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A case of self-flagellation? After the disease, the social unrest

a case of self flagellation after the disease the social unrest 816x543 - A case of self-flagellation? After the disease, the social unrest

 

Guinigundo chart 1 020421 - A case of self-flagellation? After the disease, the social unrest

Good Friday is a good two months away. But are we seeing early signs of self-flagellation? A few days ago, President Duterte admitted the Philippine economy is “in bad shape” even as he clarified that the administration is “trying its best to keep the country afloat.”

He went on to say that the country’s “greatest disadvantage” is being poor. Despite this hurdle, the President explained that his administration succeeded in allocating funds to secure vaccines for most of the Filipino population of 110 million. It’s a game for rich countries, he announced, as vaccines end up with the highest bidder.

It was good vaccine czar Carlito G. Galvez, Jr., informed the President in the same press conference that the Philippine government would actually be finalizing the supply agreements for around 108 million doses but more are coming to reach a total of 146–148 million doses.

Finance Secretary Carlos Dominguez III also assured the President and the people by disclosing that we intend to secure 178 million doses for 92 million Filipinos, more than the initial target of 148 million doses for only 70 million. Vaccine supplies may be sourced from any or all of the following: AstraZeneca, Johnson and Johnson, Moderna, Novavax, Pfizer, and Sinovac. Additional 40 million doses may likely come from the COVAX facility which is a global initiative to ensure equitable access to life-saving vaccines.

So where is the President coming from in confessing the bad shape of the local economy under his watch?

Comparing the Philippines’ GDP (gross domestic product) contraction to the performance of other major Asian economies should be enough reason to convince the Palace the country’s economic performance in 2020 was not only bad, it was dismal.

As Bangko Sentral ng Pilipinas (BSP) Monetary Board Member Felipe M. Medalla predicted during the Foundation for Economic Freedom’s Paderanga-Varela Memorial Lecture early this week, positive economic growth in 2021 is possible only because of base effects. It would be easy to demonstrate our ability to grow because last year’s hurdle was rather below the ground.

We shall witness “normal growth” only in 2022 because the economic scar on consumer spending remains a binding constraint. Growth for 2021 “will be driven by relaxation of constraints that the government itself has imposed on growth.” Next year will test the confidence of the consumers in the government’s ability to effectively neutralize COVID-19.

Of course, Medalla’s outlook is anchored on successful vaccination of the critical section of the population — the frontliners and the elderly, and strong testing capability in this warm country of mainly young people. He also pinned hope on the country’s good public finance, high foreign exchange reserves level, and strong banks, the great buffers prior to the pandemic.

What Medalla seems to be saying is that we don’t have to flog ourselves. Our own view is that with some exceptions in some areas, the Philippines really did its homework in the last 30 years. Before the virus, capital formation was rising. There was room for pushing productivity to a much higher level.  It was unfortunate the health sector was missed in the general scheme of things. While the economy performed quite well for two decades, it could have even surpassed itself if the imperatives of reforms, especially in public health and market competition, were given due course in earlier years.

The President’s candid remarks would have gained credence if he were only more decisive in demanding the resignation of some insensitive and incompetent health authorities. What could be worse than dropping the ball not once but many times.

Poor health mitigation led to severe quarantine rules that devastated production, jobs, and income. It was so poor our pre-pandemic buffers in monetary, financial, and fiscal areas were rendered useless.

Therefore, we did not have to rank last in real GDP growth in 2020 among selected countries, and rank last again in recovering pre-pandemic growth level from the deepest recession in decades. Our economic managers have been trying hard to deliver on their mandates and macroeconomic targets. Domestic and foreign investors have placed their trust in our over 20-year sustained positive economic growth. Leveraging on these elements should have put us ahead but we stalled so we were left behind. We hate to lose by default.

We might also flog ourselves through the 2021 national budget. The budget appears to be more concerned with the activities of the National Task Force to End Local Communist Armed Conflict than with flattening the pandemic and ushering in economic revival. Its budget was reportedly jacked up over elevenfold from P1.7 billion in 2020 to P19.13 billion in 2021. The difference is easily the cost of vaccines for some 13 million Filipinos. It is mind-blowing that we should detract our attention from national survival to fighting communist insurgency which has been with us for decades.

To make matters worse, our funds for infrastructure and social services could hardly qualify as economic stimulus because first, a large part would continue to support those who were displaced by the pandemic, those who lost their jobs and their business. Nothing wrong with these but obviously we need additional allocation for directly stimulating the economy. Second, our public works authorities should increase their low utilization rate and submit a list of truly new projects for more value added. The point is to add increments for 2021 that the national income accounts could capture and generate enough jobs to raise consumer spending. More support for new industries that emerged during the pandemic should also be considered because they could thrive without physical engagement.

Even the ASEAN+3 Macroeconomic Research Office (AMRO) in its press release dated Jan. 29 following the virtual Annual Consultation with the Philippine Authorities from Jan. 11 to 26 called for “further policy support and a faster rollout of vaccines … for the Philippine economy to secure a more solid recovery.”  AMRO added the slower-than-expected global recovery to the downside risks in the Philippine growth story.

Both the International Monetary Fund (IMF) and the AMRO would do well to remind the Philippines that while revenue prospects in this time of uncertain economic recovery are not too promising, fiscal policy support should be sustained. Treasurer Leah de Leon may have to rely more on the domestic capital markets than on the borrowed funds from the BSP. This is still a good time to help further develop and deepen the government bond market. Yes, national government debt hit a high of P9.8 trillion or some 55% of GDP at the end of 2020. But we agree with Finance Chief Economist Gil Beltran that with the national government’s borrowing cost lower than the expected real GDP for 2021 of 6.5-7.5%, the ratio continues to be manageable. As Paul Krugman, in his latest New York Times column, described the very much similar US debt situation: “borrowing now will not store up big burdens for the future: any debt we incur will tend to melt away as a share of GDP over time.” 

Finally, what should add worry to us this year are the social repercussions of COVID-19 on Filipino society.

Health pandemics at various points in world history clearly drew the line among social classes. IMF’s Philip Barrett, Sophia Chen, and Nan Li showed that in Paris in the early 1800s, “the spread of [cholera] heightened class tensions, as the rich blamed the poor for spreading the disease and the poor thought they were being poisoned” (see “COVID’s Long Shadow: Social Repercussions of Pandemics”). As the tension escalated, the blame went all the way up to the king and triggered a huge anti-government demonstration on the barricaded streets. Who could ever forget watching this scene immortalized in Victor Hugo’s Les Misérables at the West End?

The uprising elicited government repression and, in turn, caused further public revolt. The IMF blog indicated that disease outbreaks cast long shadows of social repercussions like “shaping politics, subverting the social order and some ultimately causing social unrest.”

Good Friday is important but the other 364 days are equally important for reflection and doing the right things.

 

Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001–2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.

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