary Teves, Romulo Neri, Popo Lotilla and General Joe Almonte; and business leaders and executives such as Endika and Montxu Aboitiz of AEV, Oscar Reyes of the MVP group, MAP President Riza Mantaring, ECOP President Serge Ortiz Luis, SHEDA Chair Jeff Ng, Bulletin Chair Basilio Yap, BusinessWorld Editor-in-Chief Roby Alampay, Harvard Alumni Association President Anthony Abad ( who kindly and superbly emceed) and others too many to mention.

The book enjoyed generous advanced praise — well deserved for 80% of the book — thanks to my four co-authors, in whose brilliance I happily bask.

Here are excerpts from some of our “reviewers”:

From Chief Justice Panganiban: “If ever there would be a Supreme Court for economic matters, I think the authors of this book easily constitute its members (or at least, some of the more sagacious) and the book would contain their landmark ponentias to be read, re-read and obeyed not only by lawyers and economists but more importantly by the policy makers of our country and the general public as well.”

From Cesar Virata: “Can we present the writings of these ‘raging incrementalists’ before the Executive and Legislative Branches as their certified agenda in July 2019? I encourage readers to adopt advocacies prescribed in this compendium of ideas.”

From Stella Quimbo: “Dear policy maker, do the country a favor. Read this book. It contains the roadmap to economic Shangri-la.”

From former President Ramos’ National Security Adviser, Jose Almonte: “The nation is grateful to the talented economists who are the authors of this book. Their thoughts and writings in the last decade have helped form an intellectual consensus that paved the way for reforms to address the root cause why this country is among the least developed in this part of the world.”

From House Ways and Means Committee Chair Joey Salceda: “A choice selection of illuminating columns from BusinessWorld written in the last decade by five of our country’s most distinguished economists whose counsel I seek before providing advice to Presidents or House Speakers, or more so when I push legislation in Congress.”

From Johanna Chua, Citibank Head of Economics for Asia: “What I find refreshing in these essays is that ardent partisan politics has not obfuscated the clarity of economic arguments. The most seasoned intellects of this country can look through the longer historical lens of experience to form a pragmatic assessment of policy trade offs, regardless of who is running the country.”

From Arsenio Balisacan: “Founded on decades of experience in policy advocacy and rigorous economic thinking, the ideas contained in this book show the way forward for the country to realize its development ambitions. Policy makers, program managers, reform advocate, practitioners, and teacher and students of development and the Philippine economy would do well to pay attention — and act.”

And from Ben Diokno, himself an economics professor and opinion writer-leader, who spoke during the book launch: “The book Momentum, authored by some of our brilliant economists, will surely provide us with insights on the significance of economic reforms for sustaining growth… As I’ve always considered myself a reformist, I laud all the people involved in this book. May we keep the momentum going to achieve sustained, strong, balanced, and inclusive growth.”

Our comrade-in-arms in the Foundation for Economic Freedom, former Finance Secretaries Bobby de Ocampo and Gary Teves, and former National Economic and Development Authority Secretary now Monetary Board Member Philip Medalla, wrote similarly glowing endorsements way of an insightful extended Foreword.

The closing remarks of National Scientist Raul summed the evening and the book: “On behalf of the authors of Momentum, Romy, Toti, Noel, Dondon, and myself, let me express our deepest thanks to all our donors and patrons; to our families; and to the dear friends who took the time to read and comment on the volume… Our thanks go as well to BusinessWorld, the op-ed home of our revolving column, ‘Introspective’; to Roel and Neil who shepherded the publication of the book; to the collective Fellowship of FEF who by joining the often strident policy debates forced us to clarify our own policy stances; and to Dondon’s baby, IDEA, of whose Board we remain members.

“This has been quite a journey, and I am extremely lucky to have had the company of Romy, Toti, Noel, and Dondon while undertaking it: Romy of the boundless curiosity; Toti of the principled pugnacity; Noel of the serene profundity; and Dondon the visionary who roped us more or less willingly into the ‘Introspective’ family.

