So Soon, So Soon

Hardly has the Marcos Administration taken office that it is swamped by a series of scandals some of which inherited from its predecessor and some of its own doing.

The Commission on Audit has discovered that thousands of laptops intended for teachers were overpriced by a factor of four and were below specs making them essentially useless for  applications needed in the class room. This scandal has to be laid to the watch of then DepEd Sec. Len Briones but it is up to the now DepEd Sec. Sara Duterte to sort it out. We have still to hear from her on this matter.

It was reported that certain people in Malacanang were asking for Php 100 million to have some people appointed to high office. The whistleblowers took up the issue directly with the President but no heads have rolled possibly because the accusations fell too close to home.

In the latest controversy a scheme was unearthed allegedly involving members of the Sugar Regulatory Authority (SRA) and some big sugar barons and traders to create local shortages in sugar thereby driving prices up to consumers and industrial users forcing some of them to curtail operations. This scheme adds to the continuing shenanigans in rice, chicken and pork that have contributed to the high inflation in our food bill. 

First some background. This country produces about 2 million metric tons of sugar but consumes about 2.5 million MT annually resulting in a shortage of 500,000 MT. The latter has to be covered by imports. We used to be a major exporter of sugar (as we were of rice) but this is another conversation altogether.

Historically our sugar produced has been divided into 4 classes: “A” for export to the U.S. under the Laurel Langley Act; “B” for sugar to be sold domestically; and “C” “and “D” for world exports and reserves. The latter two categories are insignificant because of the current sugar shortage. The export of “A” sugar is optional on our part.

 The SRA is responsible for classifying sugar. “A” sugar is computed at 5% of total production with the balance of 95% allocated for the domestic market as “B” sugar. “A” sugar has a price of around Php 1,200/50 kg bag while “B” sugar has traded as high as Php 4,000.

So why is the SRA allowing for the export of “A” sugar when there is a shortage in the country? One possible answer is the more we export the greater the local shortage and the greater the local shortage the greater the profit made by traders who are “allowed “ by the SRA to import sugar to cover the shortage. The landed cost of imported sugar from Thailand is significantly below the price of local sugar so importers have been able to reap profits of as high as 4 times their cost. The scheme is so lucrative even some big local sugar producers have joined the importers’ cartel. 

How big can the profits be? At 5% of production “A” sugar is roughly 100,000 MT or two million 50 kilo bags. If one can import sugar at say Php 1,100/50 bag to replace the shortage caused by the exports of “A”; and sell it locally for say Php 3,000 the profit is Php 3.8 billion (Php 3,000-1,100 x 2,000,000 bags). It is not rocket science but it works.

There is still some “A” sugar held by producers that can be reclassified to “B” to ease the current shortage but the SRA is apparently not allowing it. Maybe there is not enough incentive for it to do so.

The money trail behind our sugar shortage leads to the SRA which in addition to classifying sugar also issues the license to import it. In the latest arrangement, the SRA issued an order to import 300,000MT of sugar ostensibly upon the instruction of the President when he never did. What followed was a charade of “he said she said” between the SRA and the Exec. Secretary. The order was subsequently reduced to 150,000MT but by then the scam was exposed.

The SRA is only one of various cess pools in Government. Other are in Customs, BIR, regulatory bodies like the Energy Regulatory Commission, the Land Transportation Office, etc. At the apex of all these agencies is Malacanang or, more specifically, the people in Malacanang who get to call the shots.

Power in the Palace is a dynamic struggle between differing factions. In the Pinoy Administration there was the Samar versus the Balay faction. In Duterte’s time there was the Bong Go group versus the Pimentel side of PDP Laban versus, arguably, Sara. In the BBM Administration power is said to be divided between the Executive Secretary’s Office and the First Lady at the innermost circle; with Immediate family, the original friends of BBM, key members of the Legislature and the big political contributors like certain businessmen and the INC; at the next. The latter is reportedly unhappy about being unable to place its full slate of candidates in key agencies. The rule of thumb in politics is that power is correlated with how much alone time one has with the President. By this measure the Executive Secretary probably spends the most waking time with the President, the First Lady, I imagine, the most sleeping time.

