OF SUBSTANCE AND SPIRIT
Diwa C. Guinigundo
Hell has no fury like a virus that is tested but not traced. And from all indications, we have not seen the worst. Last Monday’s new cases stood at a high of 6,958 pushing the total confirmed cases to 136,638. We are now Southeast Asia’s COVID-19 hotspot, surpassing Indonesia and Singapore.
Until the pandemic is better managed, its economic impact will not be inconsequential. With real GDP growth of minus 9.0 percent for the first half of the year, credit agencies and even the International Institute of Finance forecast a grim scenario for our economy. We have not seen a recession this deep since 1991.
Economic managers and Congress are left to clean up the mess. If the infection rate does not let up, it would be more difficult to re-open the economy. Fear will prevent business activities including the rehiring of people to resume. The economy is suffering from the virus’ chilling effect on consumption, investment, trade, and public infrastructure.
The dynamics of the disease and its transmission should drive the design of fiscal response. Recent developments confirm that: (1) the fight against the pandemic must Be prioritized; (2) that there must be social protection of the most vulnerable – households and small businesses; and (3) that aggregate demand must be adjusted to ensure operation of the economy near potential output.
These were points suggested by many at the onset of this pandemic.
These three tasks are precisely what the government is now trying to work out. There are big plans. But they are not strategic. Internal consistency is not well established. Lack of communication is a big challenge. The problems involve public health and the economy, but reliance is on the military.
What we have is a whole-of-government, a whole-of-society problem. Thus, relevant sectors should be involved to generate more generalized ownership and civil society support. With leadership from government, there is very little reason for the citizenry not to cooperate so that we can heal as one.
Since there is no end yet in sight, policy makers have vowed to do “whatever it takes” to fight the pandemic, to support affected sectors, and to spend to expand domestic demand and restart the economy.
According to several members of Congress, an economic stimulus, should “reverse the trend of declining consumption by putting cash in the hands of sectors most affected by the pandemic.” Consumption is the biggest component of national output and an important driver of the multiplier effects of public spending. “Ayuda” is a treasured instrument of ramping up domestic demand.
One vehicle to provide fiscal support is the stand-alone fiscal stimulus called the Bayanihan to Recover as One Act (Bayanihan II). Recently approved on third reading, the bill provides a ₱162-billion fiscal stimulus for hardest hit sectors. While the House version is higher than the Senate’s ₱145 billion, both prioritize healthcare, small businesses, and the most vulnerable sectors including overseas workers.
The Finance Department’s position is to adhere to responsible deficit spending. This highlights the constraints faced by many emerging market economies like the Philippines. Taxes cannot be raised in a recession. Printing money would be costly after this pandemic. Borrowings have certain limits in capital markets which have turned risk-averse. Since the virus seriously intends to persist, Finance favors conservation of “fiscal stamina” with a stimulus worth ₱180 billion.
One figure going around Batasan is ₱1.56 trillion. The amount is said to be focused on wage subsidies and low-interest loans for small businesses. How this is going to be funded without new tax measures and higher borrowings from tight capital markets escapes the minds of many.
In one of its blogs, the IMF stated that saving lives is primordial. With a weak healthcare system in the Philippines, funding is critical in this respect. One way to do it is to realign public spending. There is just too much fat in the budget. Leakages could be plugged if we could just stop saying that there would always be corruption in government. Part of this can go to social protection precisely to avoid permanent economic scars. To maximize mileage for each peso spent, efficiency in public spending should also be the mantra.
A bigger pandemic requires a bigger package to combat the virus and address its economic repercussions. But as the BIS recently pointed out, investors are quite sensitive to the fiscal fundamentals of the economies in which they invest. They are also less tolerant of worsening debt metrics.
How much fiscal space do we have?
For 2020, public finance shows a potential deficit of more than ₱1.8 trillion, around 9.6 percent of GDP. Given the sustained onslaught of the pandemic, next year is likely to be as difficult. We are looking at a deficit of ₱1.7 trillion or about 8.5 percent of GDP. While the outstanding debt level has gone up from 2014’s ₱5.735 trillion to ₱9.054 trillion by the end of June 2020, debt service also rose as a percent of GDP from 5.7 percent to 7.6 percent. It is good that the National Government reduced its guaranteed debt from 4.2 percent of GDP in 2014, to only 2.5 percent of GDP by the end of March, 2020.
This is something that can be understood in the context of the current pandemic. We need a bigger budget to cover weaknesses in consumption, investment, as well as in external trade. Lives are important. Lives matter even in the calculus of public finance. Since increasing revenue efforts is not a likely option during a crisis, we are left with only borrowing from both domestic and external sources to fund a bigger deficit.
With business down, the government can benefit from the public’s propensity to invest in government bills and bonds. The external debt market is also still forgiving of the Philippines. At the end of December, 2019, the debt spread and credit default swap stood at 71 basis points and 33 basis points above LIBOR, respectively. As of August 7, these climbed to 124 basis points and 52 basis points above LIBOR. These remain reasonable even relative to some ASEAN economies. There is some space for fund raising here.
Secretary Sonny Dominguez disclosed recently that money is also coming from the Bangko Sentral ng Pilipinas (BSP) on top of its initial ₱300-billion purchases of government debt. The BSP has been asked to buy government debt in the secondary market. Given that the money comes from the BSP, this is definitely expansionary. The BSP has been supporting recovery not only by its accommodative monetary policies such as reductions in both the RRR, and the policy rate.
In the past, some economists have suggested that if monetary policy could be driven by unconventional tools, fiscal policy could be pursued with unconventional means as well. After all, what we want is just to increase domestic spending. For example, this can be done by dropping VAT rates now and announcing some adjustment in the future tostimulate spending whether for consumption or investment today. Something to explore.
Indeed, it is always relative when one says “whatever it takes.”