Maybe It Is Not The Peso That Needs Fixing

The talk of the town is the Philippine peso which has devalued by 15% in the last year, reportedly among the worst in the region. President Marcos publicly committed to protect the peso as has DOF Sec. Diokno. Rep. Sandro Marcos weighed in stating correctly the peso weakness is partly dollar induced.

The concerted talk tells us a) there is a problem and b) there could be worse to come. DOF Sec. Diokno vowed to defend the peso at P60/USD with a $10 billion war chest. Drawing a line on the sand and disclosing the size of the ammunition can be dangerous. One, it invariably means the peso will eventually move to that level. Two, once breached nobody will believe you after that.

Right now the peso is holding at around P59/USD with BSP intervention but it is unclear how long that will last. In August we posted a trade deficit of $6 billion, the largest single month figure since 1957. Our Jan-Aug.deficit was $42 billion, 68% higher than a year ago. Our foreign exchange reserves dropped from $108 billion six months ago to $93 billion. Philippine inflation rose to over 7% in Sept. its seventh month in a row.

The Philippines completed a $2 billion USD bond offering at an interest rate 200 basis points higher than our last loan. Our interest bill is heading higher.

In July 2022, NEDA Sec. Arsi Balisacan said: “The Philippines is far from stagflation”, the dreaded combination of inflation and economic stagnation. Arsi now says: “We are monitoring the developments closely. We can also deploy our monetary tools like interest rates so we can intervene in the financial markets to obtain these included in the weakening of the peso.” I am not sure what he meant but it sounds ominous.

He reiterated that “rising inflation is temporary”. This mirrored what the Fed Chairman said last year of U.S. inflation and he is now having to eat his words. Not only was Powell wrong, he lost his credibility which partly explains the volatility and over 20% drop in the stock market this year.

Defending a currency is a tricky thing. It involves three things: One, credibility. Our leaders are trying to talk the peso up but will not succeed unless the markets believe our Government is doing what it needs to finally fix our economy. Two, having the ammunition to successfully intervene. The announced $10 billion budget (11% of our international reserves) may sound like a lot but is not when faced with the power of the market. Three, an element of surprise. The BSP should not telegraph its intervention price nor the size of its war chest. Once these are known the market will position accordingly.

If these don’t work the BSP may impose increasingly harsher capital controls which is the road to perdition. Foreign investors head for the exit, the locals panic leading to a run on the currency. This fuels inflation which just adds to the problem.

The only way to halt a slide in the currency is to get the markets on side. Once investors believe in our actions – not our words – the sentiment will quickly change. The British pound, the gilt market (the U.K. version of U.S. Treasuries) and the Truss Government collapsed last week after the latter promised to cut taxes. However the British pound reversed itself as soon as the change in policy and Government were announced. 

How do we get the markets to believe in our economy? Here are possible solutions some worst than others:

1.Stop the corruption – This is more effective than a $10 billion forex war chest. It will restore investor confidence.

2. Defer the corporate tax cuts under CREATE- Studies in the U.S. and the U.K. show tax cuts do not result in additional investment or productivity. They simply go to higher dividends and share buy backs benefitting the rich not the poor. Our monetary and fiscal policies are now at cross purposes when they should be moving in tandem: The BSP is raising interest rates to quell demand while the DOF cut taxes to propel demand.

3. Impose a tax on super-profits – Some companies have benefited disproportionately from the peso devaluation and the accompanying inflation. In the U.S. a tax on oil companies is being considered, in the UK a tax on banks. Some local companies in the extractive industries and banks with unusual forex profits may fall under this category.

4. Realign the Budget – The 2023 Budget contains monies for among others an Intelligence Fund for the Office of the Vice-President (to establish provincial OVP offices) and the DepEd (to track criminals preying on the young). Is Sara building a state within a state? The DepEd needs money for the intelligence of our kids not for that of the OVP however lacking. Then there is some reported P370 billion in Lump Sum Appropriations which is the politically correct term for Pork Barrel. The money saved could go to social amelioration.

5. Prioritize the low lying fruits while building for the future – In the short term we should go all in on dollar earners like tourism and OFWs where the benefits are immediate and the capital investments modest. This involves a unified approach by all the stakeholders – the hospitality industry, airlines, local and national Government and our international outposts – targeting the Filipino diaspora and foreign travelers. We should upgrade OFW skills to address the world needs for mid level workers e.g. in airport ground handling. 

In the medium term we should build our infrastructure, education and agriculture.

6. Tighten our belts – Government needs to cut costs and dispense with frivolities. We should start with a freeze on new hires while we study how we can deliver the same services with less. We must dispense with public displays of ostentation whether funded privately or publicly.