Power in Malacanang is like an iceberg: Some of it is visible above the water but most of it under unseen by the naked eye. Thus power is wielded through one’s office but, more extensively, by the people one is able to appoint to head the various “money making centers” in Government. The monetary value of the latter varies with each agency. In the case of one infrastructure office the top position was said to be worth Php 100 million. Can you imagine what is the value of being able to appoint the heads of Customs, BIR or the ERC?

The appointment of key agency positions is not restricted to the top posts. It also applies to under secretaries who deal with the nitty gritty of governance and have the advantage of not having to pass the Committee on Appointments.

The protagonists in this political Game of Thrones operate outside the formal chain of command. By and large the President has appointed a good Cabinet. However as I wrote two months ago and as we are seeing now, these men and women are being by-passed in many of the key decisions. This playbook is reminiscent of the first Marcos Administration when unbeknownst to Cesar Virata & Co. cronies were making end runs around them. This is not to say that BBM will do likewise but as we witnessed in the SRA  scandal when Malacanang had to reverse himself on the importation of sugar; the job of President is just too vast for him to know and see everything. He has to rely on his judgement of people immediately surrounding him and right now that judgement is in question.

The new Administration will have its teething problems as the various power players vie to divide the spoils. BBM must ensure that no single faction gets to irreversibly imbed itself in the decision making and implementation of policy. He must divide and conquer so there is checks and balance. He must ensure that he holds the reins so that power emanates from him and not by those claiming to act “by the Authority of the President”.

As it is so soon, so soon is the infighting taking place in the Palace we must wonder if to inflation, poverty, unemployment, crime, climate change, and our trillion pesos in debt; we must now add a potentially dysfunctional Government. 

There Are Truths, There Are Lies And There Are Statistics

The second quarter numbers are out: The economy grew by 7.4%. This, we will be proudly told, is the second highest in the region even though (a) it is a comparison with last year’s dismal numbers when we were the worst performer (b) it is below what analysts expected or were led to expect and (c) it is below Q1’s figure of over 8% i.e. the economy actually contracted in Q2, decelerating so early in the recovery cycle. 

The major drivers of the economy were consumption as people went “revenge” shopping and construction as projects held up by COVID were completed. Agriculture, a priority sector, declined by 0.6%. Inflation continued its climb to 6.4%. Our international reserves dropped by some 10%. The peso fell by 7% since the start of the year and by 11% since a year ago. Our public debt grew to a record Php 13 trillion. There are now 3 million officially unemployed, at least that figure underemployed, 20 million are living below the poverty line and 42% of those polled believe “they are poor”. 

This is the state of the nation that we are told is fine. Is there something I am missing?

One of the most important skills of economic management is how and what to communicate to the markets. The tone of the messaging provides investors and businessmen with forward guidance which they use in deciding whether to invest, hire people, buy more machinery and build inventory. 

The President’s SONA laid out the Administration’s Six Year Economic Plan which in a nutshell is more of everything we like – growth, jobs, technology, agriculture, education, manufacturing, health, fiscal prudence, fully funded pensions – and less of everything we don’t like taxes. The SONA did not say what the final bill would be but by my count  is a deficit of some Php 2 trillion a year. This pace would double our public debt by 2028.

Our economic officials assure us if we can just grow and grow we will be able to work down our debt. This “growth surplus” theory goes something like this: In the last 20 years our fiscal deficits have averaged around 5% of GDP and Government revenues around 12% of GDP. So if for every Php 100 of additional GDP we can collect Php 12 in taxes this more than covers the Php 5 in deficit. The difference of Php 7 can then go to pay down our debt. The equation may work but the facts don’t validate it: Despite a nominal annual average growth rate of around 9%, except for 2003 when there was a rash of privatizations, our public debt has grown every year from Php 2.2 trillion in 2000 to Php 13 trillion this year. This tells me either (a) our deficits are under reported (b) our tax revenues are over reported or (c) we have lost the Php 7 surplus through leakages like corruption or funny accounting. The narrative that we can grow our way out of debt has not proven to be true so for us to be told otherwise is either whistling in the dark or an aspirational fantasy.

