The 2021 SONA (More Or Less)

(In a few weeks the President will be delivering his State of the Nation address, his last under current arrangements*. The SONA is an annual rite whose only purpose is to assure the public all is well whatever the circumstances. It is part perspective, part swagger, part bully pulpit, part cheer leading, part threats, part promise and always political. It is the affirmation that truth is in the eye of the beholder.

The opinions below do not necessarily reflect those of this writer.)

” My beloved Kababayans,

This will be my last official address to you as your President. The last five years have been tiring and I look forward to passing the torch to my next of kin and riding my Harley into the sunset. As you know I have not always been well.

When I took office in 2016, I inherited a nation that we were told was all good but in reality masked many problems which I sought to resolve.

There was a drug crisis which had been festering for years and was killing our youth, destroying families, and endangering the lives of ordinary citizens who daily lived in fear. I saw drugs as the existential problem of the country and I vowed to crush it. My tactics were often heavy handed and drew the criticism of human rights activists locally and abroad; but this was the only way to combat a disease that had been ignored by the previous Administration and that endangered the future of this country. I am being threatened by the International Criminal Court for crimes against humanity. To them I say bring it on. Today, as a result of my efforts the Philippines is a safer country for all.

I inherited a country whose territory had been annexed by China. An international tribunal confirmed our ownership of the West Philippine seas but the last Government had done nothing to enforce the ruling. Having laden me with the problem those same yellow people now accuse me of bowing to China in return for economic and medical aid. Where were they when the country needed them? Did they militarily defend our sovereignty which they now want me to do putting at risk our soldiers and their families? What solutions are they offering other than mouth off? Possession is 90% of the law and China has possession of our territory. They also have the military capability to wipe out any attempts to recover our land.

Despite claims of wonderful economic growth, our income inequality widened to a record level. The rich got richer while the poor got poorer. I took on the oligarchs who are responsible for this widening of the economic gap. I forced Manila Water and Maynilad to renegotiate their onerous terms of service. I mandated the telcos to improve their service. I shuttered Mighty Corp., the tobacco company which had been allowed by my predecessors to evade billions of pesos in taxes and forced them to cough up P30 billion in restitution. Under my watch Congress disenfranchised ABS-CBN as a warning that companies imbued with public interest must behave responsibly. 

 I clamped down on corruption. I was not altogether successful and corruption remains a big problem as we saw in Philhealth; but  I am working on it. Erring officials have been charged as I speak.

We were making progress as a nation until COVID hit us as it did the world over. I responded immediately to the pandemic by closing our borders even as other countries vacillated. I quickly formed a task force – the IATF – composed of reputable scientists and military officials to develop health protocols which have been responsible for containing the virus. These protocols will be in force until we control the pandemic which will be sooner than you think.

I put DOH Sec. Francisco Duque in charge of the IATF. Many criticize him for being incompetent and even worse but I believe in his leadership, his honesty and his abilities. We are where we are with COVID because of his untiring work.

Another busy man is Energy Sec. Cusi. He has the unique role of being a full time member of my Cabinet while running equally full time my political party, PDP-Laban, so he should be excused if he does not always get our power supply right.

The economy has suffered from the pandemic. Pre-COVID we had the highest annual growth among our neighbors. My economic team led by my valedictorian classmate Sonny Dominguez secured our highest credit rating ever. He is responsible for improving our international competitiveness by lowering corporate income taxes; launching Bayanihan 1 and 2 relief programs for the poor; and ensuring we have enough money for social relief, jobs, health and infrastructure. International banks are eager to lend us all we want but we shall not borrow more than we can repay. We are working on easing foreign ownership restrictions for certain industries to attract outside investment. The results will benefit generations to come.

Our BPO industry is thriving although admittedly I had little to do with that.

In the one year of the pandemic, our peso strengthened which attests to the resiliency of our economy, the depth of our reserves, and the confidence of investors. Sonny has maintained a disciplined fiscal policy. BSP Gov. Ben Diokno has lowered interest rates to help businesses while strengthening our financial system. The economy is awash in cash for those who need it. The DBP and the Land Bank are eager to help small businesses and strategically important industries like tourism and aviation. 

We continue to educate our children through innovative distance learning programs.

Despite the economic hardships our people continue to overwhelmingly approve of my Government. We have peace and security. The Communist insurgency has been contained although pockets of resistance still remain which we are crushing with a combination of military might and public targeting and shaming of their sympathizers. Our success is due to the courage and dedication of our men and women in uniform. To them we owe a tremendous debt of gratitude not only in words but in deeds. I upgraded the salaries and benefits of the police and military to what they deserve.

