By Marvin A. Tort
The reality is that the virus is not going away.
In just about six months, more than 10 million people have been infected by COVID-19 around the world, and more than half a million have died. The number of cases continues to rise globally.
Governments were caught unawares, and many remain at a loss how to contain the virus. States resorted to closing their borders and locking down entire cities. Movement for most was minimized to the barest essentials like buying food and medicine, while economic activity ground to a halt. Bustling urban centers became deserted overnight. The world was closed for business.
“The COVID-19 pandemic pushed economies into the Great Lockdown, which helped contain the virus and save lives, but also triggered the worst recession since the Great Depression,” wrote Gita Gopinath, an International Monetary Fund (IMF) economic counsellor and director of research.
Given the scale and harshness of the resulting downturn, the IMF is already expecting a deep global economic recession in 2020 and a slow recovery in 2021. “This crisis like no other will have a recovery like no other,” added Ms. Gopinath in a recent post on IMFBlog, a forum for IMF staff and officials expressing views on issues of the day.
Debt ratings agency Moody’s Investors Service, in a recent report, said the second quarter of 2020 is shaping up to be “the worst quarter for the global economy since at least World War II.” And while some economies started to reopen in June, and set out on the path to recovery of some sort, “in the absence of a medical solution, the strength of the recovery is highly uncertain and the impact on sectors and countries uneven,” Ms. Gopinath added.
This is particularly true for the Philippines, which in July, the fourth month of the lockdown, continues to report record numbers of new cases daily, having little to show for what was touted as Asia’s earliest and longest lockdown.
For a nation of over 100 million people, the official number of COVID-19 deaths is relatively small. But the pandemic’s economic impact has been devastating. The strictest part of the lockdown, which overlapped with the tail end of the first quarter, ended the economy’s 22-year growth streak.
“The outlook is quite grim, a sharp contraction of 7% this year, with GDP (gross domestic product) not expected to return to 2019 levels earlier than 2022,” according to Romeo Bernardo and Christine Tang in their latest quarterly report for research and consulting group Global Source Partners. Mr. Bernardo was undersecretary at the Department of Finance during the Corazon C. Aquino and Ramos administrations.
“The surprise GDP contraction in Q1, when the domestic economy was seemingly growing robustly at the start of the year and with the quarantine in effect only in the last two weeks of the quarter, points to the high economic cost of the lockdown,” they wrote. “While government is starting to loosen lockdown conditions, we do not see the economy returning to positive growth before 2021, i.e., the recovery in the upcoming quarters will not be as quick nor as sharp as government expects.”
GDP in the first quarter contracted for the first time since 1998. And, after eight years of above-6.0% annual growth until 2019, the economy is now expected to contract in 2020. In the second quarter, as a result of the prolonged lockdown, the economy shed jobs. Unemployment doubled year on year, and is now expected to rise to around 10 million by the end of the year. Hundreds of thousands of overseas Filipino workers have been forced back home by job cuts and border closures.
During the lockdown, some sectors were hit harder than others. Tourism, for instance, is facing a loss of up to $7.7 billion, or 2% of GDP, after being shut down for four months, the United Nations Conference on Trade and Development (UNCTAD) reported. With another four months of muted activity, the sector can lose up $15.19 billion or 5% of GDP. A full-year shutdown can bring losses up to $22.64 billion or 7% of GDP.
With the wisdom of hindsight, it is easy to question the reasoning behind the prolonged lockdown, considering its economic cost. “Did we flatten the curve, after three months of immobilizing people and the economy?” asked Cielito F. Habito, Socioeconomic Planning Secretary during the Ramos Administration and now a professor of Economics at the Ateneo de Manila University.
“GDP falls for the first time in 22 years, with the worst yet to come,” Mr. Habito noted in a recent presentation to the Institute of Corporate Directors. And the number of COVID-19 cases in the country, particularly in economically-important places like Metro Manila and Cebu, continues to rise.
