Signs And Wonders

Except perhaps for Bill Gates, even top economists and thinkers never expected COVID-19 to be this devastating.

The pandemic has resulted in dramatic shifts in the forecasts of New York University’s Nouriel Roubini. On March 1, Roubini was tentative: “the global recession sparked by Coronavirus doesn’t look totally farfetched.” The tone changed two weeks later: “we will be sure to have a global recession.” He described the virus as the most immediate tail risk, with markets entering correction territory.

Along with PIMCO, JP Morgan, and Morgan Stanley, Roubini predicted two quarters of US economic decline. Underlying this is the expectation that the contagion is yet to peak in three months, in June 2020. Roubini stressed the importance of providing huge subsidies to people who might starve without work. He supported the imperatives of fiscal stimulus given weak economic prospects. He highlighted the need for easy Fed monetary policy given frozen credit and debt markets with overleveraged corporates. He was all for a social protection package of giving every American $1,000, as unemployment hits the roof.

Twice in late March 2020, the economist explained that the pandemic could lead not just to a recession, but to a Greater Depression in the US with adverse global implications. Roubini dismissed a “V”, “U” or an “L” type of downturn and recovery. Instead, he said an “I” is more likely as financial markets and economic activities plummet precipitously. He reiterated the need for loose monetary policy and massive fiscal support.

Roubini assumed a trifecta, or what he called Bermuda Triangle, for the Greater Depression to happen.

First, there is failure of US public health policy. This happens when the government prematurely eases travel bans and lifts quarantine, especially in most heavily infected areas. Restarting the US economy too soon is a bad idea. While this could lead to a temporary resumption of economic activities, there could be a more acute resurgence of the virus, perhaps in a mutated form. The economic and social costs could be many times greater.

This should be a warning to the Philippines. Since health authorities are unconvinced of the viral spread being arrested, the government should not lift the lockdown too soon. Our war is against the virus. It is a virus that kills. Social protection and economic recovery must be considered secondary even as some business tycoons believe that “a floundering economy would be just as dangerous as the coronavirus… pandemic itself.” Lifting the lockdown prematurely would be reckless and might bring us back to a more devastating and uncontrollable “square one.”

Second, higher inflation is induced by sustained monetization of public debt. With imprudent money printing, the US risks becoming like Zimbabwe, Argentina, or Venezuela where hyperinflation is an economic fixture. With negative supply shocks due to workers sent home for quarantine, the US economy might go into stagflation: economic stagnation, recession, and high inflation.

The Philippines should take heed. This warning modifies Roubini’s advice that central banks should throw the kitchen sink of unconventional measures against the uniquely virus-induced economic decline. One example is monetization of public debt because it is cost-free, convenient and it can soften any tendency for market rates to increase. But debt monetization cannot forever support unconstrained fiscal response. Adverse supply shocks like what we are seeing today could reduce the country’s potential growth and printing money could just nurture the seeds of inflation.

Finally, the geopolitics of US-China trade and global cyberwarfare adds more tension to economic depression. This could spell untold global spillovers to the rest of the world, including the Philippines.

Roubini revised his economic assessment within one month. But former US Treasury Secretary Larry Summers of Harvard University was more steadfast. He shared a different view and advised authorities, “to help people get better and to avoid contracting this disease; … (it) is a much better strategy anyway than reducing interest rates below one percent.”

Summers observed, “we are looking at an event that will possibly dwarf the events that have taken place in wars.” He disagreed with the Fed’s recent easing of monetary policy, stressing the superiority of fiscal policy. He argued that “a recession… induced by …people… afraid to gather together in crowds (will be) more difficult to combat with lower interest rates than normal recession.”

Summers urged US officials to “prioritize resolving the pandemic’s medical emergency before trying to rectify its economic fallout.” He was firm that regardless of money to be made available by the US Fed and the budget deficit to run, the problem cannot be solved unless the virus is first contained.

He cautioned the US against abandoning the war too early.

Nonetheless, President Trump appears swayed to open up businesses soon — within

Weeks — regardless of where the virus stands, coupled with efforts to target the unseen virus.

This has local resonance. It is the same view expressed by Philippine businessmen to the Inter-Agency Task Force for the Management of Emerging Infectious Diseases (IATF). Recommendation is to do a parallel approach: put safeguards against the virus, while trying to revive the economy. There is a proposal to allow selected workers to report for work again, with production and distribution of goods and services re-starting. People will just have to be extra careful.

The announced end of the Luzon-wide lockdown should not be the reckoning date of the proposed modified quarantine. The more competent advice of our health experts and scientists should be heeded. Life is more precious than business or politics.

How is the market reacting to public policy announcements so far?

External developments more than dominate the rollout of policy support against COVID-19. With the IMF’s announcement of a global economic recession, global equity markets including the Philippines’ plunged to historic lows. Philippine debt spreads in US dollar over US Treasuries for the two-year and five-year instruments widened by more than 210 bps and nearly 217 bps, respectively, from the end of 2019 to the end of March 2020. Credit default swaps for the same instruments rose from 5.44% and 10.55% at end-2019 to 20.6% and 36.76% respectively, at end-March 2020.

While this viral pandemic is global, the Philippines’ own triumph over the unseen virus is a fundamental element to restoring confidence. Assurance will only come once the budget finally equips our health frontliners, strengthens our healthcare infrastructure, and protects the disadvantaged and the vulnerable. Preparing for economic recovery can then follow.

Summers could be abrasive sometimes. But he was very admirable when he urged US policymakers to spend whatever it takes to control the virus.


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.