The wonders of economics

Published April 20, 2021, 6:00 AM

by George S. Chua

I am indeed fortunate that my late father sent me to a great school for my MBA, which in 2020 was number 2 in the Global MBA Ranking.  In addition, I had a happy career in banking as a senior executive in a number of financial institutions.  Nonetheless, I still get confused with the relationship between GDP growth rate, unemployment, interest rates, exchange rates and inflation rates.

The IMF 2021 forecast Philippine GDP growth rate will be 6.6% and recently adjusted upward to 6.9%, not bad considering our GDP went down by 9.6% (adjusted) in 2020. Certainly things are looking up, and somebody must be doing an excellent job of making this happen.  It would only be intuitive to think that there is an inverse correlation between GDP growth rate and the unemployment/underemployment rate.

Our unemployment rate peaked at 17.7%, with underemployment at 18,9% in April, 2020.  Based on the latest figures from our PSA, as of February, 2021 unemployment is at 8.8% with underemployment at 18.2%.  With our current situation, it is likely that the unemployment rate will get worse in April and perhaps beyond.  How does this all compare to the pre-COVID pandemic?  In 2019, our GDP growth rate was at 6% with the January, 2020 unemployment at 5.3% and the underemployment rate at 14.8%. 

Of course we would all love to see our economy grow by over 6% in 2021.  However, doing a little math using extrapolation, and facing the reality of the economic effect of our current quarantine restrictions, I think we would be really lucky if our GDP growth just sneaks back into positive territory. 

Exchange rates are a function of demand and supply and the Philippine peso seems to have been holding up keeping its value.  This is because while our exports and OFW remittances have dropped, thereby decreasing our supply of dollars, our imports or use of dollars have dropped even more due to the slowdown in our economy.  However, once we go full blast in terms of importing and paying for the COVID vaccines, and our economy springs back to life there will be more demand for dollars causing the peso to weaken perhaps back to 50 to 1.

Due to a restricted economy with high unemployment and underemployment, there will be a lack of demand.  With nothing to fuel inflation, interest rates should be under control for now.  While the government has been providing a lot of economic stimulus through spending for emergency measures, hiring thousands of contact tracers, providing relief goods and funds to the general population, it is uncertain if these funds really end up for their intended use or beneficiaries, but that is another story.

Without a doubt, spending is limited because most entertainment, travel and tourism businesses are closed which prevents the flow of money into these major industries.  The money that would have otherwise been spent on consumption now ends up as savings.  With the limited demand for borrowing and the cautious approach to credit by the lending institutions, the banks are also awash with cash. 

I think it is only a matter of time that people who have investible funds realize that keeping their money in the bank does not do anything for them and the locally available investment notes and bonds provides such a miniscule return that it is not worth their while.  This will ultimately result in the flow of money into equities in the Philippine Stock Exchange or investments outside the country.

Don’t feel so bad not being able to rationalize all these things, if these economic experts are so good in predicting the future, they would all be rich by now.

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