“Hope Is Not A Strategy” – Larry Summers, Ex-U.S. Treasury Secretary
It is told one never remembers what was said in a speech only how one felt when the speaker said it. BBM’s SONA was a little bit like that, a sense of elation when he spoke that became less frothy when one examined what he said or, in this case, not say but more on this later.
BBM’s SONA was very respectable. He checked most of the boxes – the economy, education, the environment, agriculture, technology, OFWs, infrastructure – plus some surprising ones – ROTC – with 19 new laws to be passed.
The speech was part ho-hum as he rattled through the economic numbers – growth, inflation, debt/GDP, deficits/GDP, etc – and part rousing in BBM’s quiet way as he moved into areas like agriculture which he clearly has a soft spot for. Exec. Sec. Vic Rodriguez disclosed the President personally penned the entire SONA even if the first quarter of the address had NEDA technocracy written all over it.
SONAs are part report card on where we are and where we are going; and part expressions of hope. As the first SONA of BBM’s term this one was actually an assessment of the Duterte Administration more than it was on his since he has only been 25 days in office. BBM was kind enough not to dump on Duterte for what many believe is the mess he has inherited lauding him instead for the oh so many infrastructure projects initiated.
SONAs are also invariably used as a bully pulpit to excoriate your enemies and as a rallying cry for the masses. Pres. Duterte was especially fond of saying how the oligarchs were (not incorrectly) raping the nation and the Communists (not correctly) taking over Government. BBM was more businesslike. There were few applaudable moments, hyperboles, high prose or references to hanging businessmen from lamp posts; but boring sometimes is good.
BBM’s SONA was almost entirely about the economy. Our GDP is now around Php 20 trillion. The economy is projected to grow annually by 6.5-8% in real terms and inflation to be contained to around 5% which means that in nominal terms the economy will grow by 11.5%-13% annually compounded over the next 6 years. The debt/GDP ratio and deficit to GDP ratio will be kept at below 60% and to 3% respectively by the end of his Administration. He will spend 5-6% of GDP annually on infrastructure, presumably close to this figure for education since the latter is constitutionally mandated to have the highest budget allocation, invest heavily in agriculture and digitize Government.
These are wonderful goals. The only problem is the numbers do not add up but his economic team did not tell him that.
The 2023 Budget is around Php 5 trillion. I estimate about 80% of this is already allocated for recurring revenues like salaries, interest costs and multi-year commitments leaving only about Php 1 trillion for new spending. Let us go through what the SONA promised:
- An annual infra spend of 5% of GDP equals Php 1 trillion. Even if say 50% of this was shared with the private sector under the PPP the Government’s share is Php 500 billion per annum.
- Interest costs are now about Php 400 billion but rates are expected to rise by some 200 basis points. I estimate this would add Php 260 billion to our interest charges. This excludes the impact of our peso devaluation on our dollar denominated debt of around USD 80 billion.
- Based on the cost of digitizing a large company I estimate the expense to comprehensively digitize the economy would be some Php 300 billion over 3 years or Php 100 billion per annum, much of this front ended. The National ID program has cost us Php 31 billion and it still is not completed. Bringing our management information system to standard means digitizing the Government’s entire data base, upgrading our software to a common platform that is interoperable across all agencies, hiring outside consultants and training civil servants; all of which is expensive.
- The relaunch of agriculture will require water irrigation, farm-to-road markets, subsidies to farmers, etc. which Government will have to undertake without PPP since these are not the purview of the private sector.
5. Upgrading education could cost another Php 100 billion.
6. A GSIS actuarial study concluded that the Government has an unfunded liability for military pensions of Php 850 billion annually for the next 20 years.
7. Inflation of 5% p.a. could add more than Php 100 billion to existing recurring costs.
So this is the incremental annual bill based on the SONA: Infra Php 500B, interest charges Php 260B; digital transformation Php 100B; agriculture say another Php 50B; military pensions Php 850B; and inflation of Php 100B or a grand total of Php 1,860B. This will more than double our current budget deficit of around Php 1,400B raising our deficit/GDP to 16% and our debt/GDP to 74% versus the target of 3% and under 60% respectively. At this pace we would double our public debt by 2028 unless we raised taxes and/or sold our patrimony. We do not have limited fiscal space, we have standing room only fiscal space.
The economic managers will say this is not so, that with nominal growth in GDP of double digits our tax collections will follow suit thereby narrowing our deficits. This has not happened in the last 20 years. In this century we have grown on average by about 10% in nominal terms yet our deficits and public debt have steadily risen, not fallen. Our tax base is only some 11-14% of GDP so it will never be able to catch up with the deficits.
We can mitigate some of these numbers by “right sizing” the bureaucracy but the impact is small. The DBM estimates a 5% reduction in staffing will save only Php 15 billion. Anything larger could trigger a blowback from our civil service.
Interest rates will eventually come down but not for another 12 months.
Inflation could recede but already we are using a Government estimate of 5% versus the present rate of 6%.
The good news is what with supply chain constraints, project vetting, PPP negotiations, Local Government delays and Government’s absorptive capacity, we will not be able to spend Php 500 billion in infra projects annually. As it is there are Php 5 trillion in stranded infra projects. The upgrade of NAIA is going on its 20th anniversary of discussions.
The above analysis is a back-of-the-envelope computation that clearly could be refined (hey, I am just an outsider googling data). Some of the incremental numbers may already be imbedded in the current Budget so there is possible double counting. Yet the orders of magnitude are such that it leaves much for skepticism. Note we have not included additional spends for health, the environment and social welfare which the President identified as priorities. Nor have we inputted the cost of corruption which I easily estimate at 10% of Budget.
Which leads us to the elephant in the room, the one topic on everybody’s mind that was glaringly absent from the SONA: Corruption. Was the matter not core enough or the linen too dirty to be washed in public and before the diplomatic corps? The business community was so agog with the economic promises even they forgot to raise the issue. The absence of even a foot note on corruption brought down what was otherwise an A- SONA to a B.
To sum up the SONA numbers do not seem to add up but never mind. We felt good for a while. The new Administration is promising us hope even if hope is not a strategy. The President concluded his SONA by saying “the state of the nation is sound” but I suppose he had to say that. We trust he does not regret his words when he checks his inbox tomorrow morning.