Of substance and spirit
Diwa C. Guinigundo
(Conclusion)
The second question is quite obvious: What are the key risks that we face today?
First, the risk of pandemic resurgence. Covid-19 may now be treated like a common flu, but this requires massive rollout of the vaccines plus two boosters. As of Aug. 8, there were about 72 million Filipinos who have completed their two shots or only about 65 percent of the 110 million population. However, only about 17 million have received some boosters, or only about 15 percent of the population have both complete shots and some boosters. The risk of dispensing with the usual health protocols and initiating face-to-face classes should be preempted.
Second, the risk of sustained inflationary trend. Inflation emasculates business activities. If the Russia-Ukraine hostilities continue to rage and global value chains continue to be disrupted, these are bad for business and logistics. Out-of-target inflation for the next few years is very likely. It’s good the BSP has decided to tighten monetary policy. But given that the real policy rate remains negative, we expect to see further increases in the BSP’s policy rate. This should not lead to credit crunch because banks continue to be liquid, but credit might likely be tighter.
Third, our worsening external account. With growth, we see imports precipitously rising while our exports are barely keeping pace. China is projected by the World Bank to slow down to just about 4.3 percent this year following the pandemic upsurge and the very restrictive lockdown. Given our increased trade with China in recent years, we may stand to lose billions of dollars. While Filipino remittances and business outsourcing revenues continue to normalize, the high global oil and food prices could further dampen our external trade. As a result, we see a more volatile peso with strong depreciation bias. If this trend holds, we should prepare for a much weaker peso, higher inflation, and unless the BSP initiates another tightening cycle, capital outflows.
Fourth, economic scarring. This is the longer-term effects of the pandemic and economic lockdown. We have two years of students who were educated through Zoom or distance learning. Needless to say, our young students were vastly challenged in terms of both access to the digital equipment and good connectivity. Thus, the quality of our education has shrunk. And our young high school students rank lowest in reading comprehension, science and math. As digitalization advances, the digital divide will see our country dropping further behind its neighbors. PIDS in December 2021 posed the right questions in coming up with its analysis of what ails Philippine education: “If you pay peanuts, you get monkeys? Education spending and schooling quality in the Philippines.”
And fifth, governance. The SONA of the president needs some fleshing out of its program of government. In particular, there is a noticeable absence of any reference to fighting corruption in government. We may have the best intention, and the best platform of government, but we shall be many times challenged if the issues on good government are not squarely addressed. We lose almost a trillion pesos in graft and corruption annually. One can only imagine how much in public services that could fund, or contribute to the reduction in our budget deficit and the national debt.
And finally, the third question: What do we see for countryside business in Luzon and beyond in the next six years?
Government should always be concerned with small businesses in the Philippines. Last year, PSA statistics showed that about 1.08 million establishments operated, generating total employment of 8.57 million. More than 90 percent of these establishments are microbusiness employing only one to nine workers. The rest consisted of small (10-99), medium (100-199) and large (200 and over) businesses. Nearly half of micro and small businesses are in wholesale and retail trade.
The challenge is that due to the pandemic in the last two years, some 260,000 were permanently closed while about 57,000 temporarily shut down. The availability of jobs in the Philippines is unfortunately unevenly distributed. While the NCR, CALABARZON and Central Luzon had 201,000, 160,000 and 138,000 business establishments, respectively, the rest of the country had very little share.
What should be the direction of public support to small business?
First, the government should encourage business to be more competitive by going digital. More services and government operations should be made accessible on-line. We have seen how the pandemic accelerated the shift to digitalization of procurement of both goods and services. Unfortunately, some business establishments do not have any presence yet in social media. This is the challenge of on-boarding.
Second, the government should take all necessary actions to ensure that markets are contestable, and access to public services is corruption-free. Bribery and payment of commissions elevate the cost of public goods, and people’s access to public services therefore becomes limited. Red tape and kickbacks are antithetical to sustainable business.
Third, the government should have appropriate programs to close the gap in infrastructure, financing, labor upskilling and reskilling, as well as wider efforts to mitigate economic impacts from both internal and external shocks. Beyond public efforts in enhancing credit access, private banks should take the cudgel for their clients. We need banks to be more than fair-weather friends; they need to be counter-cyclical and allow more businesses to access loans even if the business environment is not very hospitable.
All up, we might be seeing sustained increases in market interest rates, weaker peso, and perhaps higher business taxes. Growth could reach a respectable growth rate of around 6.5 percent because it is difficult to forecast higher consumption and business activities due to rapid inflation and external uncertainty. With more competent and upright governance, the likelihood of sound economic growth is stronger.