SONA 2022: The Numbers Do Not Add Up But Never Mind

“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: 

1. 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. 

2. 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.

3. 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.

4. 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.

An Imagined SONA: Part 2

We must identify our national priorities and leverage our competitive advantages like tourism and our human capital. Tourism is a low lying fruit but we must improve our infrastructure and international gateways. NAIA is consistently voted one of the world’;s worst airports. After years of wrangling over its development I intend to fix NAIA once and for all. I have recently vetoed the Bulacan airport proposal until we have a complete picture of our gateway strategy.

One of our biggest strengths is a young work force at a time when there are labor shortages around the world for such vital services as airport ground handling, hospitality and health services and construction. We have the labor pool to fill those vacancies but we must augment their education and skill levels so they may move up the value chain. If we are to be the work force and household help to the world let us be the best at that and proud of it.

Locally I have instructed the Labor Secretary to ensure industrial peace so as to encourage domestic and foreign investments. There is an exodus of Japanese manufacturing companies from China which have relocated to Vietnam and Thailand instead of the Philippines. Similarly for multinational head offices which have moved from Hong Kong to Singapore instead of Manila. These are missed opportunities.

In an age of knowledge we have failed to invest in technology. We need to digitize our national data base so we can manage our economic, social and fiscal programs more productively. The absence of a management information system has allowed the corrupt to exploit the gaps and leakages in our social safety net and tax administration. We need real data in real time so we can apply analytics and artificial intelligence to charting and monitoring our economy and social programs. All agencies must be able to talk to each other in a common platform.

We will expedite our internet connectivity by fast tracking the infrastructure and introducing low-flying satellites in partnership with industry players. The Government will finance its side partly through the capital markets avoiding the need for budgetary funding and partly by taxes on digital transactions and a possible levy on valuable telco frequencies that have been awarded for free to a few privileged players.

We must streamline our bloated bureaucracy and retrain those displaced so they may be hired for alternative positions in Government and the private sector. The Government employs 2 million people including the military and teachers with about 1.4 million in the bureaucracy proper. About 2/3 of the latter are contractual and non-professionals. The DBM estimates we can save PHP 15 billion annually by shedding 5% of the bureaucracy. The savings can go to raising the salaries of our public servants and investing in technology to improve Government offerings. Pending an organizational review I have asked for a 100 day freeze on hiring except for key personnel. I have already started this “right-sizing” in the Office of the President.

The Government accounts for some 20% of our GDP and is the biggest service provider to the nation; yet not enough attention has been paid to the quality and productivity of our civil servants. Human resources are the foundation of good governance and our greatest asset. We must offer continuing education and value formation. We must restore pride, meritocracy and professionalism in public service.

On the fiscal side we face tremendous challenges of funding our priorities in education, infrastructure, health, military pensions and social amelioration; without raising taxes that will hurt growth and jobs. We could borrow more but we have already breached debt/GDP and deficit/GDP ratios that many consider dangerous. In the meantime the cost of our borrowings is rising. We are undertaking a fiscal consolidation which may result in a deferral of previously announced corporate tax cuts and in new taxes on assets – property, luxury vehicles, collectibles, etc. – owned by the rich but not on incomes of the less fortunate. Taxes will be targeted. We shall adopt the principle of user-pay meaning the beneficiaries of a service will be taxed for their use e.g. consumers of cigarettes and alcohol will pay for health budgets, car owners for road infrastructure, digital users for the internet investments, mining companies for environmental projects. We will seek off-balance sheet ways to fund our national priorities without having to sell our patrimony.

Government should develop more imaginative ways to partner with the private sector not only in infrastructure but in health and education. What I simply ask the private sector is that it include the social benefits of such projects in determining a fair rate of return. In the past many businesses have abused the near monopoly powers of their franchises to extract excessive profits from the consumer. This has resulted in the Philippines having the highest cost of energy in the region making manufacturing non-competitive and punishing the poor.

We must align local government initiatives with our national priorities. LGUs are a big source of funding and economic stimulus. The Supreme Court has allocated LGUs a bigger share of national revenue collections. The PPPs must invite LGUs as partners in progress since they can expedite regulatory processes like business permits for building telco towers, clean water facilities and farm irrigation. I will be hosting a summit of LGUs where this will be front and center of the agenda. I am calling for the help of Governors and Mayors in the rebuilding of our nation. If they refuse for political reasons or sheer inertia I will use the power of my office and my political capital of 31 million Filipinos to convince them otherwise.

Most of the above initiatives will take time as some will require new laws, physical build outs and a cultural mind shift. In the meantime we must provide the needy with immediate economic relief. “Fiscal consolidation” is meaningless to the vast majority of Filipinos: What they want and need now is food on the table, lower transport costs, better education, medical assistance, affordable housing and jobs. I have instructed my economic team to address these concerns by leaving their zones of comfort and personally immersing themselves in the marginalized communities. Only by internalizing the problems of the poor can our Cabinet heads appreciate the work that needs to be done. Poverty is not an economic concept it is a human condition. The public must know Government understands its concerns and will address them within the factors it can control.

