2020 Vision: Reading statistics and signs of the times
Published Dec 18, 2019 12:00 am
OF SUBSTANCE AND SPIRIT
By DIWA C. GUINIGUNDO
Diwa C. Guinigundo
As 2019 draws to a close, economists have made some predictions about the Philippine economy. Expecting a decline in growth due to the budget delay and decline in investments, Nicky Mapa of ING Bank Manila prophesied that the “self-professed pro-growth Governor (will) come out with additional easing to open 2020.”
The day after this prediction was carried by the broadsheets, in an interview with Bloomberg TV, BSP Governor BenDiokno said, “I think we are considering maybe around 50 basis points next year and we have more time on the reserve requirement because my promise is that we would cut the reserve requirement to single digit by the end of my term which is 2023.”
Evidence indicates that in the last two years, high inflation was mainly driven by supply factors such as the rice shortage prior to implementation of the rice tariffication law; the precipitous increase in oil prices; and the sharp depreciation of the peso. Monetary tightening was called for if only to anchor inflation expectations. However, it was not exactly desirable to have compressed the economy to offset the untimely decision to reduce the reserve requirement meant to ease liquidity and reduce the virtual tax on banks at a time when domestic inflation was raging at nearly 7 percent.
Monetary policy is not the perfect solution to economic moderation resulting from the deadlock between Malacañang and Congress as well as weak global demand. External competitiveness is structural. It is attained over a number of years rather than as a collateral benefit of peso weakness due to lower interest rates.
Another year-end economic prophesy came from JunNeri of BPI. Mr. Neri discussed the dynamics of the Philippine economy against the backdrop of a very challenging “economic and geo-political disruption.” He stated that of the major ASEAN countries, it appears Vietnam has benefitted the most from the trade and investment conflict between the US and China owing to its overall competitiveness. His piece concluded with a call for sustained structural reforms. It is reasonable to assume he was referring to, among others, fiscal reforms.
So it was very interesting to note that on the same day of the announcement of monetary policy direction in 2020, the broadsheets headlined the broad support of former secretaries of the Department of Finance behind the remaining tax reform packages under the Comprehensive Tax Reform Program (CTRP).
Unequivocal support was graphically shown in two photos: one, taken during the interview of current Finance Secretary Sonny Dominguez, with former Secretaries Cesar Virata, Bobby de Ocampo and Gary Teves and two, one of all of the finance chiefs with former cabinet members — Lito Camacho, CielHabito, ArciBalisacan and Bert Romulo plus the chairpersons of the Ways and Means Committee PiaCayetano of the Senate, and Joey Salceda of the House.
This fiscal positioning is genius. It sends a strong message in terms of both policy accountability and public ownership.
Policy-wise, tax reforms are the most difficult to pursue. People predictably hate paying taxes unless they are properly and effectively informed on the reasons why they need to file their income tax returns, or why businesses have to contend with the rationalization of tax incentives.
It is difficult for people to understand and appreciate the link between tax reform and its impact on the ease of doing business, and on creating jobs through increased public spending on infrastructure and human capital development.
Should it be unable to raise funds through taxes, it should be recognized that the National Government will be forced to borrow more from both domestic and external capital markets. The subsequent interest payments on these debts have to be paid over time — by the public and future generations.
Having the full support of past and present fiscal policy makers is an unequivocal statement that the CTRP is the only way forward. Congressional enlightenment in a non-election year ensures its early passage and public ownership.
The current emphasis on fiscal solutions is consistent with the literature on monetary policy. There is rich theoretical and practical understanding that today’s economic reality demands a fiscal, and not a monetary push to partly mitigate the synchronized global slowdown by way of beefing up domestic demand. Interest rate actions could amount to no more than pushing on a string.
Recent numbers confirm this approach.
For the first three quarters of 2019, the economic slowdown was caused by the anemic growth of both government final consumption expenditure and capital formation. Our growth in public spending for the last three quarters this year decelerated from last year’s 13.1 percent to only 8.0 percent. Capital formation exhibited a big decline from 16.5 percent to -0.8 percent. Thus, to accelerate economic momentum, a direct resumption of public spending is desirable. Better infra spending and quick release of public funds would also rejuvenate private investment.
Ancilliary support from trade and industry by enhancing global competitiveness and agreeing to rationalize tax incentives is also critical. Agriculture can also give the economy a significat push thorough a rational food production program that would increase agricultural productivity and a generous supply of food products available to the community. Information technology can also digitalize our platforms of production, distribution, communication, disaster mitigation and climate surveillance. Both the Department of Public Works and Highways and the Department of Transportation are on track and commendable in stepping up the gas on Build, Build, Build while watching out for, and staying clear of, any speed bumps.
Looking further under the hood of the Philippine economic engine, how did previous monetary policy actions affect the economy? The decline in the interest rates and infusions of liquidity kept domestic liquidity or M3 at a steady pace of 8.5 percent in October 2019 versus year-ago growth.
Since the demand for loans was weak, no amount of liquidity infusions or reductions in interest rates were enough to push loans outstanding net of BSP borrowings to a more vigorous level beyond a deceleration from 13 percent to only 9 percent. To top it all, the non-performing loans ratio has started to climb from 1.3 percent in October last year, to 1.7 percent in 2019.
It would be prudent monetary action to hold fire and keep brakes steady since global headwinds remain strong — even while the markets clamor otherwise.
