Same Old, Same Old

I was wrong.

I had earlier predicted BBM’s Cabinet would be younger and better looking than the outgoing one but right now it looks like a toss up.

BBM announced the core of his economic team with Ben Diokno (74) in Finance, Philip Medalla (72) as BSP Governor, Arni Balisacan in NEDA,  Fred Pacual (74) in Trade and Manny Bonoan in DPWH ( 72) ). Earlier Benny Laguesma (74) was appointed for Labor. This gives new meaning to the term Old Boys’ Club.

Other Cabinet appointees already announced were Boying Remulla for Justice, Ben Abalos for DILG,  Vic Rodriguez as Exec. Secretary and yes, I almost forgot, Sara for DepEd.

We see in the Cabinet the face of the BBM Administration, fiscally and ideologically conservative. The Cabinet is divided into two groups, an economic team and a political one. The economic selection was not necessarily BBM’s first pick – the DOF in particular had reportedly been offered to a few with no takers – causing his search committee to fall back on some oldies but goodies, a group of respected if somewhat worn technocrats, mainly from UP, recycled from previous Administrations dating as far back as Estrada. (Ateneo and La Salle alumni were excluded from the running presumably on the basis of political color). At their age they are not expected to literally hit the ground running as promised by BBM but what they lack in bounce they make up in being centrist, competent, conservative, consistent, controlled and pro-business which will please our creditors, the capitalists and the rich.

The political team is composed of Cabinet members whose mission is to advance the political agenda of the Administration. The leading members are the DOJ and DILG heads. Remulla represents the face of thIs group: He is from a prominent Cavite political family who were early supporters of BBM and is known to be outspoken, aggressive and ideologically right wing. He was vocal in the Congressional hearings against ABS-CBN and reportedly had red-tagged the food kitchen communities set up at the height of COVID. Duterte used the DOJ as his attack dog to take down political opponents like Leila de Lima and ex-Chief Justice Lourdes Sereno. One wonders whether BBM will use the office similarly. Human rights groups will not necessarily be targeted unless they start to be a real annoyance. BBM has enough of an electoral mandate that he can allow protesters some political space.

The biggest challenge of the new Government is not political but economic. The Administration is facing a serious fiscal crisis with little room to manoeuvre. The term “limited fiscal space” will be a common refrain in the future.

Here is the problem: As a result of COVID, corruption and others the Duterte Government has had to borrow Php 3 trillion in additional debt raising our total borrowing from under Php 10 trillion in 2016 to some Php 13 trillion by the end of this year. This will raise our debt/GDP ratio from 39% to 63% (60% is the threshold beyond which countries are deemed to have over-borrowed).Our economy could soon

The principal way to reduce our debt is for Government to grow the economy which however will require more borrowings. As it is we are borrowing simply to service our interest payments. The current Government will be presenting a Php 5.3 trillion Budget to the incoming Congress or 6-8%% higher than the current one. This is barely above our inflation of 5% i.e. in real terms the new budget is essentially unchanged at a time when we need economic stimulus most. Now over 80% of the Budget has already been allocated for interest payments, automatic appropriations, recurring overhead like higher salaries under the Salary Standardization Law passed by Duterte and pension payments. This leaves little money for new spending like infrastructure and social amelioration.

Our economy could soon hit a fiscal wall. Today we are running a budget deficit of Php 1.7 trillion or 8.6% of GDP. Normally we would be able to borrow to finance this but given our already high level of debt/GDP we cannot significantly do so without threatening our credit rating which will increase our borrowing costs. Sri Lanka just went into sovereign default so international lenders are skittish about any change in credit outlook.

The second alternative is to raise taxes but this will imperil the growth we need to generate more fiscal revenues. After lowering tax rates the DOF is now suggesting raising them back. This is going to be a hard sell to a newly elected Congress and an even harder one in the more independent minded Senate. If to be implemented, the Government should raise taxes on assets rather than on income, promote progressive rather than regressive taxes, while improving the productivity of and corruption in our tax collections.

