(Part 1)
At this time that the Marcos Jr. government is in serious need of stronger public support, it cannot afford to see it slipping due to avoidable policy blunders. It does not have to take generative AI to figure out that our current food policy is one problem. Imagine, rice prices, whether well-milled or regular rice, rose upwards of P40 per kilo in the last 20 months when the rallying campaign promise in the May 2022 election was to bring prices down to P20 per kilo. Even onions beat the other basic commodities when their price hit the roof, ending up mentioned in Time Magazine as being more expensive than meat. Inflation has become the source of discontent among the majority of our people, and therefore the scourge of Malacañang.
The other is the establishment of the Maharlika Investment Fund. It is something that is neither here nor there, unsure of whether it would go into investing in the usual areas where budget allocations are to be deployed, or in investment outlets of the more sophisticated sovereign wealth funds of this world.
It polarized Congress, both the House and the Senate, at least between the super majority and the tiny minority. Even decent economists distanced themselves from their kind who chose to embrace the questionable viability of putting up a fund from nothing. So far, initial signs are that decisions may be politicized, rather than based on hard market research and investment models. The strategic fund’s bad start can always be reshaped — why not? — but we hope public money from the two state banks and the central bank will not be risked.
The other risk is fiscal. That’s because the Medium-Term Fiscal Framework is very general, there is a threat of weakening previous fiscal reforms. Solid fiscal consolidation is crucial, and therefore the last thing we need at this time is to risk whatever gains we have achieved. One enormous public treasury risk emanates from the untenable military and uniformed personnel (MUP) pension system.
The MUP pension system may not be sustainable unless the affected personnel also share in its upkeep to support the government’s mandatory contribution. As is it is non-contributory, unfunded, indexed to an incumbent personnel’s salary level. And, hear this, MUP pensions exceed the cost of supporting the active military! The MUP pension system is funded directly by the national budget. The long-term solution is for a strategy that reflects our valuation of MUP contribution to our nation’s peace and stability by offering them a good and secure retirement without further worsening both the fiscal deficit and public debt.
These three risks — inflation-related risks, sovereign investment risks, and fiscal risks — were identified by the excellent discussion paper at the Philippine Institute for Development Studies (PIDS) written by Margarita Debuque-Gonzales, Mark Gerald C. Ruiz, and Ramona Maria L. Miral entitled “Macroeconomic Outlook of the Philippines in 2023-2024: Prospects and Perils.”
We have to say that the paper is a great contribution to the growing body of work that attempts to capture the dynamics of economic growth and prospects in the Philippines. Its ample discussion of risks and monitoring of a number of key indicators, not otherwise discussed in many other papers, set it apart from the usual economic assessments. Its context, through which to talk about the country’s prospects for this year and beyond, is complete.
We agree with the principal message of the first 20 pages or so — that the reopening of the economy post-pandemic generated some economic momentum producing resilient output growth. Inflation was a big challenge until last year, while labor market indicators generally painted a benign picture, with both unemployment and underemployment showing some easing. The external payments reflected the difficult global economy. The fiscal sector was characterized by lower public spending, better revenues, and a narrower fiscal deficit. The debt sustainability analysis of the authors shows that the debt-to-GDP ratio could peak at 64.2% by 2025, still sustainable by the usual global standards. When discussing monetary developments, the paper focused on the central bank’s monetary policy of tightening as domestic inflation started to escalate in the early 2022.
Some footnotes that we may suggest:
Economic growth. While economic recovery could be fast, the economy actually tanked to its lowest point in decades at -9.5% in 2020 due to the lockdown. Public health policy failed us miserably. Its economic scarring is beyond calculation; we feel it until today in the poverty of our education and unskilled labor force, among others. Equally important, we needed to grow more in order to, one, achieve more equitable, more inclusive economic growth; and, two, restore our growth path to allow us to break out of the lower middle-income trap.
Inflation and monetary developments. Price pressures gained a nearly unstoppable momentum because in 2022, the central bank assumed the supply shocks were transitory and waited them out, until they turned up in another form: higher wages and higher transport costs. As clearly outlined on page 23 of the PIDS paper, the central bank decided to take some baby steps of 25 basis points in May and June when inflation had already breached the 2-4% target as early as March and April. It took the new central bank governor then, Philip Medalla, to hold an off-cycle meeting on July 14, 2022 to deliver an unprecedented 75 basis points in a brave attempt to catch up. After that meeting, inflation still soared, from a low of 6.3% in August to a high of 8.1% in December 2022. In 2023, inflation averaged 6%.
What is ironic is that while the policy rates were jacked up, the required reserve ratio (RRR) was even increased in June 2023, resulting in the injection of more liquidity. Current Governor Eli Remolona was correct in clarifying that “I don’t think it makes sense to lower the reserve requirement while we’re still in the tightening mode. They are not consistent.”
In times past, this policy was justified on the basis of an operational adjustment in monetary policy. How to reconcile this with its impact on money supply continues to escape us to this day.
Public finance. Last year, spending out of the super budget available to the government was intentionally restrained in the name of fiscal sustainability. In the face of various impediments to economic growth on the consumption side, due to inflation and availability of good jobs; on the investment side, due to the chronic issue of the high cost of doing business; and sluggish international trade, government spending could have been a partial counterweight.
The paper’s hope that a “catch-up plan may still spur spending in the latter half of the year across projects and activities of government agencies including infrastructure” failed to materialize. Public consumption expenditure even slowed down, from 4.9% in 2022 to only 0.4% in 2023, contributing a lower share of GDP, from 15% to only 14.2%.
External payments. While the balance of payments recovered from a big shortfall of over $7.2 billion in 2022 to a surplus of some $3.7 billion in 2023, it reflected more the lower imports and inflow of borrowed funds from abroad, a legacy of the pandemic and bad governance. Lower imports are a leading indicator of both exports and output growth. A balance of payments position with such underlying fundamentals does not bode well for economic prospects.
During the pandemic, the Commission on Audit submitted negative findings in how funds were disbursed by the Budget department, the Health department, and other key agencies of government. With irrational fund disposition and limited capacity to generate revenues during a health emergency, the government could only resort to domestic and, yes, external borrowing in a big way. It is no wonder then that by the end of 2023, our external debt level of $118.8 billion (September 2023) surpassed our gross international reserves amounting to $103.4 billion (January 2024).
What about the PIDS’ macroeconomic forecasts?
The PIDS economists projected 2023 output growth at 5.2% and inflation at around 6%. Not bad compared to the actual outcome. For 2024, GDP is expected to hit the scale at between 5.5-6% and inflation at 3%. The GDP forecast is quite safe within a range, something that the economy has done before. Inflation seems to be on the optimistic side considering that the Bangko Sentral ng Pilipinas (BSP) itself has announced a risk-adjusted inflation forecast of 3.9% for this year and 3.4% next year. Upside risks continue to abound.
We believe the approach of the PIDS economists over time could yield more promising results considering that its basis of assessment is very broad and nearly encompassing. It consulted the recent results of some leading indicators, such as the purchasing managers index, the BSP’s business and consumer expectations surveys, the BSP’s senior bank loan officers’ survey, and loan activity. They also conducted macro-fiscal stress tests and debt profile vulnerabilities tests. Finally, the PIDs paper did not miss looking into the financial sector by way of doing some financial conditions indexing.
Going back to the need for the people’s support of public policy, recent developments are not exactly constructive.
(To be concluded next week.)
Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.