Economic managers will invariably talk up an economy. They will want to assure investors they are in control which protects one’s sovereign credit rating, comforts creditors, boosts business confidence and keeps their job. Our new Government is also mindful not to be critical of the previous Administration. After all Duterte’s daughter is BBM’s VP, DOF Sec. Ben Diokno was a protege of Sec. Dominguez, BSP Governor Medalla an associate of Diokno. It is all very cozy. NEDA Sec. Arni Balisacan has no such ties so he is a little more open: He believes “we face obstacles but these are surmountable” which in public parlance is the equivalent of a wink and a nod. ( Btw Balisacan has seemingly assumed the role of Economic Spokesman which reflects his closeness to the President relative to his peers. He was one of BBM’s first appointees.)

Economic messaging can be tricky, like cheating on your wife a fine balance between holding her hand and not quite telling the truth. Too much of one and not enough of the other can spell trouble as we see in the U.S. Federal Reserve Chairman Powell proclaimed last year that U.S. inflation was “transitory”. This encouraged the U.S. Government to blow out its deficit by over $3 trillion and send prices sky rocketing. He has now to eat his words and defend an inflation of 9%, the highest in 40 years, and a 20% drop in the stock market. Worse, investors are now taking his words with skepticism. 

Powell admits he was wrong in his early assessment and the Fed now needs to aggressively reverse itself to bring down prices. Last week the Fed raised its fund rate by 75 basis points after a similar record raise the previous month. However, rather than tank, the U.S. stock market spiked by 7% in the 3 consecutive days following the announcement. This was counter intuitive since markets are supposed to fall when interest fates rise. The rally also further fuels inflation through the wealth effect making the Fed’s war on prices that much harder. It appears investors are skirting the Fed narrative. Partly as a result, the Fed announced it is no longer providing forward guidance.

The lesson is public officials whether in the U.S., here or elsewhere cannot talk like second car salesmen. Then NEDA Sec. Karl Chua tried it once when he proclaimed in the spring of 2020 that COVID was a “hiccup” and was never really taken seriously after that.

Economic guidance is crucial to economic management. Monetary and fiscal tools are effective only when coupled with transparent, honest and consistent messaging on the true state of affairs. The key is trust and confidence. Once the latter is lost, once markets realize they are being manipulated they will no longer respond as desired to official guidance. Businessmen do not want to be talked to like 5th graders. They see the realities on the ground. So don’t tell them that inflation is manageable when companies are witnessing 30% rises in their raw materials, when consumers are trading down to more affordable food products, when gas is up over 40% and grocery bills over 10%.

To be fair our economic managers are relying on numbers from the Philippine Statistics Authority which are backward looking or not reflective of the true consumer basket. As a result they are invariably behind the curve. Four months ago the BSP proudly announced that local interest rates need not follow the U.S. path because our inflation was less than half that of the U.S. Well our inflation rose from under 4% to over 6% two months later forcing the BSP to ratchet up interest rates but by then the horse had fled the barn. In that period the peso plummeted 7% which has further fueled inflation. Whether COVID or economic policy our officials are consistently playing catch-up. 

Our economic managers need a broader view of the landscape than a couple of data points from the PSA. They should look at inflationary expectations which are forward looking. They should talk to businessmen about their costs, do the household groceries once in a while. Backward looking data, arguably incorrect numbers and a fear of spooking the populace with honest assessments has resulted in pronouncements that are seemingly spun leading to confusion, doubt, false hopes and disenchantment. Most countries openly warn of the difficult journey ahead. We do the opposite. Whether “Php 20/kg rice” or no need for taxes on an “easily manageable” public debt our officials sell us on a dream that is not there. The Dept. of Agriculture has admitted the former is not possible, the outgoing DOF that new taxes are needed.

The most powerful tool of economic managers is neither monetary nor fiscal but trust and credibility. Once you lose these, once the genie is let out of the bottle it is very hard to get it back in.

As I said economic messaging can be like cheating on your wife. Just don’t get caught.