The Five Stages To Recovery

There are five stages of economic recovery from a black swan like COVID. These are the stability, the relief, the easing, the recovery and the normalization stage.

The Stability Phase – The first reaction to any unpredicted, massive external shock is panic. Depositors rush to withdraw money, corporates to draw down credit lines to boost their cash reserve, and food shelves are depleted. There is the danger of bank runs as rumors abound and people head for the exits. The Government’s priority is to instill confidence by ensuring sufficient liquidity in the banking system. When COVID was recognized in March this year the BSP was quick to inject a P300 billion lifeline to the economy. This was followed by another P500 billion to the Treasury as a backstop. 

Other Central Banks went the additional mile of directly buying corporate loans to ensure credit markets were not frozen. This is called Quantitative Easing. To date the U.S.’ economic lifeboat totals some $10 trillion or  50% of GDP with a further $1.2 trillion now being considered. The European Central Bank has done the same, committing to “all it takes” to jump start its economies. The BSP has not gone this far offering instead a guaranty mechanism which 6 months later has still to meaningfully kick in.

The Relief  Phase -This second phase of recovery involves a fiscal program that will pump prime the economy via direct cash transfers for social amelioration and increased Government spending. According to the ADB, the Philippines’ relief measures amounted to $22 billion or 6% of GDP, the sixth in size in South East Asia after Indonesia’s $116 billion, Singapore’s $89 billion, Thailand’s $84 billion, Malaysia’s $81 billion and Vietnam’s $27 billion. We rank seventh in terms of COVID response per capita and sixth in percentage to GDP. By these measures the Philippines has comparably gone only half-in to salvage the economy. The Philippines has the second highest number of COVID cases after Indonesia.

The Regulatory Easing – In this third stage health protocols are relaxed to alleviate the economic stress. In the Philippines this started in July/August, much later than our neighbors. Our lockdown is said to be the longest and most stringent in the world. This is reflected in our  modest economic recovery in Q3 versus our neighbors..

The Recovery Phase – The fourth phase is where businesses start to steady their feet, workers return while the Government nurses the economy back with continuing fiscal spending and monetary easing.  

The Normalization Phase – The last phase of recovery is the “normalizing” of the economy with the arrival of a vaccine.

Where are we on the various stages of recovery?

We passed the stability and liquidity phase with reasonable success. Despite the growing defaults the banking system is strong. Banks are flush with cash even if not lending. They are simply recycling the excess back into Government securities. 

The second phase, the relief stage, unfortunately never really got going. The Government’s social amelioration rescue was not only insufficient, corruption ate up much of the money designed for the poor. The latter prompted the Treasury to parse out fund releases: Only half of an already modest Bayahihan 2 has been spent two months after its approval.

The third stage, the easing phase, is still incomplete with much of the country in various stages of quarantine with little prospect of further relaxation until a vaccine is universally available in  2022.

We are behind the curve in the fourth stage, our recovery phase. Other countries are on their third and fourth stimulus – the U.S. is working on its fourth – while we are still in Bayanihan 2 and spending only half of funds allocated. This together with continuing health restrictions means we are likely to see a 9-10% contraction in output in 2020, more than double the pain initially estimated by NEDA.

Our limited stimulus is insufficient to generate the aggregate demand needed to jump start the economy. Q3 GDP grew by 8% but this is coming from a very low base. In contrast the U.S. has rebounded aggressively due to its massive fiscal and monetary rescue which has driven up household savings. These savings together with monetary liquidity are the foundation of a V-shaped U.S. recovery next year. They explain why the stock market is at record levels despite rising COVID cases.

The BSP has only recently become more pro-active with an unexpected cut in interest rates last week. It still stubbornly refuses to counter the peso strength which is hurting our OFWs, exports, tourism-to-be and foreign investments. The BSP sees its mandate as controlling inflation and not generating employment which role other Central Banks have now recognized  is the more critical concern.The BSP interest rate cut while laudable and delayed will barely move the economic needle.

