Numbers Don’t Lie

Filipinos are worried about the future of the economy — and for good reason. The heavy handed lockdown pushed many businesses to bankruptcy, especially micro, small and medium enterprises (MSMEs). While there is no exact data as to how many businesses have closed, a United Nations survey published last October gives us a good idea. According to the survey, 81% of Filipino MSMEs experienced income drops and customer loss. Sixty percent of businesses said they did not receive any support from the government.

As much as 25% reported severe working capital shortages. It is believed that the majority of them ended up closed. This is a cause for worry considering that MSMEs comprise 99.5% of business establishments in the country and are the source of 63% of all jobs. They account for 40% of gross domestic product (GDP).

Meanwhile, medium to large scale businesses involved in travel, hotels and restaurants, live entertainment, sports, transportation, MICE, and retail continue to bleed. Those with limited cash runways have fallen on the wayside. Others must diversify into more lucrative fields.

Joblessness has increased to 8.7% while the poverty rate is still at an uncomfortable 26%. Not helping is the decision of the Department of Finance to appropriate one of the smallest stimulus packages in the region at only 5.88% of GDP. It will hardly help in priming the economy.

Last week, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno addressed the public to allay our fears. In a one on one discourse with this paper’s editor-in-chief, Wilfredo Reyes, Mr. Diokno assured the public that the worst is over and that our financial system is healthy.

In the past, the Philippines would always run out of foreign exchange whenever it faced an economic crisis. This would compel the central bank to increase interest rates and devalue the peso, both of which choked private enterprises. Hence, the boom-bust cycle. The situation is different now, said the governor. With more than a hundred billion dollars in reserves, the BSP is able to provide the system with adequate liquidity to keep businesses afloat. Our reserves are equivalent to 12 months of imports, nine months more than the minimum requirement.

Early on in the crisis, the BSP cut reserve requirements by 200 basis points which effectively unleashed P200 billion into the system. In parallel, interest rates were reduced by 2%. The two-pronged strategy allowed Filipino companies to avail of cheap loans whilst giving the banks the bandwidth to provide them. The BSP strategy, in effect, made up for the lack of government subsidies and direct cash infusions to MSMEs in distress.

In fact, loans granted to MSMEs are counted by the BSP as part of its reserve requirement. This is a BSP innovation that allowed more cash to be pumped into the system. The governor disclosed that he has standing authority from the Monetary Board to slash reserve requirement rates by a further 200 basis points (2%). This option will be tapped when the need arises. Suffice it to say that by the end of the governor’s term in 2023, he plans to reduce the reserve requirement rate from 18% (pre-COVID) to a single digit.

The reduction of reserve requirements will not weaken the financial system, Mr. Diokno assures. Our banks are generally healthy since their non-performing loans (NPLs) stand at only 3-4%. It will be recalled that during Asian Financial Crisis, NPL’s soared to 18%, which explained the spate of bank closures. This is not the case now. NPLs are manageable and banks are adequately capitalized. Nonetheless, the BSP continues to monitor the financial health of our banks.

As for the macro economy, the governor expects a 9% contraction for the year 2020. This will be followed by an expansion of 6.5% to 7.5% in 2021, despite the lingering effects of the pandemic. The low base effect helps. For 2022, authorities expect the economy to expand by 8% to 10% on the assumption that we achieve herd immunity or widespread vaccination. The national elections will contribute .5 to 1% to growth. The economy will only approximate 2019 levels in the second half of 2022.

Should there be a surge in infections between now and 2022, government agencies agree that the lockdowns will be localized to LGUs or barangays so as not to cause sweeping economic damage. This should have been done in the first place — the IATF only realized it now.

Driving growth this year is the pump-priming effect of Build, Build, Build (BBB), the front-loading of government spending (which is doable since the national budget has already been signed), the recovery of the global economy and the uptick on trade. OFW remittances are also seen to post a 4% growth following a slight contraction of .9% in 2020.

Credit watcher, Fitch, affirmed the country’s debt rating of BBB which is still within the realm of investment grade. Although our foreign debt to GDP ratio increased from 39% (pre-COVID) to around 50%, we are still in a good position to borrow at prime rates.

The governor assured us all that we should not be worried about the economy since ours is one fueled by a young population. While more developed countries grapple with an ageing workforce, the median age of ours is just 24 years old. The challenge we face is to educate and equip our youth so that they may be productive contributors to the economy.

With the advent of artificial intelligence and chatbots, we can no longer rely on our proficiency in English, neutral accent, and ability to understand American idioms as a competitive advantage. Our youth must become competent in technical fields such as engineering, accounting, analytics, cloud technology, artificial intelligence, and the like. In the next decade, Philippine competitiveness will largely depend on the technical skills of the workforce. Is the government doing enough to upskill youth? That is a subject of another piece. Our consolation is that the government is aware of the need to upskill.

So is the economy and the financial system healthy? Yes it is. However, we have a lot of catching up to do given the deep economic contraction of 2020. Sadly, we were overtaken by Vietnam in the region’s development race because of it. The only way to make up for the disastrous 2020 is to install more economic reforms to accelerate growth.


Andrew J. Masigan is an economist

Twitter @aj_masigan