7. Stop relying on interest rates alone to fix the problem – This is what happens when monetary economists are asked to address a problem. We need a holistic approach to inflation. One needs a bazooka to stop an onslaught, not a single shooter.

8. Wield the stick – SMC Power recently threatened to cancel their energy supply contract with Meralco because of some P 15 billion in annual losses from the fixed price arrangements. This will result in a loss of energy supply at a time of looming power shortages. The Government cannot allow it to happen: SMC Power seemingly made a commercial error in agreeing to a fixed price contract but the consumer cannot be made to pay for it. There could be a compromise where everybody agrees to take a hit under some form of Ch. 11 protection; in the interest of national security. The case of Manila Water comes to mind.

9. Increase the Conditional Cash Transfer program in an efficient way – Research has shown that CCTs are the best way to provide social relief. The problem is that like Ayuda most of it gets caught in the bureaucracy and corruption in the fund administration.

10. Raise the minimum wage – This is a political solution to an economic problem and will not work given our high unemployment and under employment. 

11. Price ceilings – This is generally a bad idea except in instances of clear price gouging. Even then the solution is not in setting a price cap but in punishing those operating in restraint of trade.

11. Moral suasion- This includes persuading banks to lighten whatever their overbought dollar positions which is hurting the economy. This could help for while.

11. Do not politicize the problem – A senior economic manager called our economic problems “easily manageable”. Our leaders must not lose the public’s trust with statements that defy reality.

Defending the peso through outright intervention is a one dimensional, end-of pipe solution. It could deplete our international reserves without addressing the underlying issues like focusing, aligning our fiscal and monetary policies, living in austerity and addressing gut concerns like corruption. These and not the peso are arguably what needs fixing.

A Presidency Still Finding Its Way

Barely 100 days into this Administration and already we have seen a major shakeup in  Malacanang. Last week Executive Secretary Vic Rodriguez resigned from his position “to look after his young family”. Got it. Press Spokesperson Trixie Cruz- Angeles followed suit again for “personal reasons” but more likely as part of a purge in the Palace of anybody that walked, talked or smelt like Atty. Vic. To smooth ruffled feathers the President was reportedly to appoint Atty. Vic as his personal Chief of Staff but this crazy plan was abandoned after vigorous objections from Palace insiders notably from one Atty. Ponce Enrile, 98, the Presidential Chief Legal Counsel; and family members. Why the President even considered such an option tells us he is loyal to his people almost to a fault.

Atty. Vic’s case was a brazen power grab gone wrong. He wanted to control all aspects of the presidency but, worse, being the lawyer that he is, he wanted his job description in writing. Wrong. If he had simply kept his head down, stayed in place and not bother with the legal niceties he could have been, unnoticed, the de facto President. Atty. Vic must have sensed BBM was allowing him the run of the Palace which says as much about the President and his judgement of character as it does about Atty. Vic. Unfortunately the latter ran into JPE, a seasoned power player who can smell a rat even before he sees one.

COA Chairperson Jose Calida also stepped down but this time for the real reason of a medical condition. Calida reportedly had not been reporting to office on a regular basis.

Ex-CJ Lucas Bersamin, 72, was appointed ES to replace Atty. Vic. Bersamin was one of nine Justices who voted to allow Ferdinand Marcos Sr. to be buried in the Libingan ng mga Bayani. At his age Bersamin is probably a place holder. The musical chairs of power is still not over.

In this flux JPE has come to assume a major role in the Palace both in key appointments and direction – he is said to have 3 offices, one beside the President’s, one beside the ES’ and one in the PSG. JPE is proving a much needed ballast to the Presidency at a time when the country is headed for trouble. I will not bore you with the details, just believe potentially scary stuff is coming down.

How we survive the gathering economic clouds depends on the leadership of the President and his management style. Unfortunately not much is known about these. In the Senate BBM remained fairly obscure and even today likes to stay on message and not reveal his inner thoughts.

There are varying assessments on BBM. Duterte described him as a weak leader but that was in a fit of anger. Sen. Imee has described her brother as chill. Others say he “actually is a nice guy”. Critics admit he is less scary than expected. He is intelligent, poised and capable of properly representing the country in international forums like the ASEAN and the United Nations. He is personable and prepared to listen as evidenced by the recent Palace house cleaning. The question is does he have the focus and ability to instill fear needed for an effective presidency?

BBM can talk the talk but can he walk the walk? So far the President has displayed a limited range. This is partly due to his natural conservatism – he is not a risk taker both in policy and in choice of people – but also to the heavy legacy he bears. BBM is aware the eyes of the world are on him so he is mindful to tread carefully less he be seen to repeat the sins of his father. This legacy makes him distrustful of people which limits his reach. BBM and Liza have kept to themselves all these years and have few close friends mainly social. He has relied heavily on the confidantes of his Dad like JPE and on recycled technocrats with no alternative agendas. Unfortunately many of them are getting long on the tooth and will need to be replaced sooner rather than later. 

