Introspective
By Calixto V. Chikiamco
The perfect storm: Why the Philippines faces prolonged economic pain
The country faces a perfect storm leading to prolonged economic pain. Yes, not a V-shaped recovery as a government spokesmen would like us to believe, but more like an L, with just a slightly elevated but elongated leg (the slight elevation coming more from base effects rather than real recovery).
There are numerous factors causing the perfect storm.
First is a highly political budget, more appropriate for elections rather than dealing with a still untamed pandemic and healing the economic scars of an extended lockdown. Hefty increases have been heaped on the Department of Transportation (DoTr) and Department of Public Works and Highways (DPWH), two departments known for “pork” and “corruption” but whose track record in effective spending is poor. According to Senator Frank Drilon, the DPWH budget contains P345 billion in lump sum appropriations, technically known as “pork.”
In contrast, the Department of Health has suffered a cut in the budget even if the total number of COVID-19 cases continue to rise. A mere P2.5 billion has been allocated for vaccines. The new House leadership has reportedly increased this, but Senator Ping Lacson is questioning the constitutionality of making changes to the House budget after it had been passed on third reading.
Agriculture, the star of the economy during the lockdown having registered a 1.2% positive growth rate, has also suffered a budget reduction.
On the other hand, P16.4 billion has been allocated to fight insurgency through barangay pacification operations to be supervised by the National Task Force to End Local Communist Armed Conflict (NTC-ELCAC), an amount bigger than that of the Department of Trade and Industry (P5 billion).
Second, monetary policy has proven to be ineffective even if the Bangko Sentral ng Pilipinas (BSP) has pumped money into the banking system. Credit growth in the last quarter was negative. Banks have been investing in government securities instead. As John Maynard Keynes said, fighting a recession with monetary policy is like “pushing on a piece of string.”
The only real effective macroeconomic tool to fight a pandemic-caused recession is fiscal policy because consumption and investment spending has shriveled. Unfortunately, fiscal spending is fraught with inefficiency, incompetence, and corruption. Exhibit No. 1 is the multi-billion peso losses due to fraud from PhilHealth, the frontliner health institution. Perhaps, the “trust-deficit” is the reason why the P1.3-trillion ARISE economic stimulus was never considered.
Third, the amount of fiscal stimuli is parsimonious. The amounts under Bayanihan I and II which can really qualify as stimulus are no more than 3% of GDP. Even then, under Bayanihan I, the Department of Social Welfare and Development (DSWD) left some P10 billion unspent. Under Bayanihan II, with just two months to go, the Department of Budget and Management (DBM) hasn’t released about P40 billion.
The economic managers are saying that the CREATE (Corporate Recover and Tax Incentives for Enterprises) bill, if passed into law, will stimulate the economy. CREATE will lower corporate income taxes from 30% to 25% immediately and 1% thereafter until the rate reaches 20%.
CREATE is the wrong prescription for the demand shock caused by the pandemic. A tax cut in the face of a demand shock won’t work. It will benefit only large profitable corporations rather than MSMEs which are facing losses and credit cutoffs. With no consumer demand, businesses are more likely to pay dividends, give their management unrestricted bonuses, stash money in government securities, or buy back stock.
It will only work if the investment climate is favorable and large investments flow in, but the demand shock, the restrictive laws against foreign investment, President Duterte’s tirades against the private sector, and the poor infrastructure indicate that the private sector won’t invest the tax savings.
On the contrary, if more investments don’t come in order to increase tax revenue, the government eventually has to pass more consumption taxes to limit the runaway deficit, magnifying the demand shock.
Fourth, labor rigidities embodied in Philippine Labor laws mean that the excess labor supply in the labor market won’t “clear.” Therefore, employment and income growth will be sluggish. In market economics, if the supply of a particular commodity is much more than demand, the price of that commodity should fall for the market to absorb the excess supply. However, because of minimum wage laws and other wage and labor rigidities (26 official holidays, 13th month pay, security of tenure, etc.) capitalists are unlikely to hire even if there’s a mass of unemployed. On the contrary, due to the strong peso, which makes capital imports cheaper, the low interest rates, and the lessons of the pandemic, capitalists are more likely to automate should demand pick up.