The third option is to print money to pay our peso obligations, However this will trigger inflation and weaken the peso which will raise the debt service on our dollar obligations.

The fourth is to scale back our investment in things like infrastructure and our safety net for the poor. The latter could have dangerous social repercussions and disappoint the 31 million Filipinos who voted for BBM.

The last is to transfer the burden of new investments to the private sector through more favorable PPP arrangements and foreign direct investments. J.P. Morgan has listed the Philippines as the least attractive among ASEAN countries. The BSP has touted a surge in FDI in Q1 this year but some inflows are from existing foreign companies needing to shore up their finances rather than in new employment generating projects.

I have not included in my scenarios adverse geopolitical events, the prospect of inflation, looming shortages in food, higher oil prices, slowing world trade, rising interest rates, a recurrence of COVID or another Black Swan. For every one percent increase in interest rates the additional bill is Php 130 billion. This will crowd out the little that is left for economic stimulus.

The truth is we will have to do more with less. There are not only operating deficits, there are also needed structural changes like a major shift to agriculture which will require big upfront investments with little payback until well into the future.

Do we have the economic team to do what it takes? Under normal circumstance I would say yes. The new team is experienced, of good-will and honest. However I do worry about a few things.

One, none of the key Cabinet members are particularly close to the President. It is still an employer-employee relationship. Sure they know him but not enough to guarantee his support when the going gets tough as will happen. Sonny Dominguez was effective because he has known Duterte since school and was given “carte blanche” to run the economy

Two, the economic team are dutiful foot soldiers not political street fighters. Politicians and friends/relatives of the family will almost certainly be making end runs around them as what happened in the Ferdinand Marcos Government. Cesar Virata, a good man, only found out later his boss was running a second set of books. 

Three, the economic team will invariably have to make difficult choices especially in the allocations of funds for social amelioration versus capital spending. How will they decide? Like true technocrats I suspect they will go for investment rather than consumption spending, for the size rather than the quality of the economic numbers; leaving the poor to fend for themselves.

Four, today’s problems are unprecedented: Traditional, trickle down, neo-classical economics may not be enough. The country needs quantum change which will require  measured but creative risk-taking, bold ideas and a lot of energy from an economic team, average age 73, that is a little long in the tooth.

Lastly, our country has never lacked in policy, it has lacked in execution and governance, unclogging the bureaucracy, ensuring funds get to their intended use. The new economic team are essentially staff who have never run a real business, not executives whose job is to get things done.

The new economic team represents policy continuity which will be reassuring to markets. I just hope Same Old, Same Old will be enough for the looming challenges ahead.

The First 100 Days

“To whom much is given much is expected.”

BBM won the election by a landslide.

Landslides are a blessing and a curse. The mandate can be used to undertake serious reforms. However it also means voters will be looking for results and quickly. Already there are clamors for the presumptive Government to unveil its first 100 Day program. That is not a lot of time to accomplish anything meaningful but there are three things BBM can do: First, appoint a respected Cabinet; two, present a road map that puts real substance to the usual odes to agriculture, SMEs, jobs, education, health and infrastructure; and, three, launch an impact project the public can embrace.

I. The Cabinet – The Cabinet will tell us a lot about the presumptive President. BBM needs to show he can and will form a capable Government. The challenge is finding men and women who are competent yet are loyal to him. BBM does not want a repeat of Hyatt 10 when ten GMA Cabinet members publicly mutinied. For their part, potential candidates must know the President will have their back and not leave them hanging when the going gets tough. BBM has said he will include even members of the opposition on his team but let us see.