The key to our nation’s recovery is in vaccination. We have enough orders to immunize 70-80% of the population by this time next year which will get us to herd immunity and allow life to  return to normal. We will be able to re-open our borders to tourism. Our infrastructure projects will be in full swing creating jobs. We will have lift-off. 

My term will be ending just as all this is happening so while I will not be able to claim credit for our recovery, those who I shall endorse to succeed me can. I hope you will believe in them as you have believed in me.

The Opposition and those, athletically endowed or not, who stand in the way of stability, security, integrity and progress; claim they can do better than I. Yet they have no programs, no organization, no money, no mandate and no candidate, Everybody of substance has declined their invitation to run. They want to return us to their world of elitism and economic feudalism. They love to talk.

We are past our darkest hour, dawn is upon us. We just have to be steadfast, disciplined and trust in ourselves. God is with us and we shall prevail.

I am honored and humbled for having been allowed to serve you all these years. I will leave you but never forget you.

Mabuhay ang Pilipino! I love you all.”

{* If in 2022 Digong ran for VP and won and the elected President, say Sara, resigned or was incapacitated, then Digong would again be President.)

How Has Big Business fared Under COVID?

Our economic pains continue. We are officially on a Rolling Two Week Economic Plan or whatever the IATF decides in between. After declining 9.5% in 2020, GDP fell again by 4.2% in the first quarter. Household consumption dropped by 4.8%, exports and imports by 9% and 8.3% respectively. Gross capital formation i.e. investments collapsed by 18.3%. Food prices have risen raising the specter of “stagflation”, the deadly combination of inflation and stagnation. Q2 should see some improvement but largely because of the “base effect” of even poorer numbers last year.

Small enterprises have gotten crushed but how is Big Business doing? 

To answer this I looked at the full year 2020 and first quarter 2021 results of some publicly listed companies that are representative, albeit imperfectly, of the economy and specific industries.

I. The Economy

A. Pilipinas Shell – Fuel sales are a measure of macro-economic activity. Shell’s revenues collapsed by 28% in 2020 and again by 17% in Q1 2021. Shell lost P16.2 billion in 2020 vs a profit of P5.6 billion the previous year. It turned a profit of P1.0 billion in Q1 as the economy started to hollow out.

B. Meralco – Electricity usage should parallel economic activity. Electricity is made up of power generation, transmission and distribution. Meralco is in the latter for the NCR and surrounding areas which account for 70% of the economy. Meralco’s revenues fell by 13% and 8% in 2020 and Q1 2021 respectively tracking the drop in GDP.  Profits declined by 30% in 2020 but rebounded by 60% in Q1. The latter is counter intuitive and bears looking into by regulators and legislators.

C. Aboitiz Power – Aboitiz is in power generation which makes up 50% of our electricity bills. Revenues fell 12% in 2020 and 3% in Q1 which is consistent with the decline in GDP. Profits fell 27% in 2020 but rocketed 264% in Q1. Like with Meralco the latter is against the grain and begs the question how the power industry spiked up when the rest of us are suffering.

II.  Trade

A. Asian Terminals – This company is the second largest port operator in Manila and is a proxy for trade flows. (ICTSI would have been a better measure but its results include its worldwide operations). Top line fell 17% in 2020 and 19% in Q1 2021 confirming the continuing weakness in exports and imports.

III. Tourism & Travel 

A. Cebu Pacific – Aviation is a proxy for tourism. Revenues dropped by 73% in 2020 and a further 83% in Q1 this year. The company lost P22.2 billion last year and another P7.3 billion in Q1 mirroring the existential crisis in this sector. 

IV. Food processing

1. Universal Robina – URC is a food manufacturer and dominant in snacks. 2020 revenues were marginally lower than 2019 but improved somewhat in Q1. Profits were slightly higher in 2020 but rocketed by 50% in Q1 because of higher margins.

2. Century Pacific Foods- Century processes basic foods. Revenues were up 19% in 2020 and 22% in Q1 this year. Century’s profits were 11% and 30% higher in 2020 and 2021 Q1 respectively possibly reflecting better cost management and economies of scale. 

V. Banking 

 A. BDO – Gross revenues dropped by 4% and 5% in FY 2020 and Q1 2021. Total assets increased by 6% in 2020 but declined by 1% in Q1. This probably reflects a smaller loan book. Profit dropped by 36% in 2020 but increased by 18% in Q1 this year perhaps because of recovery of loan provisions.

B. BPI – Revenues increased by 10% in FY2020 but dropped by 26% in Q1 this year. Total assets were unchanged in 2020 but fell by 3% probably due to smaller loan outstandings. 2020 profit was flat but Q1 was down 22% possibly due to higher reserves.