The Philippines has no drivers for a rapid economic recovery. Private sector savings have dropped from 34% to 26%. The 2021 Budget is no more than 3% higher in real terms than last year in an economy that has contracted 10%. It is underspending on what little there is. Real foreign investments are down. Tourism is absent. There is huge unused capacity in property and manufacturing. Businesses will be paying down their accumulated debt rather than investing. The fear from COVID is holding back consumer demand. Agriculture is moribund. Remittances, FDIs and international reserves are up but this is a result of multinationals bringing in dollars to shore up the working capital of their local operations, corporates borrowing offshore to stay afloat and OFWs sending money to help their struggling families; more than it is an uptick in recurring flows or a return of confidence. 

So where is aggregate demand supposed to come from? The Government is the only player with the balance sheet and fire power to make things happen but the Treasury is unwilling or unable to spend. It says BBB is the key but infrastructure is a long term proposition. We need a big push now, not 3 years hence. As things stand we will not see a return to normalcy even with a vaccine until at least mid-year 2022.

If this was not bad enough there is a resurgence in politics and corruption which in this country are tied at the hip. 2021 will be the start of the election season with all that comes with it. Already we have the spectacle of our two highest leaders spatting over who attended what, where and when following the devastation of  Ulysses.

And then there is the corruption. The scandals started at the DOH and Philhealth but are now publicly surfacing in the DPWH and the DWSD with many more to come most likely in the big budget departments like Education. In the end it will be corruption and its corrosive effect on policy, execution and our national culture that will bring us to our knees, not COVID.

We witness the same unfortunate dynamic of politics and pandemic in the U.S. where Presidential loser-elect Trump is finding the best path to self-immolation as he poisons the American democratic well.

Christmas 2020 will be a very sad one. Midnight mass, the flurry of shopping and expanded  family gatherings will be constricted. Perhaps this is what Christmas should be, an ode to compassion and service rather than a celebration of consumption, a return to the joys of simplicity rather than the exuberance of excess, a rebirth of the values of who we should be.

Maybe that is the message of what has been a very difficult year.

It Will Be A While


The Q3 GDP numbers are out. As we thought they are better than Q2’s but worse than expected. As Bill Clinton said, it is a matter of perspective. 

Some basics: GDP measures the size of an economy, not its distribution. Thus, our economy grew by some 6% over the last ten years but our income inequality widened.

GDP is an imperfect guide to economic well being. It is subject to the cleanliness of the data and collection methodology. If you go to your hairdresser for a hair cut that goes into GDP, if your wife does it for you it does not. GDP does not capture most of the underground economy. GDP is more useful as a measure of changes in the economy and as comparison with other countries.

GDP does not measure the quality of life. We were the fastest growing ASEAN country for some time but are told we have one of the worst education systems and urban congestions in the world. 

Pre-Covid the Philippines was an economy of some P19 trillion pesos. Compared to last year our GDP dropped by  11.5 % in Q3, better than the contraction in Q2 of 16.9%. Our economy is still falling but at a slower pace. Think a car that is decelerating.

The economy grew by 8% in the last three months. By contrast the U.S. grew by 33% in Q3. Our rebound is much slower than other nations.

Breaking down the Q3 numbers:

  • With the stimulus Government spending rose by 22% and 6% in Q2 and Q3 respectively but was not enough to offset the fall in consumer demand of 15% and 9% in the same periods.
  • Imports dropped more than exports leading to a stronger peso. 
  • Industry and construction took the brunt of the economic contraction followed by services. These make up the bulk of urban employment. This bodes badly for the banks.

To validate the GDP numbers we dove into the latest financials of publicly listed companies that represent the various industries : Ayala Land and SM Prime for retail and property;  Pilipinas Shell and Petron for transportation and as a proxy for economic activity in general; Century Foods and Universal Robina for food manufacturing; Seven Eleven for consumer staples; Max’s for restaurants; Meralco and Aboitiz Power as proxies for the urban and provincial economies; BDO for banks; Stores Specialists for high-end retail; and PAL Holdings and Cebu Pacific for tourism.

Property and retail – Ayala Land’s gross revenues dropped by 48% compared to last year, net income by 72%. SM Prime’s equivalent fell by 29% and 48% respectively.

Transportation – Shell’s Q2 revenues fell by 33% and lost P 6.7 billion vs a profit of P3.7 billion in 2019. Petron’s Q2 gross dropped 40% and lost P13.8 billion from a profit of P2.2 billion last year. Their Q3 numbers will be even worse.

Food manufacturing – Century Foods’ Q3 year to date (YTD) revenues grew by 21%, net profit by 23%. Universal Robina’s revenues were flat at P99.8 billion, profit rose 11%.