Finally let me address the elephant in the room: Corruption. Corruption is culturally embedded in Government. I estimate it accounts for leakages of 10-20% of our PHP 5 trillion budget or PHP 500 million – 1.0 trillion annually. This makes the Dept. of Corruption the largest agency in Government bigger even than the next largest, the Dept. of Education. These savings could be used for social amelioration, infrastructure, teaching our children and caring for our sick. 

If we cannot control corruption we cannot gain the trust of local and foreign investors and the public. To show I mean business today I have set a up an Inter-Agency Task Force under my office composed of the DOJ, DOF and DILG to investigate alleged corruption in the health system, energy and importation of key commodities like rice. This SWAT team will also pursue charges against monopolies, cartels and price gouging in the production and sale of vital goods and services. They will report their findings and actions within the first 100 days. I intend to set a new tone for my Government with this culture of accountability.

I will continue the War on Drugs started by President Duterte but the focus will be on the masterminds and their protectors and not on the victims of drug abuse.

I will run down the techno-criminals who daily are preying on the unsuspecting and the poor with false promises of employment and other scams. I will ask the telcos and social media platforms why they should not be accountable for enabling these activities.

The next few years will be difficult as we transition to new ways of doing things and fight the headwinds. Things will not always be perfect but we must start on this journey of hope and purpose, of becoming the nation we can and should be, better than we are.

Let us put all political differences aside for the benefit of the Filipino people and move forward as one. With the blessing of the Almighty and caring, belief, and trust among ourselves we shall overcome.

Mabuhay ang Pilipino. I love you all.

An Imagined SONA: Part 1

(The following is a fictional State Of The Nation Address by Pres. Ferdinand Marcos, Jr. Any similarities between this and the one he will deliver on July 25 are purely coincidental.)

My Dearest Kababayans,

Thank you for the historic mandate you have given me. I am humbled by the the honor and the challenge to lead this great nation. Thirty one million Filipinos voted for me but I intend to be the President of all 110 million of our brothers and sisters.

I start my Administration with many headwinds which I will not sugar-coat. We face a perfect storm of punishing inflation which will squeeze our pocketbooks, higher interest rates which will harm businesses, a looming food shortage, record debt and diminished fiscal space, slowing world economies, supply shocks, record oil and fertilizer prices, geo-political tensions worldwide, climate change, a possible resurgence of COVID variants and an economy still to recover from three years of the pandemic. In the last year the peso has weakened by 11% to a record low, the biggest deterioration among our neighbors, adding to inflation. Many of these are externalities beyond our control.

We will overcome the hardships but only if we unite as a nation and look out for each other. It will require trust in the social contract between Government and the public. The former has too often failed on its promises and responsibilities. It is my intention to restore that trust in Government for only then can we move forward in common purpose.

The rebuilding or should I say the renovation of our nation will be arduous but it must start today and not with words and empty policies but with action and accountability. I have assembled the best and the brightest Cabinet I could find but my Government must be measured not by what we say but what we do. We must correct years of inequity, corruption, economic elitism and failed trickle down programs that have widened the gap between the rich and the poor.

The new Philippines will be founded on the pillars of inclusiveness, honesty, accountability, sustainability, balance and trust. We must bring our economy to the 21st century with education, efficiency, environment, technology and reform of our civil service. With our limited resources we must do more with less. We must work smarter.

Education is the foundation for the long term sustainability of our country. We are the worst in the world in science, math and comprehension. Reforms will be a generational enterprise but one we are launching with the appointment of VP Sara as DepEd Secretary. Sara will bring her enthusiasm and her popularity to make the changes we need. These changes must start at the primary level and include a nutritional program, an upgrade in the quality and salaries of our teachers, a curriculum to meet the best world standards; and a rapid roll out of class rooms. We will put in place vocational programs that will employ the most number of graduates at the earliest time while ensuring the very best are brought to their full potential. We will review the current free higher education system so those who can afford will pay for those who cannot.

We will prioritize a clean environment in our cities, our tourism spots and in the exploration of our natural resources

I will be changing the way we manage Government both in mind set and organization. The Office of the President will be more engaged in governance. We will decentralize Cabinet level decision making but will hold Cabinet Secretaries accountable for results that we shall have pre-agreed. Responsibilities will be clearly defined and goals set for outcomes, quality of service and costs. I intend to take these metrics seriously. I am putting myself to the same test of accountability by heading the Dept. of Agriculture.