As the year draws to a close, let us keep 2020 vision by carefully reading clear statistics and the signs of the times.
Diwa C. Guinigundo
As 2019 draws to a close, economists have made some predictions about the Philippine economy. Expecting a decline in growth due to the budget delay and decline in investments, Nicky Mapa of ING Bank Manila prophesied that the “self-professed pro-growth Governor (will) come out with additional easing to open 2020.”
The day after this prediction was carried by the broadsheets, in an interview with Bloomberg TV, BSP Governor BenDiokno said, “I think we are considering maybe around 50 basis points next year and we have more time on the reserve requirement because my promise is that we would cut the reserve requirement to single digit by the end of my term which is 2023.”
Evidence indicates that in the last two years, high inflation was mainly driven by supply factors such as the rice shortage prior to implementation of the rice tariffication law; the precipitous increase in oil prices; and the sharp depreciation of the peso. Monetary tightening was called for if only to anchor inflation expectations. However, it was not exactly desirable to have compressed the economy to offset the untimely decision to reduce the reserve requirement meant to ease liquidity and reduce the virtual tax on banks at a time when domestic inflation was raging at nearly 7 percent.
Monetary policy is not the perfect solution to economic moderation resulting from the deadlock between Malacañang and Congress as well as weak global demand. External competitiveness is structural. It is attained over a number of years rather than as a collateral benefit of peso weakness due to lower interest rates.
Another year-end economic prophesy came from JunNeri of BPI. Mr. Neri discussed the dynamics of the Philippine economy against the backdrop of a very challenging “economic and geo-political disruption.” He stated that of the major ASEAN countries, it appears Vietnam has benefitted the most from the trade and investment conflict between the US and China owing to its overall competitiveness. His piece concluded with a call for sustained structural reforms. It is reasonable to assume he was referring to, among others, fiscal reforms.
So it was very interesting to note that on the same day of the announcement of monetary policy direction in 2020, the broadsheets headlined the broad support of former secretaries of the Department of Finance behind the remaining tax reform packages under the Comprehensive Tax Reform Program (CTRP).
Unequivocal support was graphically shown in two photos: one, taken during the interview of current Finance Secretary Sonny Dominguez, with former Secretaries Cesar Virata, Bobby de Ocampo and Gary Teves and two, one of all of the finance chiefs with former cabinet members — Lito Camacho, CielHabito, ArciBalisacan and Bert Romulo plus the chairpersons of the Ways and Means Committee PiaCayetano of the Senate, and Joey Salceda of the House.
This fiscal positioning is genius. It sends a strong message in terms of both policy accountability and public ownership.
Policy-wise, tax reforms are the most difficult to pursue. People predictably hate paying taxes unless they are properly and effectively informed on the reasons why they need to file their income tax returns, or why businesses have to contend with the rationalization of tax incentives.
It is difficult for people to understand and appreciate the link between tax reform and its impact on the ease of doing business, and on creating jobs through increased public spending on infrastructure and human capital development.
Should it be unable to raise funds through taxes, it should be recognized that the National Government will be forced to borrow more from both domestic and external capital markets. The subsequent interest payments on these debts have to be paid over time — by the public and future generations.
Having the full support of past and present fiscal policy makers is an unequivocal statement that the CTRP is the only way forward. Congressional enlightenment in a non-election year ensures its early passage and public ownership.
The current emphasis on fiscal solutions is consistent with the literature on monetary policy. There is rich theoretical and practical understanding that today’s economic reality demands a fiscal, and not a monetary push to partly mitigate the synchronized global slowdown by way of beefing up domestic demand. Interest rate actions could amount to no more than pushing on a string.
Recent numbers confirm this approach.
For the first three quarters of 2019, the economic slowdown was caused by the anemic growth of both government final consumption expenditure and capital formation. Our growth in public spending for the last three quarters this year decelerated from last year’s 13.1 percent to only 8.0 percent. Capital formation exhibited a big decline from 16.5 percent to -0.8 percent. Thus, to accelerate economic momentum, a direct resumption of public spending is desirable. Better infra spending and quick release of public funds would also rejuvenate private investment.
Ancilliary support from trade and industry by enhancing global competitiveness and agreeing to rationalize tax incentives is also critical. Agriculture can also give the economy a significat push thorough a rational food production program that would increase agricultural productivity and a generous supply of food products available to the community. Information technology can also digitalize our platforms of production, distribution, communication, disaster mitigation and climate surveillance. Both the Department of Public Works and Highways and the Department of Transportation are on track and commendable in stepping up the gas on Build, Build, Build while watching out for, and staying clear of, any speed bumps.
Looking further under the hood of the Philippine economic engine, how did previous monetary policy actions affect the economy? The decline in the interest rates and infusions of liquidity kept domestic liquidity or M3 at a steady pace of 8.5 percent in October 2019 versus year-ago growth.
Since the demand for loans was weak, no amount of liquidity infusions or reductions in interest rates were enough to push loans outstanding net of BSP borrowings to a more vigorous level beyond a deceleration from 13 percent to only 9 percent. To top it all, the non-performing loans ratio has started to climb from 1.3 percent in October last year, to 1.7 percent in 2019.
It would be prudent monetary action to hold fire and keep brakes steady since global headwinds remain strong — even while the markets clamor otherwise.
As the year draws to a close, let us keep 2020 vision by carefully reading clear statistics and the signs of the times.