Consumer staples – Philippine Seven revenues fell by. 12%. Bottom line went from a profit of P485 million to a loss of P389 million.

Restaurants – Max’s Q3 revenues fell 50%. It incurred a loss of P977 million vs a profit of P493 million last year.

Electricity – Meralco’s and Aboitiz’ Q2 YTD dropped by 13% and 17% respectively in line with GDP numbers. Profits fell by 43% and 57% respectively.

Banking : BDO’s Q3 YTD revenues dropped 5%, profit by 48%. The latter includes huge provisions for defaults.

Luxury retail – Stores Specialists Q2 YTD revenues dropped 32%. It lost P 476 million vs a profit of P 345 million last year. The Q3 numbers should be worse.

Air travel/tourism – PAL’s Q2 YTD revenues dropped by 55% and losses swung by P 17.6 billion. CebuPac’s Q3 YTD revenues fell 70% and bottom line swung negatively by P 21.5 billion.

The corporate results show that except for food processing, the damage to the economy is far worse than revealed by the macro-economic numbers. The lockdowns hurt retail, restaurants, oil and transportation companies most.

The official inflation is 2.5% but it masks the rise in food prices. If one strips out lower oil prices and electricity from the consumer basket, food prices could be north of 5%. Housewives will confirm this as do the good financial results of food companies.

The economy is projected by many to contract by 9-10% this year, double the initial estimate 0f 4-5% of NEDA. The economy is expected to rebound by around 7% in 2021 and 2022. Doing the math, we should not be back to pre-Covid before the second quarter of 2022. Many businesses will not last that long.

Our economic recovery is dependent on COVID. The President announced the recently announced Pfizer and Moderna vaccines will end our problems. He will be disappointed. Even his newly appointed vaccine czar, Gen. Galvez, admits a vaccine will not be universally available before 2022. There are challenges:

  1. The Pfizer and Moderna vaccines have efficacy rates of 90% and 94% respectively but the logistical problems are immense: Pfizer’s vaccine requires storage at -70C which capability we do not yet have. The Moderna vaccine is stable for 30 days at refrigerator temperature and does not require dilution which makes it cheaper and easier to roll out.
  2. It is unclear what is the durability of the vaccines i.e. how long the vaccines are good for.
  3. Supplies will be scarce: Pfizer hopes to produce 1.3  billion doses next year  which is good for less than 10% of the world’s population. Most of the output is destined for Europe. Moderna’s 2021 production of some 500 million will mostly go to the U.S.
  4. The Pfizer and Moderna vaccines will not be universally available for some time. They will probably be approved for emergency use by the end of the year but will take up to spring 2021 for FDA-approved mass distribution.
  5. Vaccines cost money. DOF Sec.Dominguez has budgeted P15 billion for vaccines. Assuming a very conservative P750/dose (two doses are required) this money is good for only 10 million Filipinos or half the 20 million the President wants inoculated. There are other vaccines in the pipeline which should increase access and lower prices but will take time. Russian and Chineses vaccines will be tempting but possibly dangerous.
  6. There will be a huge blackmarket for the vaccines. Like PCR tests today, a vaccine will probably be required for international travel. The rich will get ahead of the poor.
  7. The vaccines could be subject to ethnicity and demographics. The Pfizer and Moderna clinical trials were conducted mainly on caucasians.
  8. The virus may mutate but the vaccines can be more easily reformulated and will not require new massive trials.
  9. Finally there is corruption. If critical PPEs and test kits were overpriced by as much as four times, imagine the padding on a life-saving vaccine. The vaccine could well end up being the mother of all heists on the Filipino people.

The Philippines is in for some very hard times now compounded by natural disasters. The Treasury is reluctant to increase stimulus and expand the social safety net. Apparently we have not spent most of the Bayanihan 2 stimulus two months after its approval (The U.S. is working on its fourth stimulus package.) The BSP reports banks are reluctant to lend despite their liquidity. Banks are cutting credit lines indiscriminately by industry. The peso continues to strengthen making exports, tourism and foreign investments less competitive. Food inflation is on the rise. Many businesses are on their last legs and could well close after Christmas.

