Manila Bulletin
Opinion
On the lack of public funds, the BSP's affirmations and central bank intervention
Opinion
On the lack of public funds, the BSP's affirmations and central bank intervention
On the lack of public funds, the BSP's affirmations and central bank intervention
Published Aug 19, 2020 03:30 pm
OF SUBSTANCE AND SPIRIT
Diwa C. Guinigundo
The President intimated that we are running on empty. “Wala ng pera.” The Government has no more funds even as the battle with COVID-19 continues to threaten Filipino lives and economic activities.
It doesn’t help that new strains of the virus, considered ten times more infectious, have been discovered. Recently a new strain overran Europe. Bloomberg reports that one in three of 45 clusters is associated with people returning from the Philippines. According to Malaysian experts, “existing studies on vaccines may be incomplete or ineffective against the mutation.” The time horizon could be much longer.
This new development could impact efficacy of any emerging fiscal stimulus as health issues must first be hurdled. Congress and the Executive differ in position on the amount of fiscal stimulus needed. Economic managers stress the need for fiscal sustainability. So far, it appears that the legislature is slowly being swayed to their side. A big budget means a big deficit. Our economic managers would like to make sure this is fundable.
Without public funds, public policy is feeble.
Funds are needed for testing and treatment. Swab testing for COVID-19 virus is expensive, treatment is even more so. Undoubtedly, the pandemic is further enlarging the already great social divide.
In Singapore, the government foots the bill for testing of inbound Singaporeans and permanent residents. In the Philippines, public health insurance is in peril and may last only a couple of years before it is closed down for good.
Funds are also needed for social protection. Workers who were laid-off need wage support. Our country’s level of joblessness is one of the region’s highest. Assistance to micro and small businesses, the backbone of our economy, would also be extremely helpful.
Broadly, funds for public spending are crucial to ramp-up household consumption and business investments. This is the deepest economic recession we have experienced in 30 years.
With rising infections, households and business cannot muster confidence to resume normal economic activities. Public policies with very tiny budgetary support are uncertain. Policy uncertainty adds to downside risks.
Post 2007-2009 Global Financial Crisis, several policy uncertainty indices have been devised. Economic literature says there is a negative correlation between policy-related uncertainty and the level of firm and industry investment. Findings are that macroeconomic consequences could be quite substantial. For example, in some accounts in the US, some 32 percent of business investment decline was directly attributed to policy uncertainty during the height of the largest post-war economic crisis.
In this connection, it might be discomforting for the BangkoSentral (BSP) to repeatedly assure that “the worst is over.” It placates with the promise that the peso is likely to remain “very strong…and (is) the most appreciated currency in Asia right now.” There is too much uncertainty to be very sanguine about economic behavior months from now. The demand for BSP support in public finance is bound to escalate.
The BSP’s fearless forecast that “the worst is over” is premised on the statistical probability of the recession being deepest in the second quarter. Hence, there is “nowhere to go but up” — no matter how incremental.
The problem with this assertion is that it assumes GDP growth as the primary indicator of well-being even as a myriad of uncertainties continue to abound. These uncertainties are felt ones, directly impacting lives and livelihoods, whose pains will not be assuaged by any reported slight improvement in third quarter GDP growth.
Only when the pandemic is finally resolved with better health plans and execution, and when businesses normalize with confidence can we say the worst is over. The green shoots of early external trade gains and manufacturing activities are still uncomfortably tentative. The socio-economic scars will take time to heal.
Similarly, we cannot rely on the currently reported strength of the peso. For the time being, the peso appears strong because the demand for US dollar is weak and imports of raw materials and capital goods are at their lowest in many years.
Both the peso’s appreciation and FX reserves being at an all-time high are evident partly because external borrowings (both by the National Government and the private sector) are flooding the FX market. Investors are also shifting from the US dollar to gold as the price of gold continues to soar. Thus, part of the increase in FX reserves derives from revaluation gains from higher gold prices and not from actual increases in trade or investment bringing in more foreign exchange. When economic fortunes reverse, revaluation gains can be easily wiped out.
Why this commentary about central banking and the BSP?
Two reasons.
First, due to hefty forex reserves, we expect heavier lifting by the BSP. The BSP’s support to fund the fiscal stimulus for cushioning COVID-19’s impact on economic recovery will be sought. Nothing is patently wrong with that.
