Tests for economic revival

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Signs And Wonders

Before COVID-19, the IMF, the World Bank, and the ADB were one in forecasting that this year, the Philippines’ real GDP growth would be one of the highest among the ASEAN 6. This prediction did not come to pass. The viral pandemic notwithstanding, the IMF must be in a deep quandary over why we did not perform as well as everyone expected in the first quarter of 2020.

While Indonesia and Vietnam expanded by 3% and 3.8%, respectively, Philippine output declined by 0.2 percent. Malaysia’s GDP increased by 0.7 percent. Singapore and Thailand shrank by 2.2% and 1.8%, respectively.

The dip in Philippine GDP is a major let-down. The country has scored uninterrupted economic growth for the last 20 years. We even successfully weathered the Global Financial Crisis of 2008-2009. We have been tenacious in building institutions with nearly three decades of strategic policy and structural reforms. We have managed to keep substantial fiscal and monetary space.

The disappointing first quarter economic report for the Philippines could not have been due to usual economic transmission channels. All the ASEAN 6 are dependent on an open trading system, tourism, and investment. Both Thailand’s and Vietnam’s exports declined by over 5% Singapore’s precision engineering and electronics industries also suffered due to weak global demand. World Bank documents that, among the six, the Philippines’ dependence on exports is in fact one of the lowest. Except for Indonesia and Malaysia, the recent collapse of global oil prices should have been a favorable factor for other countries. But all six experienced drops in domestic demand as a result of lockdowns. Home bias and flight to quality motivated capital outflows.

Neither could the decline in growth be attributed to lack of monetary and fiscal support. Since 2019, and more so during this pandemic, the Bangko Sentral ng Pilipinas has been easing policy rates and flooding the system with additional liquidity. As a result, domestic credit expanded quickest at more than 10% during the quarter. Public finance compared well with the rest of the ASEAN 6, with both our revenue and expenditure to GDP ratios faring among the highest in the region.

Moreover, market sentiment has generally been favorable. We attained successive credit upgrades culminating in triple B+, a notch below A-. Independent research think tanks on governance, corruption, transparency and other metrics of economic and political performance have given good reports. Six years ago, we were rated the most resilient emerging market by the Washington-based Center for Global Development. This year, the Sydney-based CEO magazine reported the Philippines as seventh best country for investors in 2020 behind Singapore, the UK, Poland, Indonesia, India, and Australia.

So why did the Philippines falter in the first quarter 2020?

The biggest component of output, private consumption at nearly 70%, grew by only 0.2%. This is a huge slowdown from the fourth quarter 2019’s 5.7%. Public consumption also expanded but by a more modest pace.

Exports of goods and services dropped and imports also showed a big contraction. These are symptomatic of weak economic activity. The corporates did badly with fixed investments declining by 4.3%.

Pro-cyclical market watchers and commentators now expect our second quarter performance to be infinitely worse given the viral scourge.

We recall that in March, in a New York Times article, Nobel laureate Paul Romer asked if the US economy, “will … die from the coronavirus?”

Likewise, after more than two months of lockdown and inactivity, will the Philippine economy take a fatal hit from the virus?

On the US economy, Romer believes that if the health and economic crises are addressed separately, it will. He said that if this approach is taken, such would be “contradictory” and would result in “catastrophic long-term failure.” Romer emphasized that saving lives IS saving jobs and business. Saving jobs and business IS saving lives. He therefore recommends, “a targeted approach that limits the spread of the virus but still lets most people go back to work and resume their daily activities.”


In making these recommendations, a scientific breakthrough or a miracle vaccine is not part of the equation. Rather, Romer’s proposed strategy is very linear: he pushes for more and wider testing. Cost would eventually decrease as technological advances make testing more affordable. As an example, Romer cited a Silicon Valley company called Cepheid which aims to produce tests that provide results in 45 minutes.

To eliminate false findings, Romer proposes periodic testing for infection as well as testing for immunity. Uninfected individuals will have to don PPEs while those who have developed immunity can afford to go without. PPEs should be distributed to frontliners like health officers, pharmacists, police officers, fire fighters, public utilities personnel and food preparation staff.

Romer argued that the idea that one day one could restart the economy without massive testing to check if the outbreak is under control is just “magical thinking.”

This is both the brilliance and the weakness of Romer’s proposal. The strategy may not work well in emerging markets like the Philippines where the public health system remains weak, congestion is an urban blight, and where compliance with protocols is almost impossible to enforce.

Good testing is critical as it will establish some basis for lifting physical lockdowns. Massive testing reduces the fear that one will get sick should he go to work or shop. It’s all about building confidence. Confidence is what builds investment, consumption and planning for the future. Confidence is what will resume business activities.

While extending loan guarantees and direct transfers can prevent bankruptcies and debt defaults, these cannot restore foregone output and jobs lost because of months of lockdown and inactivity.

In the Philippines, we endured the two-month ECQ because there was just too much uncertainty about the virus and its impact. But to this day, our health authorities have not provided us with greater clarity on what we are faced with. In fact, Secretary Duque has announced that we are currently experiencing “the second wave of infections” — much to the public’s bewilderment as we clearly have not even flattened the curve on the first.

This lack of clarity finds us in extended mutations of the ECQ culminating with MMECQ, “Matira Matibay Enhanced Community Quarantine.” Social isolation is being prolonged.

We are already losing trillions of pesos from the lockdown. Wouldn’t it be cheaper to allocate a few hundred billion pesos more for the conduct of more massive testing, to strengthen contact tracing, improve quarantine facilities and mitigation so we could neutralize the pathogen, flatten the curve, and create more confidence in the business climate? In doing so, there could be gradual normalization of business, school and office activities. Wage support and other forms of social protection also make sense in this time of pandemic. However, considering a possible bailout of big corporates may be outside the capacity of the public sector. Big corporates have open credit lines from the banks which some of them also partly own.

The Fund is familiar with the narratives of at least 100 countries that have sought its help in battling the coronavirus that has eradicated key sources of revenues such as tourism and travel. Therefore, any further downturn in Philippine economic performance should not confound it further.

The challenge is to do what we should have done at the beginning, and in a bigger way. This is to intensify massive and targeted testing, contact tracing, and treatment. Since we have missed out on the possibility of lifting restrictions earlier, this is the best that can be done now. In doing so, we should be guided by Paul Meehl’s famous finding that experts’ intuition is inferior even to simple algorithms.

It is true that choosing between salvaging the economy and risking countless deaths is simply a Trumpian choice. But the Philippines can pursue both, even if belatedly. It would be wrong to passively wait for a flatter curve and hope for the best. Tests, not bureaucratic intuition, are needed for economic revival.


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.