VI. Property

1. Ayala Land – Revenues drop by 57% in 2020 and 13% in Q1 confirming the continuing woes of the sector. Profit declined by 70% and 26% respectively in 2020 and Q1 2021.

2. SM Prime – Revenues declined 31% in 2020 and 20% in Q1. Profits fell 53% and 22% respectively.

VII. Communications

1. PLDT – Revenues rose by 7% and 10% respectively in 2020 and Q1 2021. Profit rose 8% last year and was flat in Q1.

B. Globe- Revenues declined by 4% in 2020 but grew 4% in Q1. Profit fell 17% in 2020 but recovered by 11% in Q1.

VII. Consumer Discretionaries

1. Jollibee – The company is a measure of demand for consumer items that are nice but not essential like a bottle of Coke. 2020 revenues fell 29% and 11% in Q1 confirming the decline in purchasing power. In 2020 it lost P11.5 billion from a year earlier profit of P7.3 billion. It registered a small profit of P49 billion in Q1.

2. Philippine Seven -This operator of 7/11 convenience stores is another proxy for consumer discretionaries. Revenues fell 17% and 19% in 2020 and Q1 respectively. It lost P419 million last year and another P300 million in Q1 validating the continuing drop in consumer demand.

VII. Education

1. FEU – Total revenues rose 8% in 2020 even as profits dropped 16%. Profit recovered by 33% in Q1 this year.

2. i-People (Mapua mainly) – Revenues were flat in 2020 and down 13% in Q1. Profits declined 12% in 2020 but were up 6% in Q1.

What are the take aways from the above?

1. Consumer demand is continuing to weaken in rising food inflation. Companies selling consumer staples are doing well, those in discretionaries not.

2. Excluding tourism and transport Big Business coped well enough under COVID. After an initial hit from the pandemic large corporates were able to recover in Q1 this year by drawing down credit lines, streamlining their businesses, managing their supply chains and improving margins; which smaller businesses were unable to do. Some corporates took advantage of their market positions.

3. Monopolistic and duopolistic public utilities in power and telecommunications did well even if their consumers did not. This raises issues of pricing power and the allowed regulatory return in times of economic distress. Do essential industries have a responsibility to share in the overall economic burden ?

4. The big property companies are down but still profitable which is more than can be said for their tenants.

5. The aviation industry and tourism need help badly and soon. The changing health protocols make it impossible to plan. It will take at least one season to re-launch so initiatives must start immediately.

6. Food companies are flourishing especially in Q1 this year due to fatter margins and economies of scale. These would be consistent with the food inflation the public is witnessing.

7. Despite incentives to do so, banks have shied away from lending leaving SMEs and some strategically important industries like tourism and aviation to fend for themselves. DBP and Land Bank have publicly vowed to help distressed companies only to balk when they discover, well, these companies are in distress.

8. Education is in an existential crisis but higher tier schools remained profitable.

9. Corporate income taxes have been cut. This mainly helps big corporations who have been able to leverage their size, bank lines, industry position and pricing power to be profitable. There is little evidence the cut in taxes will lead to greater investment and employment. The GDP numbers show the economy has been disinvesting as a whole which will impact us in the coming years. The Government could have used the foregone tax take for direct relief to a beleaguered public.

10. By and large the pandemic increased income inequality. People had to suffer layoffs, food inflation and sustained utility costs while big businesses in essential industries will enjoy the benefits of lower income tax rates, inelastic demand and market dominance to increase profits.

As always the public is at the wrong end of the stick.

The Fight Of His life

As I had predicted things are getting complicated in PDP-Laban.

Over the weekend media reported mixed signals in the party. President Duterte is the Chairman of PDP-Laban while Manny Pacquiao is the (acting?) President. The party’s Vice-Chair, Energy Secretary Alfonso Cusi, convened a National Council to discuss next year’s elections. Pacquiao reportedly said the meeting was not sanctioned under party rules. The latter states only the Chairman with the co-ordination of the party President can call such gatherings. Presidential Spokesperson Roque said the assembly was at the express instructions of the President but Manny, I guess, never got the memo.

Sen. Manny should know better. It is what happens when you start speaking out of turn. Pacquiao is being marginalized after having signaled he is running for President possibly against Sara. Manny has recently started to distance himself from the Palace saying the President was soft on China and the Spratleys.

The incident tells us a number of things. One, Manny was elected President of PDP-Laban for his boxing not his political skills. If Manny cannot figure out the internal political dynamics at the lowly party level, how can he expect to handle them at the national level against a master puppeteer, Duterte, on the other side?

