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.