“It’s About The Economy, Stupid!
Those were the words ascribed to Ex-US President Bill Clinton (but actually originated by his political strategist, James Carville) as to how he trounced George H. W.Bush in the 1996 U.S. elections. The consummate politician, Clinton knew that voters would overlook all his peccadilloes (including Monica Lewinsky and smoking pot which he did not inhale) if he could deliver jobs and significantly narrow the fiscal deficit; which he did.
The BBM Presidency is facing a rough patch with one year into the midterms. If the Administration allows for the slide it could politically be in trouble. Even DoF Sec. Ralph Recto admitted that “we have to be more realistic about our growth rate this year.”
These are some of the Administration headwinds:
CORRUPTION – Our economic managers always boast our GDP growth over the last decade of around 6% p.a. is higher than our neighbors so why economically are we falling behind? One answer is corruption. Research shows private companies lose about 5% of revenues to inefficiencies and fraud. Applying this number to our GDP, over the last 10 years our real growth would have been flat to negative since leakages do not add to productivity or capacity. When 20-30% of a road contract goes to bribes, either the contractor builds under specs requiring future repair or is overpriced by that amount (what I call infra-shrinkflation). The big bribes usually end up in some Swiss bank account so are never recycled back into the economy. So we have falling capital productivity – the outputs from the infra investments are below the inputs – which when combined with rising cost of capital from higher for longer interest rates on our debt has resulted in what I term “negative capital productivity”. We are spending more than we are reaping.
The corruption covers bribes to petty clerks, policemen, BIR and Customs examiners, judges, elected officials, padded contracts and sweetheart corporate deals. In the GSIS issues of governance have recently surfaced particularly the reported approval of investments by the CEO just below the limit where he would have to seek formal Board review and consent.
EXCESSIVE GOVERNMENT SPENDING – This century our fiscal deficits have steadily risen from excessive Government spending. The bloat in the bureaucracy is such that officially Government salaries now account for 50% of all Government and private sector salaries yet the Government only contributes some 20-25% of GDP i.e. each Government employee is 50% less productive than his private sector counterpart resulting in what I call “negative labor productivity”. The Government perhaps sees this as stimulus but there are better uses of taxpayer money like promoting strategic investments, the preferred driver of an economy. Government employees are involved in back-end regulation, administration and security so it is understandable their productivity should be lower than say private sector factory workers; but this is only more reason we should be slashing the bureaucratic fat initially through a temporary freeze hire. If the PH was a company, it has been steadily losing money every year, financing the losses with more expensive debt without any attempt to bring costs down. There is no shame in downsizing. The biggest Silicon Valley companies and banks are doing so right now.
To finance its profligate spending the Government has amassed P15 trillion in debt (and is arguably overprinting pesos but more on that later). At its average cost of money which I suspect is around 5% the interest bill is P750 billion or 13% of our National Budget.
The Government will claim the process of financial restructuring has started withe the privatization of NAIA. We are starting to sell our crown jewels. Yet the Government take from the NAIA privatization for fees and revenue sharing does not reach P50 billion annually which is only some 7% of our interest bill. And already NAIA is considering increasing rental rates even for essential suppliers which will drive up ticket prices to passengers without an immediate improvement in facilities. The inflation creep is on.
INFLATION – After some respite inflation has ticked up again despite tight monetary policies. This begs the question whether high interest rates alone are sufficient to bring down prices or whether inflation is due to “cost-push’ factors where businesses pass on to consumers their higher cost of materials, inflationary expectations and loans rather than “demand pull” where over=consumption is driving prices higher. Inflation could also be fueled by an under recognized increase in our money supply (adjusted for velocity) and peso printing to cover fiscal deficits that can no longer be financed with debt. When the supply of money exceeds the availability of goods and services then prices rise as we are seeing in the exploding values of real estate that the middle class and the young can no longer afford. If one combines the liabilities from money supply with our financial debt our ratio of liabilities to GDP is some 1.6x, not good. Inflation could also cause a slide in the peso which recently breached the psychological level of P57/USD (although this is due to a stronger dollar than a weak peso at this time.)
The world economic back drop is unfavorable with US interest rates remaining elevated which sets the mark for BSP interest rates. The latter cannot be lowered without sacrificing the peso so it is a challenge.
NO LEADERSHIP – This Administration is lacking in energy and guidance. The pronouncements of the Presidential Communications Office for love, unity and compassion are designed to hypnotize the nation (Are they AI generated?) The President is most comfortable in the pomp, circumstance and relaxation of foreign travels which have still to bear fruit in promised investments. Our senior economic team prefers to push from behind in the quiet when what we need is front end leadership with a clear vision and quick-acting execution that the people can immediately relate to; not some 30,000 feet, 5 Year Development Plan the masses do not know of, care of nor may well not survive. I suggest developing bite-sized PPPs with LGUS and NGOs that provide immediate jobs, education and health care to the Filipino in a bottom-up approach to development. This will bypass the national bureaucracy with its inefficiencies and occasions for graft.
POLITICAL MACHINATIONS – Our political leaders are more focused on perpetuating themselves than helping the economy. They claim Cha-Cha will improve investments but it is really a wasteful, brazen attempt to move to a Parliamentary system because they have no viable horse in the 2028 Presidential race (What about the FL?). I call it “political corruption creep” where a seemingly benign economic proposition is quietly made cancerous and devolved into a political monster.
EDUCATION – The PH is consistently ranked second to last in international rankings for math, science and comprehension. We are short some 200,000 classrooms. We will not survive the new knowledge world of technology. AI will disrupt much of the BPO industry that we rely on so much. Education is a generation project and we have not even started to address it.
MISALLOCATION OF ECONOMIC RESOURCES – Left to itself without Government guidance, the private sector has concentrated on the low-lying fruit of urban-centric construction and financial services while neglecting the existentially vital agriculture and export sectors. Today we are by some accounts the biggest world importer of rice at a time when climate change is affecting international supply.
As discussed above, the resource mis-allocation is reflected in an oversized bureaucracy that is delivering less in services than warranted by its expense.
GEO POLITICS – We are deeply committed to US foreign policy and China retaliation. This is the Administration’s political security blanket as it was for the late Ferdinand Marcos’ … until it was not. Middle East tensions could affect the price of oil.
LOSS OF TRUST – There is seeming suspicion of anything that is said or done by Government. The President’s poll rating has dropped significantly in performance (-13%) and trust(-16%). Pollsters say the latter is the more important metric as it reflects the confidence, love, values and respect in our leader rather than performance which is more related to one’s position e.g. the President has a harder job than the VP so he is rated differently than the VP.
Recent social media reports about prohibited use of drugs at the highest level adds to the issue of judgement and trust.
We are just one year away from the mid-term elections for local officials and half the Senate. The outcome could affect the 2028 Presidential scenario. Yet there is surprisingly a nonchalance and a lethargy in Government as if things will get better on their own. In my opinion the only way for the Administration to reverse what is a decline in Team BBM’s popularity is to urgently address the economy and of course the corruption. Most of the indiscretions of our leaders could be forgiven if Filipinos can get three meals a day, educate their kids and take care of their elderly.
As Clinton successfully pointed out: “It is about the economy, stupid!”
Heneral Lunacy 