The failure of BBM to cast a wider net is also that many otherwise qualified candidates were reluctant to serve a President who until this date remains guarded on his future intentions. They are unwilling to risk their reputations to sanitize a BBM presidency until they know more but more is not forthcoming.

BBM may have a vision for this country but has not articulated it clearly nor is he consumed by it. He has not been emboldened by 32 million votes to go all in on his presidency but has instead almost taken it as a cushion to go slow and easy. BBM has also made a few rookie mistakes. His trip to the Singapore F1 may be deserved after 3 months in office but the optics were horrible: One,the President is supposed to be promoting Philippine tourism, not Singaporean tourism. Two, watching gas guzzlers hurtling around a race track when Filipinos are strangled by soaring fuel prices is shall we say insensitive.

The upshot of all this is an Administration that has still to find its footing. BBM has not yet appointed people to head critical agencies like Health and Agriculture. The President has appointed himself as Sec. of Agriculture to signal the importance he assigns to the sector. It is a bold move but not practical as evidenced by the SRA fiasco. If that could happen so soon and right under his nose then how much more on a national scale.

The first 100 days is the traditional honeymoon period of an Administration. The best that can be said of this Government is it has been uneventful, just some hand holding and sweet little nothings. The natives may soon be getting restless particularly with trouble at our doorstep. What the President needs right now is a major initiative that will excite the nation and distract from the everyday problems of Filipinos. That is unlikely to come from the economy where the problems are just too many to be resolved quickly. What he needs is an initiative that the people can relate to, is politically and economically powerful, that will prove his sincerity and commitment, and that can be launched immediately. That initiative is a War on Corruption.

JPE would be the perfect person to lead such an initiative. At his stage in life he has more money than he can enjoy. What he might value more is to leave a legacy to what has often been a controversial career, to be the new sheriff in town, the Elliott Ness that finally cleaned house. He was the chief enforcer in the Marcos’ first presidency so he could do the same in the second. He could have at his disposal the Php 4.5 billion presidential intelligence fund that could finally be put to good use. JPE could also tap the manpower and skills of the National Intelligence Coordinating Agency to infiltrate the various hot beds of corruption in Customs, the LTO and other money making agencies to ferret out the rats.

If carried through a War on Corruption would dispel all notions of a weak presidency and be the catalyst for the various reforms needed in this country.

Possible Lessons From PAL

“ A crisis is too valuable to waste.”

The Philippines is facing serious economic head winds amidst a turmoil in world financial markets. The prospect of a global cataclysm may be small but even a 10-15% probability should not be discounted. After all what was the probability – bad or good – 1 year prior to the event of (i)  a pandemic freezing the world for 3 years (5%?); (ii) the invasion of Ukraine (10%?); or (iii) BBM becoming President (15%)? With globalization any economic or geopolitical ripple could build to a perfect storm. Bank of America warns credit markets today are at their “borderline critical level”. The continuing rise in the dollar and U.S. interest rates together with say a nuclear escalation in Ukraine could trigger a freeze in global liquidity and a sell off in all risk assets. First to fall would be emerging market economies which borrowed mainly in dollars and are dependent on worldwide growth. The liquidation has already started with the index of EM debt dropping by a record.

How do we prepare for such a shock? There is no playbook because unlike the previous crisis in 2008 and 2012, overextended Central Banks in overinflated economies today have all run out of ammunition. One way is to look at how distressed companies turned themselves around and see if this applies to our economy. Companies and economies are obviously not comparable e.g. economies cannot seek Ch. 11 protection; but many of the rescue principles are.

The biggest near corporate bankruptcy in the Philippines is Philippine Airlines. Having been deeply involved in the turn around of the company I believe we as a nation can learn from the PAL experience. 

PAL has always had its share of problems but when the 2019 pandemic and travel lockdowns hit it became clear that unless something was done and quickly the airline as with many other airlines in the world would collapse. PAL’s principal shareholder, Mr. Lucio Tan, had to decide whether he should save a company so vital to the economy. In 2018, 2019 and 2020, PAL lost  a total of over $1.6 billion. The company had a capital deficiency of $1.4 billion by end 2020. Mr. Tan took the gamble.

