Charting the long road to recovery

In the wake of one of the most devastating global catastrophes in recent history, the world economy is struggling to pick up the pieces. The World Bank predicted that COVID-19 will plunge the world into the “worst recession since World War II”, owing to the total shutdown of countries in the effort to contain the virus. The International Monetary Fund called it “a crisis like no other”, pointing out that recovery will be gradual and uncertain.

Yet, prior to any wide-scale rollout of any of the approved and developed COVID-19 vaccines that hopefully will lead to the complete eradication of the virus, government leaders will have to live with that uncertainty in charting the path forward. Theirs is the unenviable task of balancing the risks of keeping economies in lockdown with the risks to public health should quarantine measures be lifted.

The Philippines is no exception to this. Yet, things might not be as dire as predicted.

According to the National Economic and Development Authority (NEDA), Philippine trade performance in November 2020 showed encouraging signs that the country is well-positioned to take advantage of improvements in external demand. Furthermore, the government’s efforts to reinvigorate businesses is gaining traction.

The Philippine Statistics Authority on January 9 reported that after eight consecutive months of contraction, exports grew by 3.0% in November 2020, the highest year-on-year growth recorded since March, when the country began imposing restrictions due to the pandemic.

NEDA further pointed out that this puts the country in good company, as the Philippines joins the ranks of other Asian economies that registered export expansions. Exports to East Asia, particularly China, and ASEAN remained positive.

On the other hand, the pall of consumer anxiety still weighs heavily on the economy, as low consumer demand contributed to an 18.9% decline in imports in November 2020 as inward shipments of raw materials, intermediate goods, and capital equipment continued to drop. Driven by the stronger exports, the contraction of the country’s merchandise trade performance eased to 10.6% in November 2020 from 11.9% in October 2020.

“The government’s response to sustain the developments in the Philippine trade sector is crucial as it sets the direction for the country in 2021 and beyond,” Acting Socioeconomic Planning Secretary Karl Kendrick T. Chua said.

Particularly, the Senate’s passage of the Financial Institutions Strategic Transfer (FIST) Act, and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act are making headway.

The FIST Act was among the priority measures that President Rodrigo R. Duterte urged the Congress during his 5th state-of-the-nation address last year to act on quickly as part of the government’s economic recovery program. Under the new legislation, banks are allowed to outsource the management of their non-performing assets to asset management companies, enabling them to focus on the primary task of lending to sectors in need of credit.

“By keeping non-performing assets contained and managed, FIST will expand the amount of risk banks can take. This benefit cannot be understated in a crisis, when lending to businesses is riskier but also more urgently needed,” Finance Secretary Carlos G. Dominguez III had said. 

FIST will also encourage the private sector, government financial institutions, and government-owned or -controlled corporations to help rehabilitate distressed businesses, he added. 

The measure provides tax incentives to defray the transaction and transfer costs of non-performing assets to asset management companies. This would entail foregone revenues of between P3.3 billion to P13 billion every year for the next five years to clear the books of banks of bad debts and keep the economy going. 

Meanwhile, the CREATE Act seeks to lower corporate income tax rates and to rationalize fiscal incentives, stimulate micro, small, and medium enterprises, promote more performance-based and targeted tax incentives, and help attract more investments in the country.

To boost trade recovery further, Mr. Chua said that structural reforms to encourage investments in the country, such as the amendments to the Public Service Act, Foreign Investment Act and the Retail Trade Liberalization Act, need to be aggressively pursued to create an inclusive and transformative economy. 

“As economies resume normal operations, we must also work towards getting ahead of the competition and breaking down barriers to trade to ensure availability of raw materials to producers and spur the innovative and productive capacity of the sector,” the NEDA chief said.

On the domestic front, Mr. Chua recognized that the country also needs to undertake a review of the non-tariff measures in place that effectively limit access to critical raw materials resulting in higher costs to manufacturers and producers.

The NEDA chief added that online platforms such as TradeNet would be integral in enabling the Philippines to be at the forefront of digital solutions designed to reduce cost and facilitate trade.

“Placing this system as a backbone of trade transactions will not only ensure continuity of business activities, but will also help the government in its campaign to lessen face-to-face transactions, thereby reducing opportunities for corruption,” Mr. Chua said.

Finding the key to recovery

On the ground level, significant effort should also be made to address the impact of COVID-19 to working Filipinos. For most of 2020, the country had been under a series of strict government-implemented community quarantines to help contain the virus, effectively shutting down around 75% of the economy, resulting in massive losses in jobs and income.

In fact, the International Labor Organization, about 10.9 million Filipino workers suffered complete job loss or pay cuts due to reduced work hours during the COVID-19 pandemic. The effects have been severe. In September, according to the Social Weather Stations (SWS) Survey, the hunger rate rose to a record-high of 30.7%, before falling to 15.7% in November.

“In 2021, the key to our recovery is to continue managing risks, not to avoid them completely. This way, we can bring back jobs and income sources to enable the far majority of people to also address their non-COVID-19 sicknesses and hunger. All economic indicators reveal that with the safe relaxation of community quarantines, incomes and jobs come back,” Mr. Chua said.

“The losses have been huge and a reversal to stricter community quarantines in 2021 is not an option. Everyone needs to cooperate and help each other practice the minimum health standards like wearing a mask, washing hands, and keeping a safe distance. Businesses also need to make sure that there is proper ventilation in their business spaces. The public and private health sector needs to continue improving the health systems to include a vaccine roll-out. Finally, the government needs to facilitate the transition to the new, but better, normal.”

“Our challenge is to make sure that our hard-fought gains in 2020 will not be reversed and the economic cost of 2020 will not repeat in 2021,” Mr. Chua added.