I am strengthening the Presidential Management Staff to be my eyes and ears on the ground and as a rapid deployment force when immediate action is needed. The PMS will be headed by a senior official. I have formed a Private Sector Advisory Council composed of respected business leaders who will work with NEDA on planning, processes and strategy. We must understand outcomes are not an end in themselves but the result of correct methodologies. 

As Chair of NEDA I am restoring NEDA’s constitutional mandate to run the economy replacing the ad hoc Cabinet economic cluster now in place. This will mean better focus and coordination across the various agencies. I expect NEDA Sec. Balisacan to exercise strong leadership in the design and execution of a national economic strategy.

We must return to basics and that means defining who we want to be. We have never had a long term strategy unlike our neighbors who decided early on to leverage their strengths and be the be best at what they do be it in high value manufacturing (Asian Tigers), tourism (Thailand), agriculture (Vietnam), or as a financial center (Singapore).

Our economic managers became enamored with growth for growth’s sake not caring how we grew or where we grew or how we shared what we grew. We are now paying the price for this misguided notion in urban densities, a failed agriculture, dismal education, environmental degradation and an unacceptable wealth gap.

We must reform the economy from the bottom up by disintermediating our processes so programs can be implemented with a minimum of layering and leakages. The welfare of the individual Filipino should be our primary concern. Budgets must be zero based. Using mobile technology we must find means to distribute AYUDA directly from the Budget Office to e-wallets thereby bypassing middlemen and fixers. Business permits must be simplified and expedited using online platforms. We must bring Government as close to the people as possible.

We must restore balance in our economy. We are long on policies but short on strategy and execution. In the last 30 years we have allowed unfettered free markets to dictate our economic path. This resulted in consumption rather than in investment and in an overdevelopment of our urban centers at the expense of the countryside. This triggered a mass migration to the cities leading to urban poverty, crime, pollution and congestion and the decline of our farming and fishery sectors and the loss of our food security.

We must implement a Balik Probinsiya program that will encourage the return to the countryside. However this cannot be done by fiat or unsustainable subsidies but by attraction, by offering livelihoods, schools, healthcare, internet and physical access in and to the countryside. The private sector must see opportunities for rural investments.

The relaunch of agriculture is long overdue. We must correct the faulty implementation of our Land Reform program. Farmers who have long paid their loans cannot secure their titles. Many farm plots have no road or water access. Cartels prey on farmers’ weaknesses with predatory farm gate prices. Smuggling is rampant under the Rice Cartelization Law. We will stop the mass conversion of farms for real estate development. We will strengthen and simplify the institutional sources of credit. We will review the land reform loans to ease the burden on our farmers; about half of which are estimated to be in default. We must develop modules for industrial scale farming.

Neighboring countries like Singapore and Brunei have the capital but not the land to grow crops to ensure their food security. We should partner with them in agriculture where they will be guaranteed the supply of the food they need in exchange for investment. However we must be competitive in producing key staples like rice where our cost of production is reportedly over twice that of Vietnam and 60% over Thailand. In the time of my father the Philippines was the region’s largest rice exporter. Today we are the world’s second largest rice importer after China. We must understand where and why we went wrong and how to correct our mistakes.

To redistribute the economy across the nation I have asked NEDA to study how we can relocate parts of our Government bureaucracy outside of Metro Manila.

(To be continued.)

Tardive Dyskinesia (TD

TD is a a neurological condition resulting often from long term use of neuroleptic or anti-psychotic drugs. The latter is prescribed for patients with psychotic disorders like schizophrenia, traumatic head injuries, bipolar disorder and other brain conditions; and chronic alcohol and drug abuse.

TD can cause uncontrolled and repetitive movements of the face like sticking your tongue out without trying, blinking your eyes fast, chewing or puckering your lips and puffing out your cheeks. In some cases a person’s legs can be affected that walking becomes difficult.

Anti-psychotic drugs can sometimes hide signs of TD in the early stages. One can get TD if one has taken anti-psychotic drugs for more than 3 months. TD symptoms may not be apparent until the individual stops taking the drug hence the term Tardive meaning delayed and Dyskinesia meaning abnormal movements. Unlike Parkinson’s disease which involves difficulty in body activity, TD involves involuntary movements.

TD is often detected in African and Asian women over 55 who have gone through menopause, with a history of drugs and alcohol. Upto 30% of women who have come off anti-psychotics have experienced TD.

TD can cause social anxiety and discomfort from the unwanted and uncontrolled jerky movements which may surface at any time. It can affect the ability to perform everyday activities, to sleep and to work. It is not life threatening although the reversibility can be low with only some 13% recovering.  

TD is often treated by lowering or stopping the use of anti-psychotic drugs. Tests for TD are a physical exam called the Abnormal Involuntary Movement Scale. There are two FDA approved drugs for the treatment of TD although many times the condition is permanent and there is a “robust association between mortality rates and TD”.

(The above information is compiled from various medical sources including WebMD and Wikipedia.)