Two, that the PDP-Laban assembly was held on May 31, Sara’s birthday, was a message of Run, Sara, Run. The meeting also clamored for the President to run as VP as he did for Vice Mayor with his daughter as Mayor when his term ran out in 2009. A double barreled Duterte ticket may be a bit much for voters to take, a surfeit of excesses if you wish. In that scenario the old man arguably has a better chance of winning as VP than his daughter as President which would be awkward if she does not. Imagine Digong in a Leni Robredo role with, oh no, an Opposition candidate as President. That would be the definition of karma.

Manny has a number of options. One, he can resign from PDP-Laban and run as an independent. He can build a coalition around his immense popularity and those disenchanted with COVID, corruption, China, the economy, and the prospect of six more years of the same. He would have no organization and little outside funding. The Duterte influencers have already started spreading rumors that the Champ has blown most of his prize and endorsement money on unconstrained spending, ill-fated investments and, you will soon hear, his love for games of chance. They will claim his prospective bouts against Mikey Garcia or Terence Crawford in a few months are designed to shore up his finances and keep his flame alive. 

Two, he can run as or with the Opposition if the latter will accept him. Pacquiao has reportedly been open to discussions with 1Sambayan but that was quickly shut down when Chief Convenor Tony Carpio very early on dismissed Manny as “incompetent”. If the Opposition wants to stay relevant it should refrain from judging those who do not quite meet its lofty standards. Politics is about addition. Even Jesus Christ did not require job interviews of his Apostles. Politics starts and ends with electability and Manny is by far the most winnable of all the anyone-but-Duterte candidates. Manny is deficient in policy and management but if he means well there are ways to get around his flaws. Cory was “just” a housewife – which arguably is a better qualification for President than most – yet she was not the worse of our Presidents. 

Three, Manny can accept the Vice-Presidential slot with Sara where he is a certain winner. This will give him some authority without the responsibility and the time to learn the top job for 2028. The Vice-Presidency has no attendance requirements. This is the deal that I am certain is being sold to him by the President. Insiders have told me Duterte has advised Manny not to waste his money on a presidential run which is how I imagine Marlon Brando would have phrased it in the Godfather.

Four, Manny can remain as Senator while pondering his future. The Senate Presidency may even be dangled but he could, I suspect, do without the administrative responsibilities, the physical presence and public speaking requirements of this office.

Manny reportedly believes the Presidency is a calling from God so the conundrum is does he listen to his President or to his Almighty? On a stand-alone basis there is no question the Champ is the most popular of the prospective candidates. However there is a lot of hard work ahead if he expects to successfully launch. Manny is no match for the President in the business of politics. Duterte remains popular and this is confirmed not only by his polls but by those of his daughter; and has the money and the pulpit. Manny has no local network although this could change quickly if he gains traction. Manny is estimated to have a net worth of USD 220 million which if true  could be enough to sustain a reasonable challenge. COVID makes it difficult to engage directly with voters in campaign sorties so Pacquiao must have a social media strategy to win.

The country’s health and economic conditions will continue to deteriorate and China is not going anywhere; which favors a challenger who can offer hope and change. However strong the family brand, Sara has still to  prove she will be more than her father’s daughter. The Administration will seek to diminish Manny but that could backfire.

To succeed Manny must be more than a one-trick pony. Eight world boxing titles are great but can go only so far. He must build his policy credentials with a respected economic and management team. He needs to run with better company since his current handlers are not up to whatever sweet things they tell him. He must build a campaign organization run by people who know what they are doing and not play him like a puppet.

Manny could be helped by a good choice for VP. Grace Poe will probably not accept the position. Isko might which would be a very strong ticket. Another option is Ping Lacson to ballast the ship, reach out to the armed forces and add maturity and experience. Ping is not afraid to rumble. Somebody like Vilma Santos would add star power and the female vote but can she be an attack dog, the traditional role of VP bets? Whoever his choice, he/she should round out Manny’s insufficient managerial heft at a time when the country is in deep economic and health trouble. The VP should want solid assurance from Manny that he/she will not simply be a spare wheel and will be a true partner in governance. The Biden/Harris combination is the model.

Running for President in 2022 is no easy matter. The external environment is favorable to a contender, voters want change after what will be two years of suffering. On the other hand the incumbent  remains popular, has the resources and the power of a sitting President, is the best at what he does, and is determined to extend his dynasty. If Manny runs, this thing will go the distance. If he does not and accept the number two slot which is not improbable, Sara should, barring no health issues with the President, have a clear path to the Presidency.