A Measured Presidency

“The more things change, the more they remain the same.”

With under a week before the presidential turnover, I thought we might reminisce about what we will “miss” from the outgoing Administration and what we might look forward to in the incoming one. 

In the broad arc of history the Duterte presidency will be remembered for its War on Drugs, the scar it permanently inflicted on tens of thousands of marginalized families and its failure – admitted by PPRD himself – as an initiative that we were promised would be completed in six months. Today drugs are still the scourge they were in 2016.

Then there were the massive frauds in Philhealth, Pharmally, the over-pricing of medical equipment and so much more largely undocumented. No one has been criminally prosecuted.

There was some good news. Duterte single handedly handed Maria Ressa the Nobel Peace Prize, tax accusations and all.

The economic legacy of the Duterte Administration is mixed marred as it was by three years of COVID. Sonny Dominguez was the economic OIC even as he did not oversee the health restrictions that stifled the economy. With one hand behind his back Sonny had through COVID the delicate balance between holding the country’s finances in check and the need to keep the economy afloat and millions of Filipinos from hardship through direct fund support. Sonny leaned towards the former even as most countries chose the latter, to blow out their deficits on economic and humanitarian grounds. As a result and together with the IATF stranglehold, the Philippines underwent some of the worst economic and human suffering and is expected to be one of the last to recover among our neighbors. On the positive side we retained our investment grade rating despite more than doubling our sovereign debt. It was a tough call for Sonny, there was no correct answer to his policy dilemma. To his credit he held firm to his conservative fiscal beliefs in an environment he did not totally control.

Congress sought to reform our tax structure through TRAIN 1 & 2, CREATE and other acronyms. These lowered personal and corporate income taxes in an effort to promote local and foreign direct investments (FDIs). The timing of these measures is questionable and the DOF now argues for their reversal or deferral in the face of looming deficits. The tax cuts also did little to promote their stated purpose. JP Morgan cites the Philippines as the least attractive for FDIs among our neighbors and there is no visible new investment by local businessmen.

Duterte had other reforms like the Rice Tariffication law which replaced the quota system for importing rice with free market access and a 35% tariff. The result was to replace the corruption by quota holders with smuggling by the new private importers proving the problem is not in policy or the law but in their execution.

The President eased foreign ownership in strategically important areas like telecommunications, shipping and aviation. The employment impact of this initiative is arguable while potentially ceding control of our vital infrastructure and transportation industries to possibly unfriendly foreigners; thus adding to our other national security concerns like the West Philippine Seas and looming food shortages. As a nation we have undressed ourselves to the world without even having been or ever being paid for our services. 

Despite the sins and omissions, President Duterte will end with a high popular note. This is tribute to his charisma and the nation’s desire for strong leadership. The latter will not be lost on the new President.

What can we look forward to in the new Administration? “Looking forward” may be somewhat strong an expression given how little we are told of what to expect other than the usual testaments to unity, hitting the ground running and such. With a mandate from 31 million Filipinos and an unprecedented majority vote, it is remarkable how little excitement there is in the air for the new Government. Certainly there is not the buzz that accompanied the Cory, Noynoy and even Duterte’s ascension into power. But who knows we might still be blown away by BBM’s Inaugural Address on June 30 at the National Museum.

BBM and his family will be settling in for a long stay in Malacanang. He is starting with a record political capital which he must dispense judiciously in the battle against the forces of social unease. The first priority is to prevent the economy from stalling.

Fiscally the new Government is inheriting a ton of debt and an economy nominally recovering but now facing severe headwinds in inflation, rising interest rates, potential food shortages and slowing world growth. The peso is around 54.50/USD from 50/USD not so long ago; and dropping. The situation could have been worse had Sec. Dominguez let go of the financial spigot. The incoming DOF Sec. Diokno, a protege of Sonny in the BSP, has said our finances are “easily manageable” but then he did have to say that.

BBM is not prone to the hyperbole and sensationalism of his predecessor nor does he command high prose. He is disciplined and business-like in his messaging which accounts for the absence of anticipation to his presidency. Going forward I expect Malacanang pronouncements will be measured and on a need-to-know basis. It will be a closed and stealth presidency. It is management by memo, not a continuing discourse with the public as with PPRD’s weekly TV monologues. Like Teddy Roosevelt BBM prefers to speak softly but carry a big stick.

There is also no hint of a vision or a quantum change in direction for the country that will stir our hearts. BBM is ideologically conservative. This is reflected in his economic team which while competent represents just more of the same. The plus side of this is his Administration will be predictable if possibly boring but boring is good if it means dispensing with the jet skis to the Spratleys and just getting down to work and delivering on the promises to the people.

