Signs And Wonders

It’s almost a quiz where the Palace spokesperson drew his observation that the Philippines’ response to the pandemic was “excellent.” His term of reference was the experience of more advanced economies with staggering coronavirus disease 2019 (COVID-19) incidence and mortality. Some quarters took exception by saying that this observation does not sit well with our longest quarantine, longest school closure, the deepest decline in output growth, and being the last ASEAN country to receive the vaccines.

We could not open up the economy as recommended by our planning authorities precisely because the pandemic curve remains on the uptrend and our vaccination schedule was delayed.

The Palace must have missed the President’s decision to predicate the lifting of quarantine restrictions on our ability to roll out the vaccines to as many frontliners and vulnerable sectors of society as possible.

A detraction from the President’s concern, this statement is literally making a mountain out of a molehill.

The decision of the President was vindicated by subsequent events when we saw the incidence of new cases peaking at July 2020 levels of more than 3,000 a day. There is an upsurge abetted by what some would call pandemic fatigue. It is becoming more challenging to continue donning our face masks and face shields and spraying everything with alcohol. New variants have also been detected in the Philippines. Some local government units (LGUs) were thus forced to impose lockdowns and curfews to prevent further spread of the virus. Even some bridges in Metro Manila were not spared from closure.

Unless we see the pandemic curve trending down with the rollout of the vaccines and the sustained observance of the usual health protocols by Filipinos, it would be aspirational to forecast robust economic growth for this year and the next.

Of course, we share the hope of the Market Call by First Metro Investment Corp. (FMIC) and Capital Markets Research of the University of Asia and the Pacific (UA&P) for our country’s economic recovery. But we may have to be cautious in forecasting, one, an acceleration of growth in the first quarter even as it remains negative; and, two, a recovery in the second quarter. Some of their assumptions may just be too sanguine.

The initial signs, and there are just a few of them, are beginning to show. We would not want to make conclusions on a limited basis, but what we can read on the wall is the direction of these few observations.

First signs are the production indices for January 2021 from the Philippine Statistics Authority (PSA). Volume of production dropped by 16.7% against December 2020’s decline of 12%. Value-wise, the decline was even deeper at 21.1% from December 2020’s -15.4%. This is the 11th month of weak manufacturing activities.

Manufacture of wood, bamboo, cane, rattan, and other related products led the volume retreat in the industry. Machinery and equipment as well as tobacco manufacturing also declined by more than 40%.

With very little incentive for the economy to produce and consume, and sluggish patronage of retail shops and eating places, net sales index in volume terms was down from -2.8% in December 2020 to -9.1% in January 2021. Value-wise, the decrease was double at 13.9% from -6.5%. Those manufactures which declined in production also registered big drops in sales, both in volume and value.

With nearly deflationary factors at work, the producer price index retreated by 5.3% from December 2020’s -3.8%. Should it continue for most of 2021, this price trend cannot inspire more production and sales.

Second signs may be found in the labor market. Unemployment rate was steady at 8.7% as it was in October 2020. This means about four million Filipinos remained without jobs at the opening of the year. Moreover, the underemployment rate climbed from the previous quarter’s 14.4% to 16%. This translates into 6.6 million Filipinos or 16% of the total employed persons. This could be explained by the fact that in January 2021, the average weekly hours of work actually decreased from 40.8 hours in October 2020 to 39.3 hours.

Less hiring means business activities remain lethargic. Again, unless the economic scars of the pandemic are reversed by positive public sentiment that our public health management is prepared to further ease the quarantine, such lethargy might spill over to the rest of 2021.

We need to be more than hopeful because of the recent upsurge. The Philippine National Police (PNP) recently issued a statement prohibiting the public display of affection and that includes “holding hands, kissing and embracing each other in public.” First, social distancing; and now, public display of affection. This must be serious; the PNP must know something we don’t know.

The third set of signs are the various aspects of the consumer price situation. January and February inflation rates stood at 4.2% and 4.7%, respectively or a two-month average of 4.5%, already breaching the official target of 2% to 4%. This is reflective of weak production of food.

Pork and other substitutes are getting pricier because of the African Swine Fever (ASF) and the impact of recent weather challenges. The price of chicken might also increase with the impending total ban on the importation of domestic and wild birds from the UK following the outbreak of avian virus. In the Philippine Senate, a state of emergency is being proposed to be declared by the President because of the worsening impact of the ASF.

So far nearly half a million hogs have been culled. Such a declaration is necessary to mandate a realignment of more public funds to the Department of Agriculture. The 60-day price freeze on pork did not seem to work because pork prices continued to climb. But it would take months before any budget realignment could mitigate local production and help stabilize prices.

What is sad here is that our experience with rice tariffication seems to be replayed. Local producers and industry associations have expressed their reservation about the reduction in tariffs of pork imports and the expansion of the minimum access volume. While the concern of our own producers should be addressed squarely, they should ultimately be prepared to compete globally. Whatever tariff duties are realized from the proposed measures should be used exclusively for funding research on the best technology to help our hog producers improve their productivity and make hogs more disease-resistant.

The cost of production and transport is likely to rise shortly. Global oil prices continue to exceed $60-70 per barrel and for this reason, output is likely to be affected, too. Global economic recovery is supposed to boost our exports but at the same time, that could also increase the demand for oil and other fuels. In addition, the recent missile and drone attacks on Saudi Aramco oil facilities and subsequent cutbacks are expected to keep oil prices elevated in the near future. That is output negative.

Policy support is therefore indispensable.

Consumption, investment, and net exports are driven by the public’s perception of risk. Unless we succeed in getting a critical mass of vaccination, self-quarantine and economic scarring will remain the driver of weak business activities.

The Government will therefore be the only game in town. It is first best for fiscal policy to be more significantly expansionary with huge frontloading for obvious reasons. Summer months are the best time to build infrastructure. Public transport is indispensable for people to do business. It is also first best for the monetary authorities to continue conserving their ammunition and enhance their monitoring. Credit and business activities cannot be pushed during this pandemic with no end in sight except for delayed vaccination. Without doubt, the pandemic virtually extinguished domestic demand but with risk aversion, easy monetary policy can only reduce the depth of the recession despite the injection of P2 trillion and negative real policy interest rate. Choosing to be pro-cyclical, the banks succeeded in recycling the huge liquidity infusion back to the Bangko Sentral ng Pilipinas (BSP). With tighter credit standards, loans to their distressed clients declined.

Deciding which of the many important indicators to examine is a big challenge. Making statements about the future without citing the risks is impossible. No one wants to end up with Paul Samuelson’s reference in Newsweek 55 years ago: “Wall Street indices predicted nine out of the last five recessions.”


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.