“Contrary to impression, however, we are not woven of the same ideological fabric: Noel is the committed liberal democrat; I am more of the Deng Xiaoping pragmatist; Toti and Romy are raging incrementalists. Noel’s baccalaureate is Atenista, Toti’s and Dondon’s are La Sallista, Romy’s is Maroonista and mine is Seminarista. Dondon, Romy, Noel, and I but not Toti are bound in the UP School of Economics. Still, the collective light of reason that we seek and that shines on us together is stronger by far.

“A few principles make up the collective light that guides us: that the market and the rule-of-law together can work miracles; that government is best that enables the market; that it is silly to trifle with [it].

“Once more, therefore, our profound thanks to all of you, friends and fellow travelers, who joined us in this milestone moment. With you, the journey, if still littered with more failures than triumphs, is itself already a reward. Together, we will continue — to quote Dylan Thomas — to ‘Rage rage against the dying of the light.’”

P.S. The Foundation for Economic Freedom, a co-publisher of Momentum, won the 2019 prestigious Templeton Prize from the Atlas Network — a competition involving think tanks and public advocacy organizations worldwide — on Nov. 7 in New York City, for its work on the removal of restrictions on agricultural patents. The removal of restrictions on about 2.5 million agricultural patents is the subject in one of Calixto Chikiamco’s articles in Momentum.

To order Momentum, call 3453-2375 or send an e-mail at fef@fef.org.ph.

Romeo L. Bernardo is Vice-Chairman of the Foundation for Economic Freedom. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

Citira, Pifita: Now na!

October 6, 2019 | 9:34 pm

Congratulations are due to House Speaker Alan Peter Cayetano and Ways and Means Chair Joey Salceda on the swift passage of the Corporate Income Tax and Incentive Rationalization Act and Passive Income and Financial Intermediary Taxation Act in the House of Representatives. Memorably tagged CITIRA and PIFITA by Congresman Joey, it is now being heard in the Senate Ways and Means Committee which is most ably chaired by lawyer and economist Senator Pia Cayetano.

At the last hearing, I was privileged to read the statement of support of former Finance Secretaries and noted economists in favor of these pending tax reform packages. Signatories included former Prime Minister Cesar Virata, former Senator and Finance/Executive/Foreign Affairs Secretary Alberto Romulo, Former Finance Secretaries Roberto de Ocampo, Jose Isidro Camacho, Margarito Teves, and Former Planning Secretaries Cielito Habito and Arsenio Balisacan.

The collective wisdom and experience of this group in the field of fiscal and economic governance is unparalleled, gained not only during their years in office, but also in the leadership positions they now occupy. Our full statement can be accessed on this link — www.dof.gov.ph/index.php/former-dof-secretaries-eminent-economists-join-top-legislators-in-seeking-urgent-passage-of-remaining-tax-reform-packages/.

The last two sentences read: “All these reforms are necessary if the Philippines is to move forward to a future with no extreme poverty by 2040. Together, we stand ready to support these reforms in any way we can. We urge both houses of Congress to recognize the great merits of the Comprehensive Tax Reform Program and pass the remaining packages at the soonest possible time.”

Urgency is truly called for, since this congress has less than a year before election fever grips the nation and everything is pushed back for at least three more years. And the country, especially the poorest citizens, cannot wait. Philippine poverty incidence stands at over 21% vs. 11% for Indonesia, 9% for Thailand, 7% for Vietnam. (Source ASEAN Key Figures, 2018, aseanstats.org)

Moreover, the world does not stand still. This is especially relevant for CITIRA which will affect the behavior of investors, the job creators. In the ASEAN, our corporate income taxes (CIT) rates stand out uncompetitively at a high 30%, even as our ASEAN peers, which now average 22%, are moving swiftly to further lower them. (See the column of Atty. Benedicta Du-Balabad, “CITIRA and the ASEAN Tax War,” Philippine Daily Inquirer.)

