Signs And Wonders

If we go by the statistics, the global economy is in a freefall. For the Philippines, there are obvious cushions.

IMF’s June World Economic Outlook puts this year’s global growth at -4.9%. This time, no regional or country growth drivers could be identified. Advanced economies are contracting by nearly twice at -8.0%. The US economy is declining by 8%. In the Euro Area, negative growth is expected at 10.2%. Emerging markets and developing economies also threaten to pull down global growth. If there is any comfort, emerging and developing Asia is expected to decline by less than 1% at -0.8%.

The IMF chief economist describes the situation as “a crisis like no other.” Global recovery at 5.4% in 2021 is uncertain and poverty reduction stands to suffer the greatest setback since the 1990s.

Equity market crashes, credit tightness, housing slumps, and grim inventory adjustments are becoming familiar. Lay-offs are rampant. The New York Times reports, “a tidal wave of bankruptcies is coming.”

The list of corporate failures is long and getting longer. It includes household names like Hertz, J. Crew, Neiman Marcus, JCPenney, Gold’s Gym, GNC, and Brooks Brothers. From the Us West to East Coast, familiar eating places have been boarded up due to bad business and protest movements.

The virus alone could not have been the cause of this economic malaise.

In a recent The New York Times syndicated column, Nobel laureate Paul Krugman argued that in the US, the war against COVID-19 was lost and the economy was devastated when President Trump tweeted liberation.

Trump opposed the lockdowns implemented over Minnesota, Michigan, and Virginia. By detesting the pandemic protocols of social distancing and face masks, Americans seem to have surprisingly turned anti-social and anti-science. According to Krugman, US anti-lockdown mass actions were not “spontaneous and grassroots affairs.” Allegations are that these were organized, financed and coordinated by conservative political activists to reopen economies and generate more jobs in time for the November elections. America’s leadership “decided that it was in their political interest to let the virus run wild.”

Where lockdowns have been prematurely lifted, COVID-19 cases have resurged with a vengeance. This is true for the US, Australia, and the United Kingdom. As for Sweden, where lockdowns were not imposed, the New York Times reports a negative outcome of “more death, and nearly equal economic damage.” This suggests that “the supposed choice between lives and paychecks is a false one: a failure to impose social distancing can cost lives and jobs at the same time.”

The Philippines appears likewise to be facing a dark scenario. For 2020, we downgraded the economic growth forecast to negative 2-3.4%. In their latest June assessments, both the IMF and ADB predict a more pessimistic growth outlook at -3.6% and -3.8%, respectively. Forecasts for 2021 see a sharp V recovery. The Government’s 8-9% output growth is way above the IMF’s 6.8% and the ADB’s 6.5%. Only time can tell if this trajectory will be affirmed but we have our doubts; a U-shaped recovery seems to be likelier.

Two credit rating agencies also share these downbeat projections. Moody’s growth forecast for the Philippines is -2.5%. It cites declines in external trade flows and the debilitating impact of travel restrictions on both tourism and exports. S&P has a more pessimistic projection of -3%, owing to the country’s long and tight lockdowns.

Singapore-based DBS Bank expects the Philippines to slump by as much as 4%. DBS points to the sharp deterioration in consumption and investment in the first quarter of 2020.

For this reason, the country’s goal to move up to middle-income status under the World Bank classification is not expected to be achieved this year. Last year, it was the budget delay that stunted growth.

But after a more careful weighing of things that matter, the Philippines is not in a freefall. We have cushions in place.

While we are more likely to suffer from a recession this year, over the last 20 years, we have built strong buffers to soften the blows.

Despite funding issues of the economic recovery program, significant positive outcomes can result from an authorized realignment of the budget to crucial activities. For example, the budget can be realigned more to pandemic mitigation to minimize fear and uncertainty. This will foster more economic activities. We can prioritize social safety nets to cushion the hit on consumption and impoverishment. Focus can be put on business support to MSMEs, to retain jobs and income. The Government has these elements in its recovery plan.

According to the IMF, the Philippine policy response is appropriate.

Finance Secretary Sonny Dominguez’s refusal to borrow and finance the supplemental budget suggests clear fiscal responsibility. In doing so, the Constitution is upheld. These decisions strengthen fiscal and debt sustainability. In turn, long-term prospects of economic growth are ensured. Both investors and financial markets who ostensibly define external destiny of economies, will count this decisiveness as additional points to bolster our creditworthiness.

This is not to say we are oblivious to the red flags.

The high unemployment rate of 17.7% in April 2020 is truly a concern. With the lockdown depressing tax collections by 16%, this year, the deficit to GDP ratio is expected to be more than twice higher. But the Philippines has succeeded in securing the support of development partners to finance the regular budget especially for infra and the pandemic response. This should approximately align the budget with its financing in the face of weak revenue efforts.

We also have the complementary support of monetary authorities in our favor. The Bangko Sentral has laid the groundwork for conducive liquidity and credit conditions; a strong transmission mechanism of monetary policy through bank and financial market resiliency; and a more pandemic-friendly and inclusive digital platform of payments and settlements.

At this time, other freefall features obvious during the Global Financial Crisis are not apparent. Then, Nobel laureate Joseph Stiglitz was concerned that expansionary monetary policy inflated equity prices. This is not the case in the Philippines. While the BSP’s recent liquidity injection could have presumably spilled over to stocks, this seems to have been kept back to its term deposit facility. Of course, more excessive infusions of liquidity — with low interest, weak demand for credit, and restrained consumer spending — can only lead to some mispricing of risks and financial stability issues.

Moreover, the bank illiquidity and insolvency which were so common in 2008-09 are yet to be seen. The capital base of Philippine banks continues to be in excess of both the BSP and Bank for International Settlements standards. Non-performing loan ratios remain muted.

We see however, possible system shocks as bank clients deleverage and become even more risk averse. Households and corporates, affected by lack of economic opportunities, will have a hard time with debt servicing. Aggregate demand is bound to shrink. It would be very challenging to export our way to recovery as the global economy remains in the freezer.

No freefall, but we face a conditional proposition.

We recently had the opportunity to speak via Zoom before the UP School of Economics Alumni Association. We affirmed that the Philippines has all it takes to recover and grow. But we cautioned against four handicaps.

First, there is the headwind of inefficient public health management ± among them, lapses and delays in testing, tracing and treating.

Second, there is the danger of uncoordinated public policies that must be consistent and complementary across all agencies and branches of Government. We really must heal as one.

Third, we have a risk of “democracy deficit” when public support is not rallied as government actions may not be believed to be credible or consistent.

Finally, we cannot discount the uncertainties of the times due to the pandemic itself — these are uncertainties best addressed by science, research and medicine.

If we allow these four to run wild, the global freefall might hit us all.


Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.