We may not be seeing the economic hardship but it is there. In some quarters of Manila beggars are growing daily and becoming more aggressive. They are now demanding not asking for money. A major mall owner is making contingency plans for looting particularly as we get closer to Christmas. None of the these stories are being carried by media for fear of Government reprisal. When the social dam breaks it will come suddenly without warning.

Yes, the country is in deeper trouble than we think. 2021 could be a year of living dangerously.

Truths and Otherwise From the U.S. Election

“Democracy is an act, not a state.”- The late Congressman John Lewis.

Here are some truths and falsehoods from the U.S. elections. 

The Truths (Mostly)

  1. Joe Biden won the Presidential election.The Russian State News agency has refused to concede claiming the elections were rigged. It knows of what it speaks having first hand knowledge thereof.
  2. As of writing, even prior to official confirmation, heads of states including the major European countries, Canada, Japan and Pres. Duterte have sent Biden their congratulations. So have former GOP President George W. Bush and two Republican Senators (out of 53). This must be how much they want Trump out. President Putin is holding off pending Russia’s canvassing of results.
  3. Biden gave his acceptance speech before his opponent gave his perhaps never-to-be concession speech. This, it is believed, is a record.
  4. Jared and Melania have reportedly asked Donald to concede but not the boys. Don, Jr. and Eric want to know what that means. 
  5. Trump will be only one of four Presidents in American history who did not win a re-election. The  others are Gerald Ford in 1976, Jimmy Carter in 1980 and George Bush in 1992. Mr. Trump believes he should be in better company.
  6. Mr Trump was not fired by 75 million American voters. He was defeated by a migrant born in Wuhan, China who managed to move to the U.S. despite the Wall.
  7. China Premier Xi has still not sent Biden best wishes. Perhaps he is waiting for Biden to first thank him for China’s successful export of the virus before reciprocating.
  8. Joe Biden garnered some 75 million votes, a record of any president. Trump got some 70 million votes also a record for any Republican candidate. Despite COVID and its economic toll, 41% of voters say they were better off than four years ago. Fully 49% said the economy was good or excellent with 35% saying the economy was the most important issue. If some 200,000 voters in six swing states had voted otherwise, Trump would have been re-elected. That is 0.0013 of the 150 million total votes cast. Now you know why Trump is sulking.
  9. Biden’s Electoral College victory was due to the suburbanites but at the margin to the black votes in Pennsylvania and possibly Georgia; and the Mexicans in Arizona and Nevada. Yet Trump improved his performance with Blacks (12%) and Latinos (32%) compared to 2016. Employment among Blacks and Hispanics was at record highs pre-COVID. Now you know why Putin is sulking.
  10. COVID has been cited as the main reason for Trump’s defeat. Pfizer, a major pharmaceutical company, announced in the last 24 hours its vaccine has proven to be 90% effective after thousands of trials. Astra Zeneca, another major pharma, simultaneously disclosed its vaccine could be out next month subject to FDA approval. If this information had been available two weeks earlier Trump could well have been re-elected. Phew. We just dodged a bullet.
  11. The U.S. elections are not over. In Georgia there are two Senatorial races in a dead heat forcing a run-off on Jan 5. If the Democrats win both seats, the Senate will be divided 50-50 but Democrats will effectively be the  majority since VP Kamala Harris can cast the deciding vote. This will affect Biden’s major initiatives on the economy, climate change and healthcare, his Cabinet and any Supreme Court appointments, and the Democrats’ path in the next decade. The Democrats and Republicans will be going all in for these vital Georgia races. It is estimated they will spend $800 million, four times what they spent for the Nov. 3 elections, to nail the two seats. Barack and, more important, hopefully Michelle will be dispatched ASAP to rally the troops.
  12. The Presidential election is not officially over. Biden becomes President only after Congress confirms the results. This is the process: The county canvassers have to finalize and submit their vote counts to the State Canvassing Boards for certification by Nov. 23 2020. The Board must submit its tally to the Electoral College by Dec. 8 2020, the so-called “safe-harbor” date. After this time, under the Electoral Count Act of 1887 states will be free from any legal challenges i.e. Trump has until Dec. 8 for his legal suits. The College must certify the results by Dec. 14 2020 which it then sends to Congress for the latter’s confirmation on Jan. 6 2021.
  13. Should Biden die before the Electoral College certification on Dec 14, the Democratic National Committee can designate his replacement and persuade the Electoral College delegates to accept the nominee which they are likely to do. If Biden dies after the Congressional certification in January, Kamala Harris as VP takes over as President. The President will be sworn into office on Jan. 20 2021.
  14. Kamal Harris is the first female and person of color to be elected Vice-President. She would also be the first such President should Biden pass or be incapacitated.
  15. The Democratic Party has since FDR always been the party of the blue collar worker many of whom are male, non-college whites. The latter are now together with white Christian fundamentalists the base of Trump’s Republican Party.
  16. The small margin of victory should be a lesson for Democrats. They cannot rest on their laurels especially with the 2022 mid-terms around the corner and COVID and the economy still in crisis. They have to hit the ground running.
  17. Twitter and Facebook confirm they will fact check Trump’s social media posts after Jan. 20 2021 and block those considered incendiary or untrue. Under their current protocols, these two companies allow leeway only for politicians in or contending for high office for what they say. As an ordinary citizen Trump will be strictly monitored for his tweets. Without the lies Trump could lose many of his 88 million followers and the political influence that comes with them.

