Numbers Don’t Lie

Last Wednesday, Finance Secretary Sonny Dominguez announced a $29.4-billion stimulus package to fight the negative effects of the coronavirus on the economy.

He assuaged the fears of the public by affirming that the economy is strong enough to absorb the financial shock wrought by the pandemic without significantly deteriorating the country’s economic fundamentals.

Thanks to the recent passage of the TRAIN law, public revenues rose to 16.9% of gross domestic product (GDP) last year, the highest ratio in 22 years. It will be recalled that it bottomed at only 13.5% during Erap’s time as President. Higher collection of public revenues means more money in our coffers to fight the pandemic.

Further, the country’s debt-to-GDP ratio is at a new low of 41.5% of GDP. The Philippines has the second lowest debt ratio among ASEAN-6 and this gives us the fiscal room to borrow. Hence, funding for the stimulus package will be sourced from debts and re-appropriations from the national budget. By year end, Secretary Dominguez sees our debt-to-GDP ratio rising to 46.7%, which is still very manageable.

As of last January, the country’s external debts amounted to $83.6 billion while our Gross International Reserves (GIR) amounted to $86.42 billion (now at $89 billion). We have more reserves than we do external debt.

In addition, the Central Bank (BSP) has gradually lowered its reserve requirement rate from 18% last year to just 12% today. This released liquidity in the banking system to be made available for companies and the government to borrow.

Due to increased spending and a decrease in tax collection by some P300 billion due to the crisis, the budget deficit is seen to rise to 5.3% from the government’s previous ceiling of 2.3%. The budget deficit will gradually decline to below 3% by 2022.

Testaments to how strong our economic fundamentals are was the recent offering of a $2.35-billion double tranche of 10-year and 25-year global bonds by the Philippines. The 10-year bonds were priced at 180 basis points above US Treasury Bonds. Meanwhile, the 25-year tranche was priced at 42.5 basis points tighter than the initial pricing guide of 3.37%. What does this mean? It means that although our debts are classified as BBB+ (by S&P), our bonds were taken up as if it were rated “A.” This exemplifies the confidence of the global debt market on the Philippine economy.

Last year, the BSP imposed policies that made banks build their capital bases. This has paid off in spades. Our banking industry is now the healthiest it has been in history and the strongest in ASEAN. It is in the position to fund the government’s financial requirements for the stimulus package.

Loan defaults due to the stoppage of economic activity are not a threat either, said Bong Consing, President of the Bank of the Philippine Islands. Records show that consumer loans only comprise 10% of the banking system’s loan portfolio. Loans to micro-, small- and medium-sized enterprises (MSMEs) also amount to 10%. So even if there are massive defaults in these categories, it will not be significant enough to displace the banking system. The lion’s share of the loan portfolio consists of loans to government and large corporations — both of which are strong enough to withstand the two month business stoppage.

As of today, the economy is seen to contract by .8% to 0% this year. The contraction can worsen if the enhanced or general community quarantine (ECQ/GCQ) is extended. Note that if the GCQ is extended to a point where the economy contracts by 3%, we will need $100 billion in stimulus funds to restore the economy’s vitality. There is no way we can afford this. A situation like this will set us back by at least three years.

It is not yet certain if the ECQ will be extended or if the GCQ will be activated after May 15. Neither are the guidelines of the GCQ written in stone. According to Secretary Dominguez, the Inter-Agency Task Force for the Management of Emerging Infectious Diseases is still discussing the GCQ guidelines. Policies relating to the quarantine are fluid. But based on what they have learned with SARS, the contagion begins to wane after three months (this May) and infections begin to flatten after seven months (in September). Only then will we see a semblance of normality.

The government plans to go full blast with its infrastructure program in the second semester to pump-prime the economy. Fortunately, most infrastructure projects are already in their implementation stage with financing in place. With luck, we can avoid a contraction of GDP.

Without an extension of the ECQ, the economy is seen to rebound next year with growth projected at 7.6%. This is due to the stimulus package gaining traction, the “Build, Build, Build” program going full swing, and the low base effect.

As mentioned earlier, the government has appropriated a $29.4-billion stimulus package which represents 8% of last year’s GDP. It will be appropriated this way:

$11.6 billion will be allotted to support vulnerable groups as well as small businesses. Aid will come in the form of cash assistance programs for displaced workers and approximately 18 million low income families; Social Security System (SSS) assistance to cover unemployment benefits; Landbank loans for struggling LGUs; Department of Agriculture assistance for marginalized farmers, fishermen, and micro entrepreneurs; wage subsidies for employees of small businesses; and credit guarantees for MSMEs, among others.

$1.2 billion will be allotted to expand medical capacities and to ensure the safety of our frontliners. This includes the purchase of medical equipment and supplies; the purchase of testing kits; procurement of personal protective equipment; subsidies for patients and health care workers who are infected by the virus; and compensation for additional health workers, among others.

$16.6 billion will be allotted to keep the economy afloat. This includes providing liquidity for the banking system and investments in social and infrastructure programs, among others.

Speaking of support for businesses in distress, Secretary Dominguez made it clear that the national government will not bail out any private enterprise. What it will do, instead, is provide liquidity to the banks to allow them to extend loans to companies that need them. Hence, private companies must still go through the process of loan application with their respective banks.

The good news is that the Banco Sentral temporarily relaxed the credit risk weight for MSMEs from 75% to 50% under the Manual of Regulations for Banks (MRB). In other words, banks are allowed to lend to MSMEs even if the risks are higher than normal.

In addition, the Department of Finance has empowered PhilGuarantee to guarantee as much as P120 billion in emergency loans for companies in distress. Through PhilGuarantee, companies can now borrow even without adequate collateral. The implementing guidelines of this facility will be published by PhilGuarantee next month.

Another form of subsidy for Filipino businesses are the tax breaks built-into the CITIRA bill. While the bill has passed congress, it has been languishing for six months in the senate. Secretary Dominguez made a strong appeal to the Senate to pass CITIRA as it will be a big help to Filipino enterprises. He expressed confidence that the country will be able to navigate this storm with minimal damage to the economy. This should give us confidence for what lies ahead.


Andrew J. Masigan is an economist