At this point, “a total write-off of the Philippine economy in 2020 is inevitable,” said Margarito B. Teves, Finance Secretary during the Arroyo administration and among the government economic managers who successfully steered the economy through difficult times when the 2007-2008 global financial crisis hit.
Mr. Teves also told a recent briefing organized by the Wallace Business Forum that if economic activity does not pick up soon, many small businesses could close permanently, poverty could worsen, and more people could end up dying of hunger or poor nutrition than of COVID-19 infection.
But Mr. Teves remains guardedly optimistic. “A low base in 2020 suggests relatively better performance in 2021. COVID-19 was a disruption to an economy that had solid macroeconomic fundamentals and was among the most vibrant economies in the world. So, if COVID is reasonably contained, we could be in a position to recover ahead of others,” he added.
Government economic managers are just as hopeful that the economy can soon begin its gradual recovery, as restrictions on movement and economic activity are eased. Since June 1, many regions have transitioned to looser forms of quarantine, allowing many businesses to resume operations. But a sustainable recovery towards 2021 will depend largely on the government’s ability to pump-prime the economy.
“The outlook for 2021 is based on major assumptions. Number one, we have gradual recovery starting July of this year and the second is that we also see the public sector or the government increasing spending as a stimulus,” Socioeconomic Planning Acting Secretary Karl Kendrick T. Chua told the House Committee on Economic Affairs. “If those two are achieved, then the target is (up to) 9% growth next year.”
Proposed legislation to help revive the economy will go before the 18th Congress, which reopens in late July. These include bills on higher government spending to stimulate the economy, lowering corporate taxes, and granting new tax incentives to investors. A new legal definition for public services is also being proposed to get around constitutional limits on foreign ownership of public utilities, thereby allowing more foreign investment in sectors like telecommunications.
Anticipating loan defaults and a credit crunch, the government also wants to inject P50 billion in additional capital into government banks, so they can lend more to micro, small and medium enterprises (MSMEs); and the creation of new asset management companies as “special purpose vehicles” to take over the nonperforming loans and assets of private commercial banks, and thus free them up to lend more.
“Over 99%, of Philippine firms are classified as micro-, small- and medium-sized enterprises (MSMEs), with their business models dependent on steady monthly cashflows. The unprecedented earnings shock from the prolonged (enhanced community quarantine is expected to push many of the smaller firms into bankruptcy, especially those in the services sector that thrive on face-to-face contact,” Mr. Bernardo and Ms. Tang noted in their report.
“Even among larger firms, which in general can weather the crisis especially under a low interest rate environment, there are pockets of risk from industries directly hit by the crisis (e.g., airlines, hotels) and certain overleveraged corporates that may or may not merit rescue packages. Although there are sectors, e.g., health and telecoms, that will continue to expand to meet higher demand, these will be comparatively few,” they added.
Legislative proposals, which can take three to six months if not longer to pass, are doubly crucial for an economy in the doldrums and a government in dire need of stimulus money. Particularly when you consider that, according to Finance Secretary Carlos G. Dominguez III, there will be no new tax bills on the legislative agenda to be submitted by the Executive to Congress this year.
Mr. Dominguez’s position regarding new taxes puts into question the viability of the proposed Accelerated Recovery and Investments Stimulus for the Economy of the Philippines (ARISE Philippines) bill, which the House of Representatives passed on third reading in June. The bill is estimated to cost P1.3 trillion, but the government can only identify P130 billion worth of available funds from budget savings and realignments, leaving the gap to be filled by borrowing and new taxes.
Legislators that pushed for ARISE wanted to boost the troubled economy through wage subsidies, cash-for-work programs, zero-interest loans for companies, and loan guarantees for banks. But Acting Socioeconomic Planning Secretary Karl Kendrick T. Chua argued that the government would not have the money to fund the proposed stimulus measure unless new tax bills are passed.
Commenting on the various legislative proposals, Mr. Teves, a former legislator who once headed the House Committee on Economic Affairs, said these could give the government “better capacity to mobilize financial resources to stimulate the economy.”