To lower the corporate income tax to 20% faster, quick action is likewise needed to rationalize fiscal incentives to cover for foregone revenues from there. The strongest objections are coming from locators in PEZA (Philippine Economic Zone Authority) zones, championed by the Joint Foreign Chambers of Commerce, and the PEZA Administrator (though disowned by its Chairman and Board). Though unsubstantiated by specific data, the apprehension has been sown that any departure from the status quo of “forever incentives” will lead to huge job losses.

Recent data suggest otherwise. That as literature and research finds, incentives are not what drives FDI (foreign direct investment). And the fears of massive exit of FDI due to recent initiatives of the Department of Finance on incentives rationalization may be exaggerated.

On this, the remarks of Prof. Renato Reside of the UP School of Economics during the Senate hearing is worth quoting. He and his UP colleague, then-former Planning Secretary and now Monetary Board Member Philip Medalla, separately did the seminal work on the case for rationalising fiscal incentives as early as the mid-1990s. (See “Reside, Towards Rational Fiscal Incentives (Good Investments or Wasted Gifts),” 2006. http://www.econ.upd.edu.ph/dp/index.php/dp/issue/view/42.) These have informed bold but sadly failed efforts of five administrations.

“… based on global experience with tax incentives, certain investors get benefits they may not need, certain incentives are redundant. And while certain benefits cannot be attributed to them, there will certainly be costs to granting them. But CITIRA aims to substitute inefficient for more efficient incentives, not take them away so the question is how adjustment will take place when shifting to lower tax rates, tax credits and tax allowances and accelerated depreciation to reward marginal additions to R&D, employment and investment levels. For sure, additional investment and hence employment will also be spurred by more efficient incentives, lower tax rates and more targeted incentives.”

A possible compromise has been mentioned by Department of Trade and Industry Secretary Ramon Lopez. A UP and foreign trained economist, he served as a Director in NEDA (National Economic and Development Authority), as a top corporate executive, and as champion of SMEs at Go Negosyo, and is thus well placed to see all sides. He is recommending a longer phase-in period for the new incentive scheme for well-defined PEZA locators.

The thinking of the Foundation for Economic Freedom (FEF) is aligned with this:

“We support the phasing out of all incentives except temporarily for a small subset of labor intensive industries which unless the CIT is 25% or lower are likely to move out to other countries without incentives. Such exemptions can be phased out when the CIT is aligned with the lower CIT rates in our neighboring countries.”

Now a note on PIFITA. This well-studied bill crafted by the Department of Finance officials and consultant team, goes a long way in simplifying, harmonizing taxation of financial instruments, towards developing our capital market. The FEF has a reservation on the proposed presumptive capital gains tax of 0.1 percent per trade, as this will create friction costs that will impair liquidity and trading, and at the end hurt issuers, especially government, the biggest issuer, as well as savers. Taxing capital gains from debt securities trading as regular income would be more efficient and friendly to the development of the market.

The other tax reform packages, including Package 2+ on Sin Taxes for Universal Health Care, and Package 3 on Real Property Valuation Reform, were likewise fully endorsed by the former Finance Secretaries and the FEF.

Hopes are high that under the committed leadership in the House and the Senate, the resolute Duterte team will succeed where their predecessors have floundered — just as they did in getting the game-changing rice tariffication law passed that has lowered inflation now and for the long haul, and is en route to upgrading Philippine agriculture and reducing poverty. On the other hand, further delay will mean more uncertainty; arguably the heaviest tax — on investments, job creation, and the public good.

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations He is Philippine Adviser of GlobalSource Partners, a New York-based network of independent analysts.

romeo.lopez.bernardo@gmail.com

The Duterte SONA and legacy: tail risks and politic

September 1, 2019 | 11:39 pm

Introspective By Romeo L. Bernardo

This is the continuation of my column last week sharing our presentation to international subscribers of GlobalSource Partners (globalsourcepartners.com) at a teleconference on July 23.