The resulting negative feedback loop — slow employment growth leading to lower incomes and lower consumption leading to low investment — will lead to persistent sluggish economic growth.
Fifth, the international market won’t provide any immediate hope either. The global economy will shrink by 3% this year, according to the IMF. With the US and Europe seeing second and third waves of the pandemic, it’s unlikely that our export sector will revive anytime soon. On top of this, the tourism market is barely alive and may take two more years to revive.
Sixth, other factors will continue to dampen consumption spending, which accounts for some 70% of the economy. Overseas remittances have declined in the first six months from January to June. While there was a slight uptick in June and July probably due to seasonal increase for tuition payments, remittances fell sharply again in August. About 400,000 OFWs have also lost high paying jobs in industries as diverse as construction and cruise ships.
The strong peso has also decreased the disposable peso incomes of OFWs. Their families are likely to tighten belts further.
On the other hand, the strong peso is a strong indicator of a very weak economy, with imports falling more than exports.
Seventh, the Philippines is the worst in managing the pandemic in Asia and there’s no indication that the pandemic will be under control anytime soon. The problem is that while the government has improved testing and treatment capacity, it still must improve significantly on the tracing part. Therefore, the government is more likely to be reliant on dumb lockdowns rather than smart, focused quarantine of exposed persons should the infection rate start rising again with looser restrictions.
Even if vaccines become available, it’s unlikely that a majority of the population will get vaccines before 2022. Almost all vaccines, except one, being developed require two shots and must be transported in vials using refrigerated facilities. Can the government be trusted to do the procurement and logistics of mass vaccination?
Eighth, with elections coming in a year and half from now, the political situation doesn’t augur well for the government focusing on managing the pandemic or for passing economic reforms. A taste of that was the bitter infighting over the Speakership between Lord Allan Velasco and Alan Peter Cayetano and the fight over the pork-laden budget. Only a small window exists next year until senators and congressmen get distracted by the coming elections in 2022 while President Rodrigo Duterte focuses on getting his anointed one elected.
Ninth, President Duterte’s health is a huge uncertainty hanging over his leadership. The uneven state of his health could complicate the campaign against the pandemic and an economic recovery plan. There were instances during the past six months of the lockdown when he seemed ill and distracted and had delegated all the decisions to subordinates whose decisions totally disregarded the negative effects on the economy.
Tenth, the European Union parliament is threatening to cut the Philippines off its GSP plus trade privileges over alleged human rights violations of the Duterte administration. Some 400,000 jobs would be lost if factories servicing the EU market shut down without tariff free access to the EU market.
Finally, there’s huge geopolitical uncertainty which could turn negative for the country. The increased tensions over Taiwan increase the risk of a conflict among China, Taiwan, and the USA in an area close to the Philippines. As a treaty ally of the United States, the Philippines may also be dragged in.
Moreover, the election of Joe Biden to the US Presidency can bring enhanced US pressure on the Philippine government over human rights violations, affecting trade relations and deterring US investors.
I’m not alone in forecasting prolonged economic pain. The IMF has named the Philippines number one in the world in terms of economic scars from the coronavirus ().
However, it would be interesting to see how President Duterte will respond to the cratering economy as he seeks to give a boost to the election chances of his anointed one in 2022. There are indications that in the face of recent doleful numbers, his administration is rushing to open the economy. He has also lifted the ban on gas exploration in the South China Sea, which, if China accepts, could lead to a peaceful settlement of the South China Sea issue.
There’s a perfect storm alright. Can President Duterte steer us out of it? Or will the country end up like the ill-fated Andrea Gail in the movie The Perfect Storm?
Calixto V. Chikiamco is a board director of the Institute for Development and Econometric Analysis.