Traditional monetary tools such as successive reductions in both the reserve requirements and the policy rates have been deployed to ensure sufficient market liquidity. The cost of money has gone down and this should benefit bank borrowers. The BSP also extended emergency loan advances by way of repurchase agreements to support public spending. BSP’s Treasury Department has also been buying government securities as an additional accommodation to the National Government. This is plain and simple monetization of public debt.
Bloomberg’s Daniel Moss last August 13 wrote that “In the not-so-distant past, direct financing of budgets was out of bounds. It was thought to enable reckless pork-barreling and fuel inflation.” He justified this unconventional monetary policy as necessary because “dire times call for unconventional means.”
This approach makes sense today since money velocity continues to decline as more and more money is released by the central bank via RRR reductions and purchases of government debt.
At this time, there is involuntary saving as travel is restricted and public/mass assemblies are prohibited. There is limited incentive for people to shop. The public’s income levels have receded and there is very partial offset coming from cash transfers.
Second, inflation is not expected to be an immediate challenge. With economic recession, domestic inflation could remain modest despite significant injection of central bank money.
Should this grim scenario continue, we might really be looking at a longer time to restart the economy. That means more public spending for mitigation purposes. This might result in inflation returning with a vengeance. Ultimately, the central bank will have to reverse monetary expansion by running down its inventory of government debt.
There must be realization that central banks like the BSP and recently Bank Indonesia, enjoy monetary space because of the pandemic. Once recovery sets in, the hysteresis, or economic scars, like supply disruptions and the weak real sector will prevent a resumption of inflationary pressures for longer.
For balance, Charles Goodhart of the London School of Economics’ Center for Financial Stability shows that there is an alternative view that is premised on a quick reversal of today’s expansionary policy. Lower globalization and modest growth of the labor force could also fuel more rapid price movement.
Goodhart suspends judgment on which view will be predominant after the pandemic. Central banks, including the BSP, should take the cue. A new strain of macroeconomic theory of money and banking seems to be just mutating.
While we are aware of the urgency of the pandemic and current needs, all policy actions can benefit from foresight. Yes, Albert Camus believed that last judgment happens every day. But being conscious of possible outcomes could spare us from learning the hard way through disaster.
Diwa C. Guinigundo
The President intimated that we are running on empty. “Wala ng pera.” The Government has no more funds even as the battle with COVID-19 continues to threaten Filipino lives and economic activities.
It doesn’t help that new strains of the virus, considered ten times more infectious, have been discovered. Recently a new strain overran Europe. Bloomberg reports that one in three of 45 clusters is associated with people returning from the Philippines. According to Malaysian experts, “existing studies on vaccines may be incomplete or ineffective against the mutation.” The time horizon could be much longer.
This new development could impact efficacy of any emerging fiscal stimulus as health issues must first be hurdled. Congress and the Executive differ in position on the amount of fiscal stimulus needed. Economic managers stress the need for fiscal sustainability. So far, it appears that the legislature is slowly being swayed to their side. A big budget means a big deficit. Our economic managers would like to make sure this is fundable.
Without public funds, public policy is feeble.
Funds are needed for testing and treatment. Swab testing for COVID-19 virus is expensive, treatment is even more so. Undoubtedly, the pandemic is further enlarging the already great social divide.
In Singapore, the government foots the bill for testing of inbound Singaporeans and permanent residents. In the Philippines, public health insurance is in peril and may last only a couple of years before it is closed down for good.
Funds are also needed for social protection. Workers who were laid-off need wage support. Our country’s level of joblessness is one of the region’s highest. Assistance to micro and small businesses, the backbone of our economy, would also be extremely helpful.
Broadly, funds for public spending are crucial to ramp-up household consumption and business investments. This is the deepest economic recession we have experienced in 30 years.
With rising infections, households and business cannot muster confidence to resume normal economic activities. Public policies with very tiny budgetary support are uncertain. Policy uncertainty adds to downside risks.
Post 2007-2009 Global Financial Crisis, several policy uncertainty indices have been devised. Economic literature says there is a negative correlation between policy-related uncertainty and the level of firm and industry investment. Findings are that macroeconomic consequences could be quite substantial. For example, in some accounts in the US, some 32 percent of business investment decline was directly attributed to policy uncertainty during the height of the largest post-war economic crisis.