We see signs of this in BBM’s decision to appoint himself concurrently as Secretary of the Dept. of Agriculture. The new President has the courage and conviction to be accountable for a sector that has been paid lip service in the last 30 years yet has lagged behind others. With BBM in charge agriculture will finally be given the budget, executive and local Government attention it deserves. Bravo, Sir.

In terms of social justice we see the BBM Government as right wing. This is reflected in his choice of DOJ Secretary Boying Remulla. It would be a mistake if this should translate to an attack on human rights activists, food kitchens and online news services as Commies existentially threatening our Republic. Our Communists are outlaws posing as an ideology that has been abandoned even by Russia and China. Communists are invariably hauled out as a national security threat by Governments in need of a distraction and by the military in need of a budget. With 31 million in political capital BBM does not need this  bogeyman. If he wants to truly eradicate  the Left his best weapon is to improve the economic plight of the poor.

An unanswered question will be what will the incoming Government do about the sins of the outgoing one, specifically whether certain high officials will be held accountable for their crimes in the DOH and other agencies. Sara would have an interest in this since they were her nemesis and arguably influenced her decision not to run for what was a sure presidency at the time. Will she press BBM to live up to what could have been a condition of their partnership? What BBM finally decides will tell us much about how accountable he will be in his term.

At the risk of being stoned by the Pinks I wish BBM’s presidency well for the sake of the nation. He is cognizant of the legacy he bears and hopefully of that he will leave behind. He will thread gingerly at least until he secures his footing knowing the world is watching. This is good for the beneficiaries of the status quo, less so for those seeking major changes in our culture, values and economic inequality.

A Time To Get Real

There is a joke among economists that if they are so smart how come they are not rich? As a student of economics I can relate to this. 

Here are some possible reasons: One, economists view things from 30,000 feet forgetting the answer is in the trees, not the forest: It is not about the idea it is about the execution of the idea.

Two, neo-classical economics falsely assume that people are rational, that if you have the right policies the markets will produce the right outcomes. For example lowering taxes should but does not always generate more investment and growth. This has led to other schools of thought like game theory and behavioral economics to better explain market behavior.

Three, economists are not by nature risk takers, a prerequisite for financial success. They are often paralyzed by their own brilliance: As they say economists have two hands, on the one hand and on the other hand. Again ask twelve economists for a solution and you will get thirteen different replies. 

Four, economists by and large have never run a business, met a payroll, or competed in the market place. NEDA has said it will foster manufacturing but that requires more than a wish. It needs a business strategy, industrial peace, worker skills, affordable energy, inexpensive labor and other input costs, and hassle free importation of equipment and raw materials. It needs a product consumers want at a quality and price that is affordable. NEDA has not outlined how we do that.

I mention economists because the profession represented by Ben Diokno (DOF), Arni Balisacan (NEDA) and Philip Medalla (BSP) is about to assume the management of our economy. They are good people who make up their lack of youthful zest with experience and wisdom. Economists have often run our economy from Cesar Virata in the Marcos years with mixed results. I say this is not as a judgment on their credentials, character or intellect; but on their perspective. Economic performance is not about policies but about how policies work on the ground. For example, economists have arguably over-relied on fiscal and monetary policies to move the economy rather than on ground level programs that like the Asian Tigers focused on manufacturing competitiveness or like Thailand and Vietnam on agricultural productivity.

The finance people also control the economy through the capital allocation process in the Development Budget Coordinating Committee (DBCC). The latter is composed of the Dept. of Budget Management, the DOF, NEDA, and the Office of the President. This sometimes result in a mismatch between goals and outcomes in the line agencies. For example agriculture is central to our growth yet is historically under funded (It has not helped that some of the biggest scams have happened in this Department).

There is also the matter of how we organize ourselves as a Government. Most enterprises have a CEO to define the path and implement the plan. Successful economies like Singapore happened because of the vision, leadership and discipline of a central figure, Lee Kwan Yu. We have no CEO running this economy. Theoretically the President is the CEO but other than GMA we have had no leader who had the interest nor the management knowhow to do so. As a result historically it has been the Sec. of Finance who became the de facto economic head even if he had no authority over the other line agencies. This is the equivalent of having your CFO run your business with nobody reporting to him. That is a bad idea. The CFO’s role is to make sure there is money in the bank not to produce a competitive product, market it, and constantly improve it. What we need is an economic czar who would oversee all economic and social agencies and distill the inputs for the President. Right now these agencies report to the President who is overwhelmed by the information.

The result of our failed organization is there is no overall accountability. There is an economic cluster with no one responsible. Every agency is a separate fiefdom.

