Heuristics and sober thought: What to expect in 2021

There was little doubt that the reimposition of strict community quarantine in the transition from Q1 to Q2 2021 dashed our hope for a quicker economic recovery this year. This was confirmed by the 4.2% decline of the country’s real GDP in Q1. As we indicated in our previous columns, the headwinds are rather strong as we work hard to move closer even to the lower end of the downgraded National Government growth target of 6 to 7 percent.

But some hopes seemed to glimmer during the Economic Journalists Association of the Philippines forum last Tuesday. That semblance of optimism laced the assessment of the National Economic and Development Authority (NEDA) as reported by one broadsheet: “The Philippine economy is expected to turn in a strong second quarter performance, but sustaining such growth hinges on the reopening of economic activities to bring back consumption and boost business confidence.”

NEDA Secretary Karl Chua anchored his optimistic take on the fact that the Philippines did not completely close down the economy. Most sectors were allowed to operate, public transport was resumed while curfew was lifted for workers. Combined fiscal, monetary, and financial support was also stepped up including the two Bayanihan packages, tax holidays, and targeted, performance-based incentives. Macropolicy-wise, we could not ask for more.

The Department of Finance stressed on Government efforts to meet the health emergency, recognizing that economic bounce back is a function of good pandemic mitigation. Finance claimed that millions of test kits were procured, and cash support was delivered to most vulnerable sectors of society to cushion the pandemic’s impact on their consumption and quality of life.

Finance Secretary Sonny Dominguez maintained that despite the expansion of the fiscal deficit to 9.3% of GDP and the corresponding borrowing requirement equivalent to 58.7% of GDP in 2021, “our prudent debt management gave us the fiscal headroom to deal with the pandemic.” He clarified that despite the temporary rise in debt, we remain within the prescribed bounds of fiscal viability.

The Bangko Sentral ng Pilipinas (BSP) focused on the divergent economic recoveries across countries and the risks to the Philippines’ economic revival including the surge of the pandemic, renewed lockdowns and the slow rollout of the vaccines.

BSP Governor Ben Diokno encouraged everyone to be ready, underlining the need for “robust institutions and sustained policy discipline to see us through COVID-19 fog.” He assured that the BSP would remain attentive to inflationary pressures and support economic growth.

The Department of Budget and Management (DBM), for its part, announced the release of government funds to various agencies in the fight against the pandemic. Budget Secretary Wendel Avisado declared that some P661 billion has been released, of which nearly 90% or P487 billion has been spent on public projects. He also cited a trillion pesos as having been earmarked for pandemic management including medical assistance to poor patients.

Next year’s budget, for obvious reason, would prioritize funding for coronavirus booster shots, support to poor local government units, National ID integration, and a proposed Virology Institute, among others.

How then do we assess our economic outlook?

First, it was correct for the economic managers to hedge their forecast of economic recovery this year on the massive rollout of vaccines. Failure to quickly arrest the further spread of the virus and its variants will make strict lockdowns unavoidable again. If business activities are suppressed and people are literally locked at home, economic recession will be protracted. Our concern about possible divergent growth paths, in the words of IMF economist Ruchir Agarwal, could indeed be a likely, but exacerbated, scenario.

It’s important for the health authorities never to drop the ball again. A good mantra in this fight against the unseen enemy is Buy, Buy, Buy. It is better to invest in more vaccines than in less vaccines. A more systematic coordination with LGUs, public and private hospitals, clinics, and even drug stores for devolving the administration of the vaccines will accelerate massive protection against any further outbreak. This was done elsewhere, perhaps we can also do it here.

At the very least, this should be our contribution to the global efforts now championed by some quarters at the IMF to vaccinate at least 40% by end-2021 and 60% by end-2022. Insurance schemes can be made available to cover downside risks including more deadly mutations and the need for booster shots. In the transition, we need to sustain scaling up testing, and tracing; rolling out more therapeutics; and accelerating internal distribution of vaccines.

Second, it is by all means relevant to talk about the pandemic’s long-lasting economic scars. Economic scars are long-lasting because they heal just too slowly. Unlike in previous crises in Asia and the globe, output contraction was rather rapid and deep in this pandemic era. Some IMF staff in a March blog estimated that, using quarterly data, global output shrank about three times as much as in the Global Financial Crisis in half the time.

Business closed down and investment spending was also cut back because of uncertainty due to the health issues. Disruptions to schooling have weakened labor growth. Workers who were displaced by the virus could be rendered irrelevant because their skills might be dulled by inactivity. High-contact sector workers could also be giving way to more innovative digitalization in production, service delivery, and distribution.

Our economic managers may need to outline for the Filipino public how to deal with the dynamics of economic scarring. Output losses are a direct effect of the pandemic. But reduced productivity would require official support and resource reallocation for the workforce and firms to work out better modalities to adapt to a new normal. Retooling and promoting job mobility is one possible route.

Economic scars are in many ways no different from the ravages of war; rehabilitation efforts could not decide where to begin. It’s like building all over again.

And, third, it is about time that we kept our eye on the ground so we also see the parts rather than just the whole. To avoid being blindsided is one big challenge. In one of our previous columns, we cited the BSP’s Financial Stability Report in 2020 that indicated the creeping corporate distress among those sampled in terms of their earnings before taxes and other expenses. Interest coverage ratios have also declined. These emergent risks are also reflected in the banks’ non-performing loan ratios which have been consistently going north. With pandemic-induced rise in corporate and public sector debt, coupled with the sea changes in demand patterns, it is good to be prepared for some bankruptcies.

Globally, markets and the major credit rating agencies have begun the inevitable marking down of major banks and conglomerates. Only herd resiliency can reverse the tide because the pandemic has actually lasted longer than initially expected. Without the massive rollout, as the Fund is afraid of, mutations could happen, another upsurge could be triggered, and a round of lockdown could very well seal our economy’s destiny.

More heavy lifting by the fiscal authorities is necessary. Monetary policy can remain accommodative, but not more because price pressures and financial stability risks have started to build up. Instead, the central bank may wish to initiate balance sheet repairs of banks through prompt recognition of losses. Restructuring is the next order of business.

It is good to have heuristics — mental shortcuts that may be convenient to use than rigorous rational thought. But our economic journey this pandemic era is more complex and therefore more sober reflection, greater circumspection would be necessary.

So, a good summing up of what to expect this year and the next comes from the IMF. Concluding its mission for the annual Article IV consultation, the IMF Mission Head Thomas Helbling, announced yesterday that “We reduced our growth forecasts for this year (to 5.4%). Some of the strong rebound that we expected to be earlier in our previous forecast has just been delayed so there will be still a relatively strong growth rebound. If the economy starts from a lower base, that then will lead to higher growth.”

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.