In appreciation for her role in his Presidency, BBM announced that VP Sara would be his first Cabinet appointment as Sec. of Education. She would have preferred Defense but “People will fabricate intrigues about my loyalty in the DND position “ (Translation: Intrigues in the Palace have already started between supporters of BBM and Sara). The truth is Presidents like to keep the Defense and DILG posts close to their chests and limit them to those with no political aspirations. Sara garnered more votes than BBM so this could make the BBM camp insecure. 

Sara for DepEd is an out-of-the box appointment. On the positive side Sara might be able to leverage her popularity and political capital to raise the morale of the Department and undertake real reforms. BBM said let’s give Sara a “chance”, “that she will be motivated as a Mother to improve the education of children”.

The Philippines is consistently rated last in the world in math, science, reading and comprehension. The department has a mosaic of problems: Financial constraints despite having the biggest budget, teacher competence and pay, an outdated curriculum, corruption in procurement, class shortages, malnutrition. So for the President to entrust the DepEd which is arguably the most important department in terms of its long term impact on the country; to a young woman on the basis largely of her being a Mother does not inspire confidence. DepEd Secretary is not a position one learns on the job or that one takes a chance on. Teachers and students have voiced their protests as will I believe the institutions of learning.

 In her acceptance Sara said:” Our country needs a future generation of Filipinos that advocate peace and discipline.” What about learning? What is about the Dutertes they see the world only through the prism of armed conflict? Sara advocates a compulsory military draft for our young. The CHED has already pushed back suggesting its budget is better used elsewhere than ROTC. Is the goal of the new DepEd to create a Nazi Youth or a generation of young Filipinos who can compete in the new world of knowledge?

There are the cynics who say the appointment of Sara is the kiss of death, a political graveyard where she will fail and kill any aspirations for higher office in the future.

To conclude Sara’s appointment may be inspired but I don’t get it.

II. A Road Map – BBM needs to present a road map for the country. He was elected by 31 million Filipinos who still do not know who he is and what he stands for. BBM avoided debates and hard interviews during the campaign but as the presumptive President he should give something particularly for business and investors to chew on.

III. An Impact Project – Every President needs a major initiative to kick off his Administration. Duterte had his “War On Drugs” which he vowed would be over in 6 months. Never mind that he failed even by his admission. The point is it got his Administration off to a running start which the BBM administration could use.

The impact project must meet the following criteria: 

  1. It can be launched immediately. 
  2. The public must immediately relate to it in their daily lives. The War on Drugs quickly made the streets safer. 
  3. It will prove the Administration means business.
  4. It will redound to the economy.

What would such a project be? I call it the “War on Food Cartels”.

Some context:  Our country is facing a looming food crisis with high prices and possible shortages from the war in Ukraine – Russia and Ukraine account for a large bulk of the supply of wheat and fertilizer needed by agriculture – and the cascading protectionist measures as agricultural nations close their exports to protect their internal needs. The Philippines imports almost all of its food requirements. Rice is a big part of these imports. From being one of the largest exporters of rice in the 1970”s, we were in 2019 the largest importer of rice in the world! We import about 52% from Vietnam and 29% from Thailand.

Rice makes up almost all the food budget of the poor and is therefore highly sensitive to inflation and shortage. The National Food Authority is the agency tasked to build a reserve of rice for food security but we do not know what the current level is. In 2018 the NFA buffer stock was almost depleted leading to panic buying. Rice was the major source of inflation that year.

The challenge to our rice industry is supporting the incomes of 2.4 million farmers and 11 million workers by ensuring them a minimum price for their produce while keeping prices stable to the public. Prior to 2019 the country imported rice via a quota system under the Agricultural Tariffication Law (ATL). Holders of the quotas made massive profits because imported rice was cheaper than local rice. A cartel of well connected rice importers controlled these quotas.

In 2019, Duterte replaced the ATL with the Rice Tariffication Law (RTL) which allowed private parties to import rice as long as they paid a tariff of 35% for rice from ASEAN countries and 40% from non-ASEAN nations. The tariff proceeds go to a Rice Competitiveness Enhancement Fund (RCEF) to the tune of P10 billion annually to support our rice industry by allocating 50% for farmer mechanization, 30% to the Rice Institute for R&D, 10% for subsidized loans to farmers via the Land Bank and 10% for farmer extension services. 