We also have a Government that is too often removed from the realities on the ground. Two months ago the BSP, the agency tasked with controlling inflation, happily reported our inflation rate was contained at 3.8% when the rest of the world was already at twice that figure and commodity prices were rocketing. That inflation number was quickly adjusted to 4.8% the following month and more recently to 5.4%. We are so far behind the curve on inflation we are delayed in our responses. We rely on data that is backward looking when we should be forward thinking.

Policies and ten point programs are a dime a dozen. The nation does not want to hear more macro-economic, trickle down solutions that the people do not understand nor care about. What the poor want to hear is how and when will food, utilities and transport prices be brought down or relief provided; what is being done about the rampant smuggling in key commodities like rice and the cartels that are squeezing our farmers; and where are the jobs. Government reports 3.1 million Filipinos are hungry.

Big businesses want to know when will corruption stop. The SMEs want to know when will credit be available. A DTI Undersecretary recently publicly advised consumers not to buy their food from the small sari-sari stores but from the big supermarkets where prices are lower. So much for helping our micro-enterprises.

There is more bad news. The reason for our relatively low (official) inflation so far is the price of rice which makes up almost all of the Filipino’s food budget; has been stable but that is about to change. The Dept. of Agriculture now projects rice could increase by 16% from Php 38/kg to Php 44/kg by the end of the year. Due to looming shortages in animal feed, vegetable oils and fertilizer from the war in Ukraine and protectionist measures from food exporting countries; prices of chicken, hogs, meats and other staples are at record highs. Twenty countries have banned exports of food including Indonesia for palm oil, Malaysia for chicken, and India for wheat. If Vietnam or Thailand ban the export of rice we are in real trouble since 52% and 29% respectively of our imports are from there. In 2019 we were the world’s biggest importer of rice.

The incoming economic team has sought to comfort the country that we are fine, that policies are being put in place that will grow the economy, allow us to “easily” repay our mounting debt, increase manufacturing and agriculture, build infrastructure, ensure food security and alleviate poverty with funds we do not have. The new Administration has promised the price of rice will be reduced to Php 20/kilo yet even the Dept. of Agriculture says that is not possible. Such irresponsible pronouncements raise false expectations and add to the growing social unease. In the last three years Filipinos have displayed remarkable resilience but hunger and inflation could be the proverbial straw that breaks the camel’s back.

 The new Government has 31 million in political capital which may have emboldened it to make ambitious promises. Rising prices and looming food shortages could threaten its credibility so early on. The price and availability of rice will be the barometer. Let us hope the situation is being addressed because it could get ugly.

The Gathering Clouds

JP Morgan CEO Jamie Dimon warns of an approaching economic “hurricane”. Rising interest rates, record inflation in oil and other commodities, supply chain disruptions, geo-political concerns in Europe with Ukraine and Asia with China, looming food and power shortages, falling stock markets and slowing world economic growth; have created a perfect storm. In the Philippines we must add the mountain of sovereign debt the BBM Administration has inherited.

The incoming economic team is unfazed. “We will be able to repay our debt with an economic growth of just 6%,” says DOF Sec. Diokno, more or less, even if our fiscal history has proven otherwise. Government data shows our National Debt has steadily increased from Php 2.2 trillion in 2000 to Php 13 trillion today, a rise of 590%, despite annual growth rates that averaged around 6%. Each Filipino family of 5 today owes Php 600,000 to our creditors and it does not even know it. In the last six years alone, our debt more than doubled by Php 7 trillion. This has been attributed to the pandemic but there were already stirrings: Between 2016 and 2019  we had already increased our debt by 28% or Php 1.7 trillion partly to fund worthwhile infrastructure and non-worthwhile corruption.

The main reason for our huge debt are the massive deficits of Government. In the last 22 years we had only three years of budgetary surpluses, Php 27 billion, PHP 123 billion and Php 90 billion in 2013, 2014 and 2015 respectively (at PHP50/USD) as the Pinoy Government held back spending, wisely or not. In 2016 we reverted to a deficit of Php 55 billion which ballooned to Php 1.7 trillion today. Our debt to GDP ratio has gone from 34.6% in 2015 to 63.5% this year which is beyond what many emerging economies deem to be safe.

Highly developed countries like Japan, U.S. and Western Europe have debt/GDP ratios in excess of 100% but this is comparing apples and oranges. One, these countries can monetize their debt because their currencies are international reserves. Two, Japan’s debt is held largely by Japanese. Three, they have mature political systems and reliable bureaucracies to run their economies. Looking at better comparables, Thailand and Malaysia have debt/GDP ratios lower than ours.

