OF SUBSTANCE AND SPIRIT
By DIWA C. GUINIGUNDO
In his memoir, “The Courage to Act” (2015), Ben Bernanke wrote about headwinds during his firefighting term at the US Federal Reserve Board. There were three: one, the lingering effects of the financial crisis; two, tight credit conditions and slow housing recovery; and three, fiscal policy that was blowing the wrong way. Against these headwinds, the US Fed forged on with its unorthodox monetary management strategies. Along with Treasury Department measures, further collapse of the US and global economies was successfully prevented.
Through the decades, our own economy has faced intense headwinds. Against these, we have stood resilient. We were able to ride out both the Asian Financial and Global Financial crises with credit conditions that favor quick economic recovery. There has been price stability and banks remain capable. With structural reforms, public finance has become sound. More taxes have been collected to fund more public spending and to make economic growth stronger and more sustainable.
By itself, the COVID-19 pandemic is a global scourge. While the threat is common to all continents except Antarctica, it is each nation’s management of the crisis that will define how their bounce-back policies will swiftly bite.
Last week’s column stressed that “fiscal and monetary policy and the BSP’s well-laid plans cannot substitute for weak public health management.” We continue to stand on this point. Our disjointed and uncoordinated public health mitigation system is the greatest headwind in restoring our economic well-being.
Tell-tale signs of our struggle against this headwind are becoming more pronounced.
According to a recent Social Weather Station (SWS) survey covering 4-10 May, because of quarantine measures, some 4.1 million Filipinos were unable to pursue their regular activities such as work and business. Some 90 percent of respondents experienced stress due to job lossesor salary cuts.
This SWS number was extrapolated from 5.4 percent of 4,010 working-age Filipino respondents, blown-up against the 75.8 million working-age population. While the actual number could be less than the extrapolated level, it is undeniable that millions have experienced pandemic-related social and economic stressors including involuntary hunger.
Labor statistics further confirm the sad narrative. The Department of Labor and Employment (DOLE) recently reported that about 2,000 companies have shut down, affecting nearly 70,000 workers. The Philippine Statistics Authority (PSA) estimates a more-than-tripling of the unemployment rate from 5.5 percent in April, 2019, to 17.7 percent in April this year. This translates to over 7 million Filipinos who have become jobless. With the lockdown, it is not surprising that the incidence was highest in services in the entertainment, food, hotel, IT, and construction industries.
As expected, banks’ bad loans as of end-April, 2020, the second month of the lockdown, surged by more than 18 percent to 2.3 percent of their total loan portfolio. This has prompted banks to increase their loan loss provisions to nearly P236 billion. The amount is just a little lower than the total sour loans and poses an obstacle to banks’ ability to help us achieve economic resurgence.
We also saw the quick impact of NCR’s transition to GCQ last Monday on the equities market. There was a precipitous drop owing to “resurfacing COVID-19 worries.”
Moreover, on account of COVID-19-driven business slumps in other countries, there are serious negative externalities to our domestic economy.
According to the Bangko Sentral ng Pilipinas (BSP), Overseas Filipino (OF) cash remittances could decline by as much as 5 percent this year. More overseas workers are being sent home or are made to accept wage cuts. This drop alone would be equivalent to $1.5 billion or P75 billion less from both services in the current account and private consumption in the GDP computation.
In addition, the repatriation of more than 500,000 OFs might also entail an additional public expense as each asks for financial aid of around $200 or P10,000.
Recently, the BSP also halved its previous $8.8-billion net Foreign Direct Investment forecast to only $4.1 billion. For this reason, Fitch Solutions now expects some slowdown in the infrastructure sector.
It is not unreasonable to expect that with the rising rates of infections and mortalities, community quarantines are bound to remain. With continuing restrictions on mobility outside NCR, commercial activities will be minimal and curtailed. These are absolutely bad omens to consumption expenditure that accounts for nearly 70 percent of total output. In these conditions, economic recovery will be difficult to attain. This is where we stand against this strong headwind.
The World Bank must have had these in mind when it shrank its growth forecast for the Philippines to negative 1.9 percent, citing weak mitigation of the virus despite the early and extended lockdown.
Therefore, if the pandemic continues to stalk the land, and our defenses are not up to it, how can business and labor resume operations with confidence? How else can we improve our fight against the virus? What do we need to avoid?
The Greeks, Romans, and medieval thinkers approached challenges “via negative.” This strategy posits that once downsides or “thinking errors” are eliminated, the upsides will handle themselves. Factors, or headwinds, that block economic success should be addressed.
This approach resonates with Warren Buffet’s admission that he and his associate, Charlie Munger, “have not learned to solve difficult business problems.” Instead, they have “learned to avoid them” (quoted by Rolf Dobelli in “The Art of Thinking Clearly,” 2013).
“Via negativa” reduces an idea to its essence through the process of continuous elimination. Instead of describing what something is, one describes what it isn’t or what it shouldn’t be.
It must be clear to us that our major headwind could have been avoided through more competent non-blaming leadership in the health sector. It could have been moderated by leveraging on the three months of lockdown to strengthen testing, contact tracing, and treatment capacities. It could have been mitigated by improving data gatheringand issuing more coherent communication.
As we suppress the downsides, we rely on our encouraging economic upsides.
These upsides were all captured by the stable credit ratings we recently obtained and the latest upgrade from Japan Credit Rating Agency (JCR). On 11 June 2020, our economic managers led by Finance Secretary Sonny Dominguez and BSP Governor Ben Diokno, welcomed the Philippines’ entry into the A category, from BBB+ to A-.
JCR declared that “the ratings mainly reflect the country’s high and sustainable economic growth performance underpinned by solid domestic demand.” It also showed Philippine “resilience to external shocks, supported by an external debt kept low relative to GDP and the accumulation of foreign exchange reserves, the government’s solid fiscal position, and a highly sound banking sector.”
JCR believed that the downward pressures on the economy due to quarantine measures would be limited, “given the country’s strengthened economic base, resilient external position, and the government’s economic stimulus package totaling more than 9 percent of GDP.” It added that “fiscal soundness will not be impaired because (while) the fiscal deficit may widen, the package at this time is justifiable and the government debt will remain comparatively subdued.”
Our progress on the road to an A credit rating will not immediately put food on Filipino tables.But it can indeed help produce jobs and income as investors are attracted to the Philippines, and as external capital markets exact lower lending costs to Philippine sovereign and corporates.
Our previous columns proposed that at the beginning of the year, we faced the pandemic from a position of economic strength. We believe that our economic recovery plan is solid. It provides strategy rather than desiderata.
If we manage our downsides better and smarter, our upsides will work in our favor and will allow us to bounce back from that rude COVID-19 interruption.