How can President Rodrigo Duterte announce to his country and his people (and to world investors and creditors) that, “Now. The economy is in the doldrums. Actually — now.” (Philippine Daily Inquirer [PDI] June 24, 2018) He then rants on his version of economic dynamics: “Interest rates are picking up, are getting high so it destroys the present (economic gains)…you raise your (interest rate), our (peso value) goes down, theoretically…” Mr. Duterte said at a speech at the SMX Center Communications Summit 2018 (Ibid.).
Of course academicians immediately pounced on the President for illegal practice as economist — University of the Philippines professor JC Punongbayan said that “Duterte knows little to nothing about economics” (http://politics.com.ph June 26, 2018). He just had to correct Duterte’s “stab at economic theory” when Duterte incongruously said, “when you raise your [interest rate], our [peso value] goes down, theoretically.” Prof. Punongbayan said, “Basic economics tells us exactly the opposite is what happens. Higher interest rates spur capital inflows, and as investors haul their money into the country they exchange their dollars for pesos. This extra supply of dollars raises the relative value of the peso, thus strengthening (not weakening) our currency. The peso, at P53+ per US dollar, is not just the weakest in 12 years but also the weakest in ASEAN” Rappler, June 28, 2018).
Why didn’t his economic team and the Bangko Sentral ng Pilipinas (BSP) tell the President that? The peso started to drop in late 2016 because of the steady strengthening of the US dollar, as interest rates were raised in phases by the Fed. With the Philippines being a net importer rather than exporter of goods, costs were multiplied in more expensive foreign currency. Notwithstanding the foreign remittances of overseas Filipino workers (OFWs) and foreign exchange-paid business process outsourcing (BPOs), the increase in global oil prices caused rapid inflation, oil being a major input in most economies.
Academics would call it cost-push inflation, as costs of production in economic activities shot up, and thus the need to increase prices to maintain profit margins. Add to that the net increased taxes under the Tax Reform for Acceleration and Inclusion (TRAIN) law which lowered the tax-exempt income to P250,000/year but increased the excise taxes on various products like fuel, sugar, coal, and automobiles, while it expanded coverage on products which were previously exempted from the value-added tax (VAT). Note that prior to the TRAIN law, up to 40% of the country’s total number of families were already exempt from paying income taxes, while all have to pay the new excise taxes and VAT (cebudailynews.inquirer.net July 2, 2018).
Yet the Duterte economic managers said in a joint statement at the July 6 pre-state of the nation (SONA) forum: “While we acknowledge the public sentiment on rising prices, let us remind ourselves that the Train Law raised the take-home pay of 99% of income tax payers by an average of 15%, much higher than inflation. The additional revenues that we generated from the Train Law will also allow us to provide free education in state colleges and universities, free irrigation for farmers, conditional cash transfers to poor families and senior citizens, and higher salaries to government employees including uniformed men. Without doubt, these should help in coping with the rising prices of goods.” (Rappler, July 6, 2018).
Where did the “15% higher-than-inflation increase in take-home pay of 99% of income tax payers” come from? And this was just as the Philippine Statistics Authority announced that inflation hit 5.2% in June, the highest in five years (BusinessWorld July 6-7, 2018). “It is not something to worry about. It’s within historical amounts,” Presidential Spokesman Harry Roque said during a Palace news conference (Manila Bulletin, July 5, 2018).
When there was palpable public anticipation that inflation would soar further, BSP finally raised interest rates to 3.5% from 3.25% to tighten money supply and help bring down inflation. It last raised rates in May to 3% from 2.75%, which was the first increase since September 2014 (CNN Philippines, June 20, 2018). “There may have been a little bit of a slip in [the] timing of increasing policy rates….[The issue] is best addressed to BSP,” Socioeconomic Planning Secretary Ernesto Pernia chided (Rappler, July 5, 2018). Meaning: the BSP should have done this sooner?
BSP Governor Nestor Espenilla, Jr. accepted that “the higher-than-expected June inflation outcome is a setback. We will review and update our situational assessment and forecast inflation path. This will shape the strength and timing of our next monetary policy response to firmly anchor inflation expectations.” He reaffirmed commitment to the target inflation of 2% to 4% (Ibid.). In May, the BSP had expected 2018 inflation to average 4.6%, versus the 3.9% forecast given last March. Price increases are expected to ease next year to average 3.4%, back within the government’s target although higher than the previous 3% estimate (BusinessWorld May 11. 2018).
UP School of Economics professor Dr. Emmanuel de Dios criticized government economic managers’ non-coordinated economic moves. “They are pointing fingers, but they are all guilty (for what is happening),” he said. They cannot say TRAIN is only responsible for 0.4% of the [inflation]. But who is in charge of the economy? ’Di ba silang lahat (Isn’t it all of them)?” De Dios said last week in a forum on democracy and governance (Rappler, July 5, 2018).
De Dios shot down the ready boast of government that the country’s economy is among the growth leaders in the region, registering 6.8% in gross domestic product (GDP) in 2017. “Which countries are we comparing ourselves with?” he asked. “Reports said we are 3rd in ASEAN, but if we include Nepal, Bangladesh, Laos, China, Cambodia, and Vietnam, we are actually just 7th…and a 6-point-something percent of GDP is still not good enough…considering that Laos and Cambodia reached 7% in 2011,” De Dios said (Rappler, July 6, 2018). Our country dipped 9 notches to the 50th spot out of 63 economies in this year’s World Competitiveness Yearbook rankings of the International Institute of Management Development; the Philippines’ ranking in the ease of doing business also slipped to 113th this year from 99th last year across the 190 countries covered by an annual World Bank Group report (Ibid.)
At President Duterte’s landmark “we are in the doldrums” speech, he probably realized midway that he had babbled and blundered. To promote economic activity and boost tax revenues in the provinces, where “the doldrums” was most noticeable, he suggested, “Now if there’s jueteng…at least money goes around. Some people will get hungry, others will be able to eat, [but] there’s commercial activity.” (Rappler, June 28, 2018). Prof. Punongbayan (earlier quoted) reacted, |“But jueteng is illegal and not taxable. It can also hardly be considered the prime mover of economic activity in the provinces (no matter how big an industry it may seem).” (politics.com.ph June 26, 2018).
God help our country!
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.