 In Sept. 2021 PAL filed for Chapter 11 protection to stave off creditors while PAL re-organized. PAL re-emerged three months later, possibly a record time. By comparison Hertz-Rent-a Car took over 18 months to exit a similar proceeding. The NY Ch.11 judge lauded PAL for the harmony, clarity and order of its filing. The PAL rescue was voted the World Restructuring Plan of the Year. Despite record fuel costs, in 2022 the first year of its re-emergence, PAL Holdings, the listed parent, reported six month profits of Php 3.6 billion, a Php 20 billion reversal from a loss of Php16 billion in the comparable period in 2021. PAL has repaid $278 million of debt (Php 16.4 billion) so far this year as it continues to deleverage.

What can we learn as a country from the PAL experience?

1. Recognize the problems early, build a plan that all stakeholders will buy into – PAL prepared a detailed rescue plan. Each flight route was examined for profitability. The airplane fleet and seat configurations were tweaked to serve a leaner network. A vision was laid out of a new and improved airline leveraging the strengths of its transpacific flights to SFO and LAX. Lesson: Government should design a strategic plan that leverages our competitive advantages – a young English speaking population, our natural geography – and allocates scarce resources to the best common good. 

2. Build trust – Trust is the foundation of every re-organization. PAL built a consensus among its stakeholders – employees, creditors, shareholders – by being frank and open with its limitations. The Tan family asked independent directors to chair the critical Governance, Audit, Risk and Restructuring committees to show accountability. Lesson: Our country is divided. We have become tribal. We are a nation not of Filipinos but of Pinks, Reds and Yellows. The people are wary of Government: They are afraid of the police; they believe politicians are corrupt, they are skeptic of economic promises. The primary task of Government should be to restore Filipinos’ faith in Government and each other because everything else – economic growth, peace and order – will follow.

3. Take a reputational risk – Lucio Tan took the risk that a PAL Chapter 11 filing would not cause banks to call in their loans to his other companies. He was right. Lesson: Although an investment grade is important we should not be hostage to it if it means doing the right thing for the Filipino. If we do what we need to do our credit rating will return. 

4. Share the burden – Ch. 11 is an exercise in brinksmanship but also one of collaboration among stakeholders with conflicting interests. Despite the layoffs, PAL employees rallied behind the company. Some creditors balked but in the end essentially all signed off to a $2 billion haircut. For a long time Board directors received no compensation. Management agreed to reduced salaries. The Tan family did its share by injecting $505 million in new money. PAL did not borrow a single peso from Government even as other airlines were receiving billions from theirs. Some private banks stepped in with new loans dispelling the reputational risk that many feared. Lesson: If stakeholders believe in the vision they will accept sacrifices: Businesses will (reluctantly) agree to higher taxes, workers will accept industrial peace, citizens will strive, new money will arrive.

5. Communicate –  Restructuring is largely about the credibility of management and shareholders. PAL management held regular town hall meeting with employees. Creditors were constantly informed. Despite the absence of a Government bail out PAL apprised Malacanang, the DOF and all involved agencies of developments. Lesson: Government should level up with the nation. It should not spin bad news nor exaggerate good. Filipinos can take dire warnings of hardship, what they cannot accept are empty promises like Php 20 rice and dashed hopes. 

6. Work as a team –  The PAL turn around was a collective effort of employees, the Board, management, creditors  and shareholders. Lesson: BBM should put substance to his call for unity. Government should stop the red tagging of food kitchens, the imprisonment of critics and the killing of responsible journalists. Trollers should be asked to stop their divisive posts.

7. Stick to the basics, leverage your strengths, invest in critical infrastructure, execute – With its back to the wall PAL returned to the basics: PAL cut costs, it enhanced its trans-Pacific crown jewels, it is strengthening its information system (MIS). It is working on its Mabuhay loyalty program. The work of PAL is far from done, it must replace its ageing fleet and continue to improve its customer experience; but now there is a way forward.  Lesson: Government should return to the essentials of governance. It should streamline the bureaucracy starting with a freeze on non-essential new hires. Government should protect and enhance its key franchises by upgrading the skills of its OFWs and BPOs, go all in on tourism,  invest in a MIS and not rest until the job is done. It should address corruption. 

8. Bring in fresh blood – Professionals were brought in the airline. The PAL Board was reconstituted one third of which were respected independent directors. Lesson: The country needs fresh energy and thinking. Same old, same old is just more of the past.

In every crisis there is an opportunity. Without the backdrop of the pandemic PAL may not have succeeded in its restructuring. COVID forced the stakeholders to accept sacrifices. Similarly the Philippines could use the current world financial turmoil to take a hard look at itself. PAL can still do more but has already proven this, that if we as a nation stay focused on the prize, work on the processes, trust in ourselves and each other, and share the sacrifices; we should be able to build back better and stronger.

(The writer is an independent director of PAL since Dec. 2020 and member of its Restructuring Committee. )