Corporate Watch

“Ma’am, you have a maturity today,” her account officer said.

“What are my options for reinvesting this?” asked the retired former corporate employee, now a Senior Citizen living on her pension and small investments. “I want my investment to mature before the May 2022 elections. We don’t know what will happen to our country then.”

Client classification: Moderately conservative. Wants safety of the principal and guaranteed interest for the investment term.

The account officer offered the 182-day Treasury Bills for a minimum investment of P50,000, earning net of 20% final income tax to be withheld on the 1.5% purchase discount on face value. Maturity of the placement will be before the May 2022 elections, as specified by Client.

Why are the May 2022 elections a critical cut-off for the small peso investment of this widow? Because things might be better after then, she says. Maybe then the niggardly interest on cash investments will at least cover inflation. That’s the way “real” earnings, especially on government securities are supposed to be computed, right? Nominal interest rate and charges/taxes minus inflation equals real interest rate. Compute: 1.5% less 0.2 tax less 4.1% inflation (as at end-June) equals -2.8%. Earned nothing, actually! The government, borrowing from the public must be honest and fair not to let citizens suffer “negative carry” from a transaction bullied and intimidated upon them by the lack of other options in the collapsed markets in the COVID-19 pandemic.

The widow’s experience with her small T-bills investment replicates frustrations of the middle class with other options to improve their wherewithal for survival and a little more quality of life. In a recession like in today’s 15-month (and continuing) COVID-19 pandemic, the middle class is in the most vulnerable position, where it is easier to slump and sink to poverty than to rise to wealth.

The Philippine Statistics Office (PSO) shows that as of 2020, there are 46 million Filipinos (about 12 million households) who are “Middle Class,” with a range of monthly family incomes from P23,381 (Lower Middle Class) to P46,761 (Middle-Middle Class) to P81,832 (Upper Middle Class) peaking at P140,284 which is the maximum before the next “Upper Income but not Rich” income class. The Middle Class would be 43.5% of the total population of 105.76 million per the PSO. The Low Income but not Poor would be 38.4% of population, and the 17.7 million Poor (earning below the P11,690 poverty level) would be 16.7% of population.

The Middle Class pays taxes on at least 30% of its income. That is a painful slice off from the fruits of hard-earned labor — for the middle class is also the largest contributor to the labor force. The tenuous financial condition is usually augmented by personal borrowing (the ubiquitous credit card, or company loans, personal loans) on a need basis — for health, education/training, survival; or on a want basis — wants blown big in the availability of consumer goods and services for about any social or income class.

What happens now that the bubble has burst, in the stranglehold of COVID-19? The Middle Class has the most anxieties about when the pandemic will end, and what will be the “New Normal” after, say three to five years, as the virologists estimate that confident controls will really be established against the virus.

“The economy contracted by 4.2% year on year in the first quarter of 2021 amid prolonged implementation of containment measures. The country registered the worst growth performance among peers in the region such as Thailand (-2.6%), Indonesia (-0.7%), Malaysia (-0.5%), and Vietnam (4.5%),” according to the World Bank Philippines Economic Update, June 2021. There has been weak domestic demand (businesses and establishments have not picked up); weak external demand from contraction in services exports and for international tourism amid lingering restrictions and containment measures. Add rising inflation on top of it all.

The public sector was the main driver of growth, armed with the P4.506-trillion National Budget for Fiscal Year 2021 for accelerating public spending to boost the economy. Stimulus spending and infrastructure investment drove public spending from 19.1% of GDP in the first quarter of 2020 to 23.4% of GDP in the same period in 2021, the WB cites. Pandemic response measures under the “Bayanihan to Recover as One” Law (Bayanihan II) were implemented on June 30, 2021.

The budget deficit grew to P191.4 billion, a big rise from the P71.6 billion in the same month last year, the Bureau of the Treasury reported in April. Government spending rose by 22.3% annually, but revenue collections (from taxes, customs duties and other fees) dwindled by 17.3% in the period. The widening deficit was accompanied by an increase in the public debt ratio from 54.5% of GDP by end-2020 to 60.4% of GDP as of end-March 2021 (CNN Philippines, April 27).

It was Milton Friedman who questioned the knottiness of John Maynard Keynes’ prescription of stimulus spending by governments in recessions. He argued passionately against government intervention and in favor of the free market, pointing out that government failures could be worse than market failures, the latter being able to make and correct itself in the classic laissez faire of Adam Smith. He did not believe in increasing government borrowing to finance current deficits. In free trade and less government, a slow, steady increase of the money supply would grow the economy. His emphasis on monetary policy and the quantity theory of money became known as Monetarism.

“No bureaucrat would or could spend money as wisely or as carefully as the taxpayers from whom it was taken,” Friedman says (The Nobel Prize. “Milton Friedman: Biographical,” A person’s consumption and savings decisions are more greatly impacted by permanent changes to income, rather than changes to income that are perceived as ephemeral (like cash dole-outs, perhaps like the “ayuda” from government in COVID pandemic?).

And we hear the whines of the Middle Class, the largest aggregate of individual taxpayers who must subsidize the “short-sighted elected politicians to run fiscal deficits and accumulate massive levels of government debt,” as was the acidic remark of one critic of the Keynesian formula. Might it be added that Keynes also espoused consumer-driven economics as the ruling paradigm of the 1970s and ’80s — an obsession to spend, spend, spend. But the Middle Class was the most susceptible to most often uncontrolled consumer spending. And it has all come around from start. Now the Middle Class pays most for stimulus spending in the recession.

It is truly opportune that in the limitations and restrictions of the COVID protocols, individual introspection will urge an examination of principles and values and a forced focus on what really matters in life. Deep discernment is needed individually on changes in lifestyle and a strategized personal plan of action for the hopeful future. Government must recognize and consider the new parameters for dealing with economic crises, specially in the unique global segmentation and separation of countries and indigenous opportunities, forced by the COVID pandemic. Leaders must honestly and with integrity, think and do for the common good, and not for criminal self-aggrandizement in the seeming helplessness of this trying pandemic.

“You are right, Ma’am,” the bank account officer said. The May 2022 elections are a critical decision factor for us to plan our future.


Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.