Beyond fiscal stimulus

beyond fiscal stimulus - Beyond fiscal stimulus

 

In his recent commentary in an IMF Blog, Nobel laureate Joseph Stiglitz of Columbia University argued that COVID-19’s impact differs from country to country.

Factors that make a difference are: the state of healthcare facilities; the preparedness and resiliency of individual economies; the quality of public response; public trust in government guidance and policy; and sense of community.

The viral scourge is worse where there is pre-existing wealth inequality. The poor, and low-skilled workers are more exposed to other people. Studies show that infections are rampant even in some developed economies where citizens do not have access to decent healthcare. This is how they sustained larger damage.

In previous columns, we cited the 2019 Global Health Security Index involving 195 countries. The Index broadly covered the same metrics. In it, the Philippines ranked 53rd and scored 47.6 out of 100%. The Philippines fared lowest among the ASEAN 6. Thailand was 6th; Malaysia, 18th; Singapore, 24th; Indonesia, 30th; and Vietnam, 50th.

While all countries have been hit by the pandemic, its effects vary across countries and regions. The Philippine infection rate is now the highest in Southeast Asia.

Given real and lingering fears of catching the disease, many normal social, consumer and business activities are unequivocally priced riskier today. Empty or half-full malls and restaurants are anathema to financial statements and balance sheets. With weakening business links and value chains, indicators of consumer and business activities continue to trend south.

We share Stiglitz’ fear that this state of things could further accelerate inequality and shorten the social fuse.

If there is one big lesson that 2020 taught us, it is anagnorisis. We now recognize the whole essence of the pandemic; its pervasive health impact and how vulnerable we have become. We are aware of public policy limitations; of economic dislocation and forced poverty. We feel the effects on mental health and many have experienced the trauma of desolation and even faced death. Even spiritual activities like church services and prayer meetings have to give way to health protocols, with Zoom replacing sanctuaries and temples of worship.

We agree with most of Stiglitz’ recommendations for rewriting the rules of the economy, in the US and elsewhere.

Interesting are his recommendations for better balanced bankruptcy laws, instead of overly creditor-friendly ones that leave little accountability for those engaged in predatory lending. Equally intriguing is his recommendation to have more inclusive corporate governance laws that protect both shareholders and other stakeholders. Workers and environment protection is critical in the new normal.

While it appears sound, it is difficult to share Stiglitz’ proposal for monetary policies “that focus more on ensuring full employment of all groups and not just on inflation.”

Reducing both the policy rate and infusing the system with more and more liquidity during this pandemic is like pushing on a string. With limited policy instruments, central banks would be challenged to deliver on Stiglitz’ all-embracing expectations. With this inherent handicap, monetary policy can lose credibility. Its effectiveness will be compromised.

This means fiscal policy should do more heavier lifting. In the Philippines, fiscal measures have been trained on increasing public spending on both fighting the virus and enabling an economic bounce back. Support has also been given to the impoverished and the jobless. Our fiscal authorities have also indicated their intent to provide assistance to small entrepreneurs. Some big corporations including those in the aviation industry are also seeking some hand holding.

Can we afford what Congress and some segments of the civil society would like the National Government to do — spend more to stimulate economic recovery, save businesses, and protect jobs?

For 2020, any additional amount to the supplemental budget can only be funded from budgetary reallocations — from pork to public works, social protection and wage support — and from any future revenue stream or public savings. Finance Secretary Sonny Dominguez categorically pegged it between P140 billion to P160 billion.

Senator Sonny Angara, sponsor and champion of Bayanihan II, explained that the P140-billion allocation will go to procurement of some 6 million N95 face masks, 8.5 million gowns, 1 million head covers, and 2 million coveralls; hiring more frontline medical workers and extension of services; payment of compensation for affected frontline medical workers; more quarantine facilities; reimbursement funds due to district, provincial, and city hospitals; hiring of contact tracers; and procurement of medicines and vaccines, when available. We cross our fingers and pray this amount would be sufficient because this is all the government can afford this year.