So how do we get from our estimate of 6% to government’s 7-8% growth target? I would describe 7-8% as aspirational, considering especially the current global trade environment that has dampened export growth. Although we said Build, Build, Build will add to domestic demand growth, there is high import leakage (40-60% per IMF). An example is cement where imports have grown by a Compound annual growth rate (CAGR) of 30% in the last three years. Also, as we said, all the building activity will aggravate strains on traffic, logistics, and power supply, not to mention that manufacturing plants have been operating at over 80% capacity for some time now.

So, growth will be 6%, maybe even 6.5%, inflation is under control especially with freer rice trade, and markets expect easier local monetary policies ahead consistent with the US Fed’s stance. For a time, there were worries about rising risks from the twin deficits, fiscal and external, in an environment of tightening global monetary and financial conditions. But these have subsided with the changed environment and, at the end of the day, we go back to the basic driver of both deficits which is domestic investment activity, both public and private, which are necessary to propel GDP growth to higher rates in the future. Also, the country has built up ample international reserves to serve as a cushion for higher current account deficits. Based on the IMF reserve adequacy computations, the Philippines has one of the highest ARA (Assessment of Reserve Adequacy) metric (1.83 as of June).

Let me add a word on the trade war. Exports, though still important, have not been big driver of Philippine growth. To illustrate, per our estimate, on a value-added basis, export earnings last year amounted to $35 billion or 11% of GDP compared with a total of $50 billion or 15% of GDP for remittances and BPO. Ten years ago, the comparative numbers were both around 14% of GDP. So, my prognosis is that while we will be affected, the overall impact will not drag growth in a major way. But neither is the Philippines expected to gain significantly from ongoing shifts in production bases. Competitiveness issues remain the key constraints in the short-term. (N.B. Since our July teleconference, trade war and global recession risks have intensified with new Trump tweets and tariffs.)

I will also add three tail risks, one is on the sustainability of Philippine Online Gaming Operator (POGO). The other is a possible power shortage, and the third is a key man risk.

First, the risk that the POGO game ends. There has been talk about Premier Xi Jinping asking for President Rodrigo Duterte’s help to do something about it, a strange request until one considers how closely the industry is perhaps tied to the Duterte administration’s China pivot. However, its continued growth, or even existence is vulnerable to change in the Chinese government’s sentiment, for example, less friendly relations with the next Philippine administration, or a crackdown on money laundering that could be initiated by Chinese authorities or multilateral watchdogs. A sudden stop would have adverse effects not only on direct employment but also on real estate prices, office space demand, and banking profitability. (N.B. POGO’s “game over” risks has increased considerably with progressively firmer diplomatic communications against it by the Chinese embassy since our July teleconference.)

My second tail risk is a power shortage. From a situation of surplus power forecast three years ago, the main grid — which includes Metro Manila services — suffered sporadic shortages and red and yellow alerts earlier this year due to unplanned outages/plant shutdowns and the El Niño drought. Reserves have grown thin due to delays in approvals of several power plants, a long story involving the Supreme Court, the Energy Regulatory Commission (ERC), weak oversight and slow regulatory response. While the ERC seems to be trying to clear the backlog, there is a tail risk that the thin reserves will grow even thinner should there be more delays before new plants come on stream to meet the growing power demand in line with GDP growth.

My third tail risk is a key man risk. If, for whatever reason, Finance Secretary Carlos Dominguez III drops out of the scene, all bets are off. Secretary Dominguez, a highly regarded business executive and technocrat, a classmate of President Duterte from kindergarten and his most trusted political ally and confidant for decades, is likely irreplaceable. Without Secretary Dominguez, it may be difficult to check populists measures that threaten macro stability.