There are also new expenses: A GSIS actuarial study shows the Government needs to allocate Php 850 billion annually for the next 20 years to cover the pension shortfall of the military of Php 9.6 trillion. This alone will double our already record primary deficit but must be covered. BBM will not want to mess with military pensions.

In my opinion we are past the tipping point where we can reduce our national debt without taking extraordinary measures that would permanently damage the economy (More on this later.) There is not enough for our recurring expenses much less for economic growth. Even without interest charges our Government is today running an operating or primary deficit of Php 800 billion. The best we can hope is to slow the rise in our borrowings recognizing this will be difficult given prospective higher interest rates and weakening world economic conditions. Every one percent rise in interest rates adds Php 130 billion to our bill. Interest rates are expected to jump by 2-3 percent in the coming year.

Incoming DOF Sec. Diokno said he expects to reduce our deficit to 3% of GDP by 2028 from 7-8% today. By then I estimate our debt to climb to over Php 20 trillion even if we keep our debt to GDP ratio at current levels.

The first step to fixing our fiscal house is to generate a primary budget surplus by spending smarter and downsizing our bureaucracy. A temporary freeze on hiring may be warranted until we can figure out where is the administrative fat. This will show the world we are serious in addressing our budgetary deficits.

The second is to grow the economy and our fiscal base. Manufacturing and agriculture will reportedly drive this effort. These two sectors have stagnated in previous governments some under the watch of members of our incoming economic team; so we wonder what will be different this time.

The third is to stop corruption, improve our tax administration and the efficiency of our spending. We must strengthen Government’s management information system.

The fourth is to get the private sector to do more of the heavy lifting through simple, predictable, honest, and speedy Government policies and procedures. Tax incentives help but they are not the only reason to invest.

The fifth is to find new non-tax revenues. We could privatize what is left of Government assets like PAGCOR, military land and the Cultural Center but these one time initiatives to sell the family heirlooms  do not solve the underlying problem of living beyond our means.

The nation has valuable non-tangible assets that have been awarded to certain business groups for next to nothing. I refer to things like telco frequencies that in other nations are auctioned for huge sums; and scarce licenses and franchises be they to operate certain businesses or to import certain products. These are all doled out for political favors and who knows what else when the Government can charge for their use via upfront fees and/or annual rentals.

The sixth is to review taxes. The Duterte Administration cut corporate income taxes in a move to attract foreign investment. Yet the measure has not done that, it simply cannibalized the existing tax base. In fact JP Morgan reports we are the least favored destination in the ASEAN for FDIs. The tax cuts simply benefitted local companies and their wealthy shareholders allowing them to raise dividends. The DOF is now suggesting we defer or reverse these tax cuts.

Lastly we must identify new core activities. For example we should capture the exodus of multinational offices and banks from Hong Kong which is now going to Singapore. Can we aspire to be the second financial center in Asia? The Philippines has the English speaking labor force, international schools and lower cost of living making us very competitive. However we have to improve NAIA, our urban congestion and governance. We had a similar opportunity to capture the manufacturing businesses leaving China but this has gone to Vietnam and Thailand.

Certain wealthy countries like Singapore and Brunei are concerned about their food security but do not have the people nor the land for agriculture. We should invite them to invest in this sector in exchange for assured food supplies.

There is some good news, so to speak. One, we can still borrow. Financial institutions (including local banks who are big holders of our debt) and family offices hold record levels of cash and still believe in our credit worthiness (until they don’t). Unfortunately this masks our deficiencies, tempting our economic managers to continue to borrow and leave the problem of how to repay it to the next Administration.

Two, seventy percent of our Government borrowings is in pesos. This means if in trouble we can simply print more money to settle these obligations but this will create massive inflation and devalue our currency. We can also further tap the local capital market but this will crowd out private businesses and hamper growth.

Three, there is no eminent danger of our defaulting in the short term. Sec. Dominguez did a good job of extending our debt maturities. The problem of servicing these is left to future generation of Filipinos.

Four, we have enough international reserves (USD 105 billion equivalent to 9 months of imports) to cover our upcoming dollar obligations. However this will leave less dollars for vital imports like oil.

Five, we have an investment grade rating. However, understand this is a relative not an absolute metric, it is akin to being graded on the curve: It does not mean we are not sick, it only means we are not sicker than our peers.

The new economic team will want to assuage their boss, our creditors and the nation that all is well. I understand that as well as the desire not to dump on the outgoing Government. However the country must also be warned there are difficult times ahead. We can comfort people some of the time but we cannot comfort them all of the time.

We cannot solve our economic problems by talking them down, neither can we by whistling in the dark. We simply have to act on them so we would like to be told, specifically, how.