In this connection, it might be discomforting for the BangkoSentral (BSP) to repeatedly assure that “the worst is over.” It placates with the promise that the peso is likely to remain “very strong…and (is) the most appreciated currency in Asia right now.” There is too much uncertainty to be very sanguine about economic behavior months from now. The demand for BSP support in public finance is bound to escalate.
The BSP’s fearless forecast that “the worst is over” is premised on the statistical probability of the recession being deepest in the second quarter. Hence, there is “nowhere to go but up” — no matter how incremental.
The problem with this assertion is that it assumes GDP growth as the primary indicator of well-being even as a myriad of uncertainties continue to abound. These uncertainties are felt ones, directly impacting lives and livelihoods, whose pains will not be assuaged by any reported slight improvement in third quarter GDP growth.
Only when the pandemic is finally resolved with better health plans and execution, and when businesses normalize with confidence can we say the worst is over. The green shoots of early external trade gains and manufacturing activities are still uncomfortably tentative. The socio-economic scars will take time to heal.
Similarly, we cannot rely on the currently reported strength of the peso. For the time being, the peso appears strong because the demand for US dollar is weak and imports of raw materials and capital goods are at their lowest in many years.
Both the peso’s appreciation and FX reserves being at an all-time high are evident partly because external borrowings (both by the National Government and the private sector) are flooding the FX market. Investors are also shifting from the US dollar to gold as the price of gold continues to soar. Thus, part of the increase in FX reserves derives from revaluation gains from higher gold prices and not from actual increases in trade or investment bringing in more foreign exchange. When economic fortunes reverse, revaluation gains can be easily wiped out.
Why this commentary about central banking and the BSP?
Two reasons.
First, due to hefty forex reserves, we expect heavier lifting by the BSP. The BSP’s support to fund the fiscal stimulus for cushioning COVID-19’s impact on economic recovery will be sought. Nothing is patently wrong with that.
Traditional monetary tools such as successive reductions in both the reserve requirements and the policy rates have been deployed to ensure sufficient market liquidity. The cost of money has gone down and this should benefit bank borrowers. The BSP also extended emergency loan advances by way of repurchase agreements to support public spending. BSP’s Treasury Department has also been buying government securities as an additional accommodation to the National Government. This is plain and simple monetization of public debt.
Bloomberg’s Daniel Moss last August 13 wrote that “In the not-so-distant past, direct financing of budgets was out of bounds. It was thought to enable reckless pork-barreling and fuel inflation.” He justified this unconventional monetary policy as necessary because “dire times call for unconventional means.”
This approach makes sense today since money velocity continues to decline as more and more money is released by the central bank via RRR reductions and purchases of government debt.
At this time, there is involuntary saving as travel is restricted and public/mass assemblies are prohibited. There is limited incentive for people to shop. The public’s income levels have receded and there is very partial offset coming from cash transfers.
Second, inflation is not expected to be an immediate challenge. With economic recession, domestic inflation could remain modest despite significant injection of central bank money.
Should this grim scenario continue, we might really be looking at a longer time to restart the economy. That means more public spending for mitigation purposes. This might result in inflation returning with a vengeance. Ultimately, the central bank will have to reverse monetary expansion by running down its inventory of government debt.
There must be realization that central banks like the BSP and recently Bank Indonesia, enjoy monetary space because of the pandemic. Once recovery sets in, the hysteresis, or economic scars, like supply disruptions and the weak real sector will prevent a resumption of inflationary pressures for longer.
For balance, Charles Goodhart of the London School of Economics’ Center for Financial Stability shows that there is an alternative view that is premised on a quick reversal of today’s expansionary policy. Lower globalization and modest growth of the labor force could also fuel more rapid price movement.
Goodhart suspends judgment on which view will be predominant after the pandemic. Central banks, including the BSP, should take the cue. A new strain of macroeconomic theory of money and banking seems to be just mutating.
While we are aware of the urgency of the pandemic and current needs, all policy actions can benefit from foresight. Yes, Albert Camus believed that last judgment happens every day. But being conscious of possible outcomes could spare us from learning the hard way through disaster.