It should be a different ball game for 2021 and 2022.

Yes, it would be too ambitious to raise revenues to approximate pre-pandemic levels. Yes, we can also undertake reforms to further improve efficiency of spending, reduce corruption, and enhance the business environment. But these are good only in the medium term. The yields may not be enough.

This is a crisis like no other. To manage it and its consequences would cost an arm and leg especially given pre-existing handicaps in healthcare and infrastructure. The Philippines is in this situation. As in golf, we need to catch up to be at par. We need to spend more to compensate for disadvantaged consumers and businesspeople.

Therefore, the government will have to borrow in a big way from both domestic and foreign sources. We need not be anxious about this because when the year began, debt sustainability assessments by both the government and international financial institutions indicated that our public finance was robust and promising. Fiscal policy has good latitude.

This is one of our pre-existing buffers.

But borrowings cannot be unlimited. Debt must be kept sustainable so that it does not imperil growth and stability. Otherwise, debt distress will follow and we might be unable to fulfill our financial obligations. We would then find ourselves in a bind, unable to grow because of hamstrung revenues and resources. We might be in a situation where nobody is paying taxes because businesses are down and people are not buying.

No one wants to lend to a losing proposition. This cycle can only be broken by the government.

So far, the Government is doing its share. As of the end of July 2020, accumulated National Government (NG) debt reached P9.16 trillion. This is more than twice the proposed budget for next year. Deficit spending was intense at P700 billion. Public expenditure of P2.4 trillion was supported by total revenues of only P1.7 trillion during the first seven months of the year. Between end-December 2019 and end-July 2020, the NG has already borrowed P1.4 trillion. This is the reason for the urgency for Congress to pass the various revenue bills pending on the floor. This is crucial in avoiding dependence on too much borrowing to promote economic recovery and sustain growth.

If the deficit hits 9.6% of GDP, we expect that the debt to GDP ratio will hit around 54%. This would be the same as the debt to GDP level of 10 years ago.

We can interpret it negatively by saying we would be set back by 10 years in terms of debt sustainability. More than half of output was generated by borrowed funds. As a consequence, a larger portion of our output would have to be earmarked for debt servicing.

On the other hand, borrowing is an imperative if we wish to grow out of debt. We need more resources to fund infra projects, to support consumption and investment, to lay down the groundwork for economic recovery. We shall be paying down our debt as we grow. Over time, we should be able to reduce the debt to GDP ratio and restore it to pre-pandemic levels.

For its part, the private sector should innovate products and services to conform to the new normal. Delivery modes should also adapt by employing digital solutions. Agriculture will benefit from more engagement with the soil.

Our prospects will only improve when the pandemic shows some flattening. This requires our health authorities to step up. The people of the Philippines are looking for results. Unless they see this, the crisis of confidence will remain more than sand in the wheels.

Otherwise, we cannot restart growth. We shall fail to replicate what we have sustained in the last 21 years of uninterrupted economic growth.

In the recent Fund publication, we note that countries face a formidable future characterized by a collapse of government revenues and withdrawal of private capital.

In the Philippines, tax revenues dropped during the lockdown months. Both foreign direct and portfolio investments have nearly dried up. More official international capital flows appear to have been made available as a compensatory measure.

The Philippines has already tapped both the World Bank and ADB, in addition to the Asian Infrastructure Investment Bank. The government has also floated global bonds amounting $2.35 billion and Euro 1.2 billion in the first half of 2020.

Responding to what is expected to happen during a global crisis, credit rating agencies (CRAs), have started credit downgrades.

We are afraid that with these procyclical downgrades, the situation could be pushed from bad to worse. From the perspective of emerging markets like the Philippines, these actions further weaken the external sector of trade and investment and reduce latitude for recovery and growth. This underlines the need to pursue economic revival while ensuring fiscal and debt sustainability.

Definitely, public spending should be sufficiently large but it should also be smarter, addressing  both present exigencies and future concerns.

 

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.

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