Here is where it gets tricky. The same rice cartels that held the quotas under the ATL have now resorted to smuggling to avoid paying the tarriffs under the RTL. Thus prices to consumers remain elevated while those to farmers remain depressed. Today Filipinos pay more for their rice than any of our ASEAN neighbors while our farmers live in misery. The latter sell their “palay” (unmilled rice) to local traders who have banded together to keep down their buying price. Our farmers live day to day, have no working capital, have no storage facilities and often have outstanding debt to the Government for land acquired under Land Reform; so they will take what is offered to them at the farm gate. These cartels are often the same ones who are smuggling the imported rice so they completely control the industry.

There are other sources of corruption but smaller. Imported rice requires clearances from the Bureau of Plant Industry for phytosanitary permits. I imagine those have to be greased.

If BBM wants an impact project that will propel his Presidency from the get-go, he should launch a war on our food cartels. The authorities know who they are since many are connected to the powers at be. If successful, the initiative will lower the price of rice to consumers while raising the farm gate price to farmers, address the looming food shortage, raise confidence in the viability of agriculture, prove the new Government will curb corruption, and show the world BBM means business..

In one simple stroke BBM would go from zero to hero even among his critics.

The Morning After

“Insanity is repeating the same thing again and expecting a different outcome.”

Thank God our insane elections are finally over. Maybe now the country can address the problems facing us namely massive poverty masked by a statistically growing economy, 3.7 million officially unemployed, raging inflation that is unrecognized by the authorities, a failed educational system, an unfunded health system, annually ballooning deficits, a PHP12.6 trillion Government debt with rising interest rates, a looming energy crisis, a decayed infrastructure, a failed agriculture and the prospect of a food shortage.

Yet we sense no urgency from the prospective Malacanang occupants to hit the ground running. The nation will just have to wait until the partying is done.

The initial numbers point to a convincing BBM win. What will a BBM Government look like?

I suspect it will be a mix of business and pleasure. The Marcos are aware the eyes of the world are on them so they will move gingerly while wanting to prove they are up to the task.

The economic policies will be Neo-classical, trickle down, and Big Business oriented. There is no Big Idea, no plan to narrow the huge income inequality which if anything will widen. The approach will be transactional not strategic. We should not expect much compassion. Politics will dominate the agenda as the family settles in for a multi-generational reign.

Like his father, BBM will want to hire the best and the brightest but the challenge is whether he can attract the talent the country needs. All we can say with any certainty is the BBM Cabinet will be on average be younger and better looking than the current one. BBM is seemingly a private person who will surround himself with a concentric layer of advisers. At the heart of this group will be family and friends he has grown up and partied with, children and relatives  of his Dad’s associates. From this inner sanctum will emerge the new set of business confidantes.

The key Cabinet appointments will be Finance, DILG, Education, Health, Energy, Public Works, and Agriculture. BBM will probably reach out to the academe for staff positions like NEDA. Some of the names surfacing are Gibo Teodoro – if he loses his Senate bid -, scions of a prominent banana clan from Davao and classmates and officemates of BBM and Liza.. A critical appointment will be Defense since the military arguably holds the keys to Government. Ferdinand Marcos had Gen. Ver to see to things, his son will need somebody he can trust yet is respected by the armed forces. BBM may retain the current Defense head Gen. Lorenzana until he figures things out.

GMA may be consulted for the economic portfolios as will the likes of Bobby Ongpin. Liza A. Marcos will likely have a role in the final decisions.

On the legislative side, BBM will rely on his first cousin Martin Romualdez to control the House and the legislative agenda. Outside of the immediate family, Martin will be one of the key players in the new Government because he combines business experience, political acumen, money and charm. Martin is said to be close to GMA. Martin should become Speaker in due course.

