I am pleased to share with readers excerpts from recent posts to subscribers of GlobalSource Partners (globalsourcepartners.com), a New York-based network of independent analysts, mostly former finance and central bank officials. Its subscribers are “investors and business leaders including asset managers, traders and analysts, investment bank economists, private equity investors, corporate CFO’s, and multilateral officials.” Christine Tang and I serve as their Philippine Advisors.

THE STICK FOR NOW (JULY 22)
President Rodrigo Duterte has found himself caught between a rock and a hard place. On the one hand, COVID-19 cases are rising, with data from the Department of Health (DoH) showing the seven-day average positivity rate for daily tests close to 12% compared with a little over 6% a month ago and with experts estimating the reproduction number in Metro Manila rising from 1.2 to 2. On the other hand, quarantine measures have taken their toll on the economy, with survey data from the trade department showing that most of the country’s largely small businesses are either closed (26%) or in partial operation (52%), and with the finance secretary earlier calling for more easing of quarantine restrictions to revive economic activity.

Left in a bind, the President’s interior secretary, a former army general and member of the COVID-19 task force, has proposed using the police in house-to-house searches and transferring those suspected of carrying the coronavirus to government isolation facilities; an idea that was immediately met with strong public criticism. Stepping back from this proposal, President Duterte instead warned the public yesterday to wear masks and practice social distancing, or face arrest. He called on local government officials and the police to do their duty in enforcing quarantine rules set by the national government or face possible charges of negligence and removal from office.

While the President seems to be responding to the general lack of discipline in observing the most basic quarantine rules, the problem of rising COVID-19 cases may be more directly correlated with inadequate contact tracing and lack of incentives for exposed individuals to self-quarantine. As it is, exposed people with mild or no symptoms may not know that they have been infected while those who suspect themselves infected but are only mildly symptomatic or asymptomatic may not have isolation rooms at homes or may choose to forego testing as they may not be able to afford the income loss from being quarantined. Compared to providing subsidies (the carrot) to suspected carriers to stay home, the threat of arrest (the stick) seems to be a far inferior solution, even putting frontline policemen at risk of contracting the coronavirus, and may even create an incentive to avoid being tested or to hide if feeling unwell.

This puts the upcoming debate over the proposed stimulus bill (Bayanihan 2), expected to start when congress opens next week, front and center. As it stands, fiscal managers maintain that the Constitution bars the executive from proposing a larger than P140-billion stimulus while the lower house of congress remains adamant in passing an outsized package worth P1.3 trillion. There were rumors early on of a middle-of-the-road package brokered by Malacañang; whether or not true remains to be seen.

In addition to Bayanihan 2, the financial community is also looking forward to several bills being proposed by the economic managers, including the Financial Institutions Strategic Transfer Act or FIST and the Government Financial Institutions (GFIs) Unified Initiatives to Distressed Enterprises for Economic Recovery or GUIDE Act. These are intended to keep banks’ nonperforming loans under control by proactively providing a legal framework for dealing with distressed assets and by directly assisting distressed firms through capital increases for GFIs. While banks’ non performing loans (NPLs) remain low based on latest data, the lesson from history is that these will rise after a lag (Chart 1). That said, we think NPLs this time around are unlikely to reach the record levels of the 1980s and ‘90s thanks to stronger macroeconomic fundamentals, monetary policy accommodation that has kept interest rates low and the peso stable, and better capitalized banks.

WHERE TO PHILIPPINE PESO? (JULY 10)
During Wednesday’s pre-State of the Nation Address (SONA) that focused on the Duterte administration’s economic achievements this past year, one chart in particular caught our attention. Presented by Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno, the bar chart shows the Philippine peso alongside eight other east and southeast Asian currencies, with the peso standing out as one of only two currencies that has appreciated against the dollar this year. (Chart 2) Moreover, it topped the other currency, the Japanese yen, in terms of the rate of appreciation. Close competing currencies like the Indonesian rupiah, the Thai baht and the Malaysian ringgit have all depreciated by around 4%.

Why is the peso relatively stronger despite the more aggressive policy rate cuts by the BSP so far this year?

1. Governor Diokno provided one of the reasons, which is the Philippine’s comparatively robust external position. Gross international reserves at the end of May shot up to $93 billion from below $88 billion at the end of 2019. The latter amount per IMF assessment is over twice what the country needed to cover short-term foreign exchange needs, including for trade and debt repayments, and is among the highest in the region. (Chart 3)

2. Expectations about the country’s current account balance have changed. At the start of the year, the consensus forecast was that the current account will remain in deficit of around $9 billion (2.2% of GDP); this forecast has now turned positive or a current account surplus of $0.7 billion (0.2% of GDP). The shift is mainly driven by improved outlooks on the trade in goods deficit, with forecast double-digit contraction in imports outpacing projected fall in exports. The collapse of trade during the lockdown is quite evident in the 53% and 43% drops in imports and exports, respectively in April-May that saw the cumulative five-month trade gap shrink by over 40%. The difficulty of restarting economic activity with local COVID-19 infections still rising is likely to mean more modest import recovery ahead and a better current account position; notwithstanding expected declines in remittances and tourism earnings.

3. Although risk-off sentiments have led to a withdrawal of portfolio investments by over $3 billion in the year to May, dollar inflows from foreign borrowings, both public and private, have provided offsets. Government in particular raised the share of external financing in its higher borrowing program to minimize the risk of higher domestic interest rates. In the year to May, government’s external debt has risen by more than $5.2 billion following increased borrowings from multilateral lenders and a $2.3 billion global bond issuance. Additionally, a number of private firms, banks and nonbanks, have also decided to tap the external commercial bond market, bringing in more dollar flows.

Back in May when we were preparing our quarterly report, we had forecasted the peso to depreciate and approach P52/$ by year end. Yet since June, it has gone the other way and has consistently fallen below P50/$ since late June. Indeed, the peso may continue to linger below P50/$ in the near term given the current economic environment and additional planned external borrowings ahead by several private firms; but we do not think it can appreciate much more from current levels. We expect the BSP to intervene in the event, especially with certain sectors calling for a more active foreign exchange policy to weaken the peso to help overseas workers and their families. Too, we recall that Governor Diokno, in his past life in the academe, had advocated for the BSP to adopt a deliberate competitive exchange rate policy to support the export sector.

As it is, the peso had already appreciated by over 5% in real effective terms as of June. With these in mind, we think that when imports start firming up later this year, the peso will likely reverse course to settle above P50/$ by year end.

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com