Funding the Bayanihan Act: What works, and may not work

This viral pandemic has its own dynamics. The Luzon-wide Enhanced Community Quarantine (ECQ) has wisely prioritized public health and countless lives over business. But not without costs. Unavoidably, there is some short-run trade-off between preventing mortality and economic growth.

Graduate Institute’s Beatrice Weder di Mauro stressed that decisive government policy matters: “The size and persistence of the economic damage will depend on how governments handle this sudden close encounter with nature.” It appears that countries that took early drastic measures are mitigating the epidemiological curve. Vietnam is a good example.

We all aim to contain the pathogen’s spread with generalized testing, firm contact tracing, and treatment of infected patients. The next two weeks are crucial. The swift construction of emergency wards at the Philippine International Convention Center and in some public offices should further reinforce initial gains. Any partial lifting of the ECQ as proposed by some business groups should be anchored and weighed against our health experts’ additional data and prognosis.

We dread the risks now faced by the American public. In the middle of a raging pandemic, President Donald Trump decided to re-open the US to the world. His decision is backed by a task force bereft of scientists and public health experts.

In his book, The Great Influenza: The Epic Story of the Deadliest Plague in History, John M. Barry summed up the dominant lesson of the 1918 Spanish flu pandemic: “… governments need to tell the truth in a crisis… retain the public’s trust… distort nothing… put the best face… manipulate no one.” About 50 million people worldwide perished from that flu, with 675,000 in the US.

The best way to earn public trust is to ensure the success of the Bayanihan Act. The virus does not discriminate. It does not submit to a political agenda. It has no respect for market analysis. It will not yield to academic wish lists. It directly assaults the country’s output. When people reduce social consumption to avoid infection, monetary and fiscal measures may work only partially. This is the reason why beating the virus should remain the top priority of public policy.

US Treasury Secretary Lawrence Summers emphasized last week: “…if we put the public health problems behind us, I think there is the prospect for quite rapid recovery, but we are a long way from (this).”

Initial missteps in not immediately clamping down on foreign travel to and from China were somewhat mitigated by the ECQ and Luzon lockdown. Mass testing is now being implemented. With private sector help, more masks and PPEs are being distributed to public and private hospitals. Public transport for frontline medical workers is now available. Obviously, we need more.

Because of this unforeseen pandemic, the pre-COVID-19 economic growth target of six to seven percent falls to the wayside. The IMF has already scaled down the global growth forecast from 3.3% to a recession at -3%.

For the Philippines, IMF’s Yongzheng Yang announced a slashed growth forecast of 0.6% from 6.3%. This IMF forecast for the Philippines is higher than Thailand’s -6.7%, Malaysia’s -1.7%, and Indonesia’s 0.5%. Vietnam’s is higher at 2.7%.

The IMF was humbled by the pandemic. It called on policymakers to avoid repeating the Depression-era mistake of ratcheting back budget deficits. With lower interest rates, fiscal expansion is expected to result in quicker recovery from what is foreseen to be the deepest recession in 100 years.

With the IMF’s advice, we imagine a world where countries stimulate their economies with funds from higher taxes, with borrowings from both the domestic capital markets and the central banks, and with more money printed by central banks.

But with the work stoppage and with economic activities frozen, higher taxes are not forthcoming. Taxes are in fact contractionary. Rather, the sale of government securities may be more effective as a weak basis exists for market players to hold more cash. It would be advantageous to instead invest in interest-earning, fully secured T-bills or T-bonds. Interest-free borrowing from the central bank was recently done in the Philippines. This amounted to some P300 billion.

It would be imprudent to instruct the Bangko Sentral to print more money to fund the budget. Yes, times are not normal. But under the BSP Charter, printing money can only be justified as a special credit operation extended to banks for a maximum period of seven days without collateral “for the purpose of providing liquidity to the banking system in times of need.” All other emergency credit operations under the law can only be done with collaterals. Banks cannot expand their loan portfolios without explicit consent of the Monetary Board.

Proponents of printing money should realize that we have not maximized our conventional tools of monetary policy. An early implementation of bringing down the RRR to single digit levels is one option. Every 100 bps reduction in the RRR can move P100 billion from the BSP to the banks. This, in turn, could be lent out to clients. A 400 bps drop in RRR, translates into banks having P400 billion in loanable funds. But theory ends here.

In previous occasions, the BSP has aggressively reduced not only the RRR but also its policy rates. Banks are already awash with liquidity. Instead of lending out the freed deposits, these were deposited back to the BSP. Should this trend continue, the BSP could simply keep monetary policy at current settings and ease further as the need arises to minimize the magnitude of unwinding.

Furthermore, the Department of Finance’s guarantee may lessen risks from MSME lending but it cannot eliminate administrative challenges of small loans to small businesses.

DEMAND FOR LOANS AT THIS POINT IS MUTED BY THE LOCKDOWN.
Quieting and assuring the market may be achieved through BSP reiterations that it will do whatever it takes to support economic growth and financial stability. Composed and firm reiterations help. The Finance Secretary’s assurance that ample fiscal space exists to manage COVID-19 and to resume economic activity is also a strong and affirming stance. Honoring the country’s debt obligation bolsters public confidence that the Republic’s strategy of growing out of debt that has worked in the past, will work again.

There is such a thing as open mouth operations apart from open market operations. Depending on who and how he makes the pronouncements, open mouth operations could be cheaper, widely confidence-boosting and more effective.

Social backlash of a lockdown and insecurity is exacerbated when people receive mixed and conflicting reports.

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.