I now come to my last topic, politics. Notwithstanding his international image as a despot, President Duterte is very, very popular locally. He enjoys the support of 85% of Filipinos nationwide and he drove the point home in his State of the Nation Address the other day by highlighting the fact that only 3% of survey respondents disapproved of him, the other 11% are “undecided.” Such approval ratings are historically unparalleled.

For a while, there were concerns that the President, with this much political capital and overwhelming influence over the country’s democratic institutions (Congress, the Supreme Court, constitutional bodies such as the Ombudsman, Comelec), and unrestrained in dealing with the media, the church, oligarchs, however he defines them, or anyone in the opposition, may try to do what it takes to change the Constitution and shift to whatever form of government that would keep him in power. At least based on what he said in his State of the Nation Address, he appears to have given up on the campaign promise to a shift to federalism (which his economic managers called “a fiscal nightmare.”) Not a word was mentioned on it during his speech and he told media afterwards that “I’m out of it.”

But he is clearly not a lame duck at this point. After the midterm elections, he has even stronger supermajority support in both houses of Congress. And, without the charter change distraction, the next one to one-and-a-half years would be good for the economic reform agenda. This is why I am very confident that the remaining tax reform packages will pass quickly.

After that, the last year, year-and-a-half of the presidency would be mostly about succession and positioning for the 2022 presidential elections. The Philippine Constitution limits the president’s term of office to a single six-year term. In one of our earlier reports, we observed that historically, only one incumbent, Cory Aquino, had succeeded in making her anointed successor, Fidel Ramos, win, and narrowly at that. History has not been kind to ex-Presidents who did not manage their succession well. Since 1986, one went into exile, one was under house arrest after being thrown out of office, one spent five years in a military hospital with a neck brace. The last president has several criminal cases hanging over his head.

President Duterte’s goal then for 2022 is to choose a successor who will keep him out of harm’s way. This is where his daughter and her HNP (Hugpong ng Pagbabago) party come in. The daughter is Davao Mayor Sara Duterte, who rose to fame decades ago by punching, on camera, a local government executive who went against her orders in an incident involving the demolition of shanties. Like the father, she is a very popular figure and the betting at present is that she will be the anointed one.

But it is too early to say who the “Presidentiables” will be in 2022, much less who will prevail. Random names I’ve heard include any of three Villars (ex-Senator Manny Villar, ranked richest in the Philippines by Forbes magazine, his wife Cynthia who topped the last senatorial race, and their son, current Public Works Secretary Mark), Senator Grace Poe (who ran and lost to President Duterte), and Senator Manny Pacquiao, the Pacman.

We need to bear in mind some history lessons from Philippine elections. One, in a multi-contested election, as has been recent history, a candidate without a clear majority can win. Winners have been surprises. Two, I am also reminded that “necropolitics” has defined presidential election outcomes on more than one occasion in the past. The story of both Aquino presidents. A third lesson from election history, unlike elsewhere, here it is not the early bird who catches the worm. It is the second mouse who gets the cheese.

And speaking of necropolitics, my political tail risk is the death of President Duterte in office. The President is 74 years old and rumored to be sick. His Vice-President, Leni Robredo, an opposition leader, has reportedly doubled her security detail to discourage any assassination attempt by those who may be adversely impacted by inevitable drastic changes. Even the more likely smooth assumption, as the Constitution mandates, could be disruptive — there will be changes in policy across a wide field, projects will be reviewed, there will be leadership changes across major departments.

To summarize: The key messages I would like to leave with you today are: 1.) the economy is doing well thanks to the economic team that has also been able to push for good economic reforms; 2.) the Build, Build, Build infrastructure program is moving forward with government spending reportedly up to 5% of GDP, a level that I think can be sustained through 2022; 3.) economic growth at 6% to 6.5% over the next three years is resilient but will be hard to sustain if higher than that; and 4.) on the political side… well, we don’t really know… the genius of the man is in keeping everybody guessing.

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

romeo.lopez.bernardo@gmail.com