The limits to fiscal and monetary space

Published June 10, 2020, 12:00 AM

by manilabulletin_admin



Diwa C. Guinigundo
Diwa C. Guinigundo

Demands on fiscal policy during this pandemic are great and daunting. The P1.3 trillion economic package passed by Congress is to be funded by government revenues and/or savings. But according to DBM, the Government’s savings have been understandably depleted by unexpected spending on COVID-19 mitigation measures.

Bureau of the Treasury borrowings do not qualify as funding sources for the supplemental budget. This was stressed by Finance Secretary Sonny Dominguez when he clarified the constitutional prohibition against a debt-financed supplemental budget. Incurring additional expenditures on top of what the annual general appropriations law covers is allowed only when revenues or savings are available.

The proposed Accelerated Investments Stimulus for the Economy (ARISE) can only be partially funded by around P170-180 billion authorized by the President as budget realignment in his exercise of Emergency Powers. Congress and the executive are therefore facing a difference of more than a trillion pesos. This means that only very strategic infrastructure projects could be prioritized for the rest of 2020. Capital injection to crucial but temporarily distressed private industries would have to be done through the state-owned Land Bank of the Philippines and the Development Bank of the Philippines.

Secretary Dominguez cited other ways to maximize fiscal space.  He mentioned cash-for-work programs linked to pandemic mitigation (like hiring contact tracers). Wage support can be directed to ECQ areas where workers are hard-pressed to make a living.

These measures make for prudent fiscal policy.

Detractors should realize that since COVID-19 froze business activities, revenues have virtually diminished. Keeping the level of public spending at what Congress has in mind, would bloat the deficit to GDP ratio to beyond 9.0 percent.

While the pandemic has spurred other economies to breach metrics for fiscal sustainability, this is no reason for us to be carried away and imitate their fiscal stimulus. It will be very difficult to unwind irresponsible fiscal policy.

Fiscal space is tight.

Is monetary space available?

This pandemic has locked down public and private transport, factories and offices, malls and restaurants. COVID-19 has decimated sales of nearly every industry, bloodied their P and L, and destroyed balance sheets.  Public health and economic recovery concerns are likely to add even more pressure to monetary policy moving forward.

At a time when demand was weak due to a severe health issue,  the BSP has already done much heavy lifting — indeed, more than what is required of monetary policy.

Quoting a very useful BSP Working Paper issued in May 2020, “COVID-19 Exit Strategies: How Do We Proceed?” (written by BSP economists from the Center for Monetary and Financial Policies namely, Eloisa T. Glindro, Hazel C. Parcon-Santos, Faith Christian Q. Cacnio, MaritesB.Oliva and their Director, Laura L. Ignacio) –  “BSP has immediately deployed measures to ease the macroeconomic fallout and to ensure that no disruptive imbalances emerge in financial markets.”

It is very reassuring that both monetary and fiscal responses to the health issue were consistent with the Government’s Four-Pillar Strategy and the IATF-TWG-AFP COVID-19 framework.

The BSP paper traced the evolution of policy responses in three phases, with the final phase reflecting a return to the pre-COVID-19 growth path.

In Phase 1, the BSP responded to the public health emergency with monetary policy measures and by granting regulatory relief to banking institutions.

To ease liquidity constraints, restore business confidence, and sustain credit flows to businesses and households, the Monetary Board reduced policy rates and the RRR while temporarily shelving BSP’s term deposit facility. In addition, the BSP extended provisional advances to the National Government in the amount of P300 billion and advanced P20 billion in dividends.

The BSP provIded regulatory relief to the banking industry by relaxing regulations on the calculation of penalties on violations on RRR, the single borrowers limit, asset cover requirements for FCDU and NPLs. Other regulations for specific types of financial institutions were also deferred for a year.

Phase 2 covers the transitioning from ECQ to MECQ to GCQ foir most of the country, with the economy starting to reopen. During this period, monetary policy has remained accommodative.

In this phase,  due to potential COVID-19 related shocks, there is a risk of a possible second wave of capital outflows from emerging markets. Citing an IIF study, the BSP economists observed that in the first quarter of 2020, there were net capital outflows from the Philippines. Further easing of monetary policy could therefore trigger more shocks in the external market with possible consequences on the peso and inflation.

Phase 2 also sees increased transition to on-line financial services and digital platforms. Moreover, several initiatives including legislative amendments were launched to sustain credit flow to the real economy.

Phase 3 is most interesting. In it, the BSP will prepare for the “new economy arrangements towards recovery.”

This phase unwinds what was established in the first two phases. It involves an exit strategy aligned with the long-run economic growth path. The BSP wisely qualifies such an outlook given uncertainties posed by the pandemic.

Key issues are the timing and the long-term growth path.  Both would define whether withdrawal of stimulus or introduction of structural reforms could be done with least negative consequences to recovery.

The BSP economists identified specific metrics to guide the unwinding process. These include usual public goals like price stability, financial system stability and effective communication. “The BSP should continue making the people understand the importance of forecasts in the policy process and the horizon of the forecasts.”

Specific metrics were also identified to ascertain liquidity and credit risks to provide direction on timing of stimulus withdrawal.

All told, I agree with most of the BSP economists’ propositions. However, the health sector’s feeble efforts to mitigate the pandemic, make me skeptical about the possible duration between phases 2 and 3. This is crucial to economic bounce-back efforts.  As of 9 June 2020, the total number of positive COVID19 cases in the Philippines stood at 22,992 with the day’s 518 increments. Some 4,736 have recovered with 99 new recoveries for the day and deaths at 1,017 with 6 new deaths.  The doubtful statistics, the want of clear scientific basis, and the easing of quarantine restrictions on a population challenged with social distancing measures, may likely result in more cases, mortalities, as well as new outbreaks.

I am doubly skeptical because of what the recent monitoring by the Visual Capitalist cited by Iman Ghosh (The Road to Recovery: Which Economies are Reopening?) last May 28, 2020 clearly reveals. Based on the plots of two metrics namely mobility rate and COVID-19 recovery rate, the Philippines is grouped with the US, Argentina, Colombia, Indonesia, Belgium and France in terms of low COVID-19 recovery rates.  The Philippines is also with the UK, Sweden and Netherlands in terms of low mobility rates.

Countries with high recovery and high mobility rates and therefore, with greater likelihood for stronger economic bounce back, are Vietnam, Taiwan, South Korea, Hong Kong, New Zealand, Israel, Japan, Thailand and Australia.

Yet before the pandemic, the Philippines has enjoyed good macroeconomic headway. In fact, even just a few days ago, our 5-year credit default swap spreads at 52.93 bps remained competitive against Indonesia’s 105.67 bps, Malaysia’s 63.21 bps and Thailand’s 35.95 bps.

Let us recall that pre-COVID-19, we had consistently been given very positive assessments by the IMF, the World Bank, the ADB, and by credit rating agencies.  Our 20-year uninterrupted growth record, lower inflation and declining deficit and debt to GDP ratios are strong buffers. Our track record demonstrates expertise. This is not the time to doubt the Philippines’ economic management.

Unfortunately, fiscal and monetary policy and the BSP’s well-laid plans can substitute neither for weak public health management, nor for supplemental budget that cannot be funded.