Public Private Partnerships (PPPs) could also be crucial in continuing the Duterte Administration’s Build-Build-Build program “at full throttle,” to make up for having more government resources diverted to anti-COVID measures and assistance to businesses, he added.
“With the economy certain to contract sharply in Q2, the hope is that government intervention could make Q3/Q4 recoveries as strong as possible, not least by boosting consumer and business confidence through a bigger stimulus package. A speedier economic revival, it is argued, would benefit public finances through more favorable debt dynamics that would make the larger budget deficit financeable,” said Mr. Bernardo and Ms. Tang.
“Indeed, fiscal authorities have a tough balancing act ahead, not least because they also need to take spending leakages into account, an issue that is evident in the ongoing slow distribution of cash support. But clearly, what they choose to do — and we think they have room to maneuver — would matter greatly for how well the economy will emerge from this crisis,” the pair added.
Unfortunately for the troubled economy, legislative efforts, and even reviving the PPP for infrastructure projects, will take time. And their positive impact on the economy will take even longer. Meantime, the risk of people getting sick from COVID-19 or forced to stay home will continue to be a drag on labor supply and firm productivity, Mr. Bernardo and Ms. Tang noted.
Consumer and business sentiment will also likely remain low in this environment, while numerous Bangko Sentral rate cuts intended to make more cash available to the economy “will not necessarily push risk averse banks to lend to businesses already teetering between illiquidity and insolvency,” they added.
For Ateneo’s Mr. Habito, economic recovery can be hastened also by government prioritizing assistance to sectors or industries with the most potential to generate jobs and restore income; and, by prioritizing help for regions or provinces or cities that “appear least at risk from the virus spread, and can thus ease up earlier than rest.”
He noted that the sectors of Wholesale and Retail Trade; Agriculture, Hunting and Forestry; and, Construction have been top job creators, accounting for about half of the number of jobs nationwide. As for generating income, the top contributors were Manufacturing; Trade and Repair Services; Real Estate, Renting and Business Activities; and, Other Services.
The problem, however, is that “areas that can most contribute to restoring jobs, production and incomes are also those where it’s most risky to ease up,” Mr. Habito said. He pointed in particular to the National Capital Region, Central and Southern Luzon, Cebu province, and the Davao Region and Southern Mindanao.
Simply put, recovery and growth now depend not only on economic solutions but on medical interventions as well. But a vaccine is still far off, possibly available only by late 2021, and drug treatments are currently in limited supply overseas and remain elusively expensive for a nation with a low per-capita income. At this point, government stimulus efforts, coupled with effective containment at the local level, appear to be the most viable option to curtailing the spread of COVID-19 while slowly easing restrictions on movement, and to increasing economic activity.
As Mr. Bernardo and Ms. Tang noted in their report, improving the economy’s performance in the near term will “rely on government being able to prop up demand by striking the right balance between easing lockdown conditions alongside fiscal support measures, and minimizing any widespread recurrence of infections, which will be invaluable for regaining consumer and investor confidence.”
The caveat, of course, is that allowing the economy to restart remains a risky proposition. The potential for a new wave of infections remains high, especially in densely populated city centers and regions that account for most business operations. “At this time, we cannot rule out a more pessimistic outcome of double-digit GDP contractions, which will happen if a second wave of widespread infections occur necessitating another extensive lockdown,” Mr. Bernardo and Ms. Tang noted.
But, if there are still doubts as to how the government will respond to the COVID-19 slump, Mr. Dominguez offered a pragmatic course of action. In a televised briefing on June 30, he noted that the National Capital Region and its nearby provinces accounted for about two-thirds of the economy’s output. He backs the easiest quarantine restrictions in these areas.
“The reality is… we will have to live with (the virus) for a long time. I really believe we really should begin opening,” Mr. Dominguez was quoted as saying in a news report. “You know, NCR, Calabarzon, that is where the economy is based. About 60% or 67% of our economy is based in that area. (We should move) to MGCQ (modified general community quarantine) as quickly as possible because people have to start working.”