In the Senate, Imee will become a more dominant figure cementing the family presence in our two democratic institutions. The family is mindful of not being too brazen about this so there could be a warm up period before it all comes together. The time table could be advanced if May 9 results in a landslide for BBM which is why size of the win is important to what the future will offer.

What are the signals to watch for in Malacanang going forward? One is the dynamics between BBM, Liza and Imee. In the past BBM has shown little interest in the details of governance which would leave the girls to figure things out. Liza is strong willed, bright, ambitious and capable and will want to assert her independence from her in-laws.

Two, there are unfinished business opportunities that are ready for the picking: The ABS-CBN franchise, the Malampaya natural gas deal, NAIA (probably to be renamed), and various cartels in the commodities trade like rice where there could be looming shortages. How these spoils are divided will tell us a lot of the new Government.

Three, there are the critical relations with China and the U.S. BBM may have a tentative relation with the U.S. after they cut his Dad clean in 1986. However BBM understands the importance of the military to his Administration and its pro-U.S. bias. Should BBM appoint Phil. Ambassador to Washington and the U.S.’ “Man in Manila” Babes Romualdez as DFA Secretary, we will know how the chips will fall. Liza has reportedly said that “She is oh so New York” so we know where her sentiment lies.

What about Sara? Thanks for asking. In 10 months Sara has gone from a shining light to an after thought. The VPship is about the the best she can expect if elected so she should enjoy the ride. Sara has shown she never had it in her to be President and, short of an act of God or a legal technicality, she will probably never be. Her Duterte sheen will lose its shine in the dimness of her office. She has no place in the long term plans of the Marcos’ for a family dynasty. She will be offered a Cabinet position, DILG? In 2028 Sara will probably run for the Senate  or return to Davao City.

What about the opposition? A significant part of the population is afraid of a BBM presidency, mainly in the intelligentsia and professional class, and may leave as happened during Martial Law. This exodus of brain power will drain the country’s already depleted skill set.

If this is of any comfort BBM is unlikely to be as ruthless or as single minded as his Dad. The Marcos’ have a long term interest in running the country at a certain level. Sure there could be a return to past practices but this would risk 30 years of work in regaining power only to lose it in six. BBM has time to nurture his family into the business and will not need to impose Martial Law to prolong the family reign.

The transition to the new Government will be orderly. The contest between BBM and Leni was not about ideology – right vs left – which often ends in violence but about values – good vs evil – which typically ends in prayer.

If we believe in the democratic ideal then we must respect the outcome of the elections whatever it may be. If elected BBM and Sara will have won fair and square. Sure they were funded by arguably ill gotten wealth, unpaid taxes and trolled fake news but in any contest there will be fouls that are not called and one simply has to play through it. Politics is after all the ultimate blood sport. 

The disenchanted do not understand why the better candidate in their opinion did not win. Some may ask whether they could have done better, that had they not left democracy unattended all these years, had they reached out more often to the fallen Filipino, had they paid their employees a fairer wage, had they called out corruption more forcefully; whether this could have made a difference.

But all is not lost. Unlike in 2016 when the Yellows were defined by how they fell, the Pinks could be defined by how they get up. May 9 has shown there is a significant impetus for change. The work the opposition put into the elections will have been for naught if it does not result in something bigger and better. There is the genesis of a movement but it means harnessing and sustaining the amazing energy of the volunteer network, building a socio-economic base for the next stage of the journey, the local elections of 2025 and beyond. It is hard work but that is what it takes to change a paradigm. The country cannot repeat the mistakes of the past and expect a different outcome for the future.

Finally let us remember we are as a nation bigger than any presidency. We are a Republic of the people, for the people and by the people, a country of 110 million Filipinos who are the arbiter of our fate. If we can keep reminding our leaders that we have that power in us then we may just get the accountability and respect from them that we deserve.