The Falsehoods (Mostly)

And now for what Trump adviser Kellyanne Conway has dubbed as the “alternative facts” aka fake news:

1. Mr. Trump is renaming Mar-el-Lago the White House so he can prove he never left it.

2. Mr. Trump is leaving the White House in a straight jacket.

3. The Trumps have offered to host the Bidens for tea and show them around the premises.

4. Mr. Trump will run for Governor of Florida after which he will sue to have the state secede from the Union.

5. Trump and Republican Senators Ted Cruz, Marco Rubio, and Lindsay Graham have a common prayer group.

6. The CEOs of Pfizer and Astra Zeneca are Democrats.

7. Melania has renounced her U.S. citizenship and returning to her native Slovenia where votes are properly counted.

8. Melania has filed for separation of property from her husband so her assets will be excluded from the $421 million in debts he needs to repay.

9. Jared and the boys profited in the stock market in the last four years from prior knowledge of Trump’s Twitter feeds.

10. Hillary Clinton will be the Democrat National Committee’s designate in the event Biden dies before his Congressional certification.

11. The Trump family is spending Christmas in Vladimir’s “dacha” in the Bosphorus.

12. Rudy Giuliani, the President’s lawyer, is applying for political asylum in some Eastern European nation, not Slovenia.

Thank You, America

The U.S. Presidential elections are almost over. On the trend it appears America will have a new winner and, more important, a new loser. Donald Trump looks to be leaving the White House the only question being whether with his head high or kicking and screaming with his personal belongings strewn all over the South Lawn. We will miss Melania.

Donald is not a happy camper. With early leads in all the swing states he thought he would once again upset all predictions and win a second term. He has threatened to challenge the final results in court. The cash-strapped Republican Party will have to pay the legal costs for what seems a fruitless endeavor given the various jurisdictions, the minimal numbers involved and the frailty of the evidence.

Out of office Trump faces a reported $421 million in debt, a couple of investigations by the Southern District of New York, a continuing tax audit, no more official business in Mar-el-Lago, his golf courses and the Washington Trump Hotel at a time when COVID is ravaging the hospitality industry; and a diminished brand. Joey Antonio of Century Properties must rue the day he paid to affix the Trump name to his real estate projects. The brand has, certainly internationally, arguably become a symbol of shame and derision rather than of glamor and success.

The election is important to non-Americans because of its impact on geo-politics, trade and the environment. As one of the largest democracies in the world – India is the largest – the U.S. showed how things are supposed to be. It is not about the final outcome but about the process of determining the victors and the vanquished.

The election was notable at various levels. First the elections humbled many, not only Trump.

The elections humbled the Republicans as a party. The polls suggested a loss but not via Georgia a red state which has has not gone Democrat since Jimmy Carter in 1977. There may be a recount but this is a phenomenon in itself.

The Democrats were arguably even more humbled. Polls predicted a Blue Sweep in the Presidency, the Senate and the House. That did not happen. Biden could end up winning the Electoral votes by as much as 306-229 but the race was far closer than that. Biden’s likely margin of victory in the swing states of Wisconsin, Pennsylvania, Georgia, Arizona, and Nevada will collectively only be a couple of hundred thousand votes out of a total turn-out of some 150 million. In some states the difference was a few thousand. Trump was competitive till the end.

The Republicans will most likely retain the Senate. They also picked up a few seats in the House to the chagrin of Speaker Pelosi. No, this was not a Democratic tsunami by any stretch.

The elections proved the pollsters and pundits wrong. They predicted a Democrat landslide both at the national and state level. Biden was forecast to win the over-all vote by 5-8%, the final tally will be closer to half that gap. This will be the second presidential election that the polls got wrong and speaks to the sample demographics. My guess is that Republicans are more circumspect in disclosing their choices while Democrats and independents are more candid.

The elections bring again into question the U.S. Electoral College system which allocates votes not based on proportionality but based on individual states’ designated votes in the College; and a winner-take-all system where the winner be it by a majority of only one vote garners all the electoral votes of the particular State. This was designed by the Founding Fathers to protect the smaller States but has become effectively a rule of the minority with almost all Presidential elections now being determined by a handful of States in the Mid-West (Michigan, Ohio, Minnesota, Pennsylvania, and Wisconsin), the South West (Arizona Colorado and Nevada);  and Florida. The winner-take-all system heightens political and emotional tensions which aggravate the polarization of the populace. Only Maine and Nebraska allow for a proportionate distribution of their Electoral College votes.

The elections highlighted the binary nature of American voters. Despite his failings, Trump has over the last four years consistently held on to a base of 40-45% of the population. This speaks to the anger, conservatism and arguably racism of a large segment of America. Even if Donald loses, his supporters and Trumpism as an ideology are not going to disappear. It reflects the broader phenomenon worldwide whether it be in Brazil, China, Turkey, Russia or the Philippines where strongmen have a genuine appeal to the people.

The U.S. will have midterm elections in two years for the House and the Senate so politicians will be looking at the 2020 results for lessons to be learnt. The irony is that while and because the electorate is so polarized, politicians seeking national office must bridge the gap between the divisiveness, seek the center of the political spectrum rather than the extremes. Biden won because he represented the middle ground not the overly left as espoused by Bernie Sanders nor the extreme right. The keys are the independents and moderates on both sides of the aisle. The challenge for Republicans is how to distance themselves from Trumpism while keeping the man within reach for his base.

This is good news for America. With Trump gone Republican Senators will have less pressure to be acrimonious. Biden has worked with Republicans in the past and has a relationship with Mitch McConnell, the likely Senate Majority floor leader. The Republicans also have a few moderates including Senators Mitt Romney and Susan Collins who have not been afraid to defy the party line. This means more room for bi-partisanship in policies. The Democrats lost a couple of seats in the House which is a humbling experience after their success in the 2018 mid-terms and the election of Biden. Speaker Pelosi (D) will be more amenable to reaching across the aisle for compromise.  

The markets cheered the combination of a Biden Presidency and a divided Legislature  with a strong run-up. A Republican Senate means corporate income taxes are unlikely to be raised. A much needed stimulus will likely be passed not as large as the Democrats want but not as small as the Republicans advocate. Trade and health policies will be more predictable and fundamentally based which is what businesses look for. The U.S.-China tensions will not disappear since even Biden favors a more accountable China but we can expect more of a quiet conversation than invectives hurled across the Pacific. The tariff wars that Trump favored even against the U.S.’ European allies will be scaled down. Geo-politically there will be a more united front against the incursions of Russia and China. Most important the U.S. will be more pro-active on climate change which for the world is the best reason to be optimistic on a Biden Presidency.

Human rights will return to the forefront in foreign policy. This has implications for relations with China and other nations similarly situated.

The most important take-away from the U.S. elections is democracy, however flawed, works but only if one is on top of it. As Churchill said, it is not perfect but is the best we have. It elects people who are highly deficient but also corrects itself when it does. It proves democratic institutions – the Executive, the Legislature, the Judiciary and responsible media – must be stronger than the people that populate them and therefore must be defended. 

The U.S. elections affirmed the power of the people which is a lesson for us. It showed our destiny is still in our hands if only we believe in ourselves, if we know that change is possible, that we can be better than we are. But it starts with us voicing our voice, a person at a time, so it becomes a message to our leaders. For this alone, for this example of hope, the world owes Americans a debt of gratitude. Thank you, America.