National Statistician Dennis Mapa confirmed that the pandemic has severely affected the very poor — the bottom 30% of income households. With cash transfers that not every impoverished Filipino has received, there are but feeble safeguards against extended hunger and poverty.
Inflation is more bitingly pervasive.
The September inflation rate eased to 2.3% from August’s 2.4%. Outside the National Capital Region (NCR), there was some weakening in price movement from the August inflation rate of 2.5% to 2.4% last month. The NCR reported steady inflation of 2.2% for both August and September.
Adopting the usual perspective of monetary policy, this may suggest more room for further loosening of domestic monetary conditions and release of money supply. But a different analysis would warn that this approach pushes on a string. After pumping about P1.5 trillion and bringing down the policy rate to below both the actual inflation average for the first three quarters of 2.5% and the September 2020 inflation, credit demand has remained anemic while lending rates continue to be restrictive of business activities. Some rural banks are charging clients nearly 20% annually. A good portion of the cash released from lower required reserves ratio (RRR) has to be mopped up by the treasury operations of the Bangko Sental ng Pilipinas (BSP). There are not just enough willing takers in the market at this stage.
Thus, the BSP’s heavy lifting did not seem to address persistently weak domestic demand. At best, however, it assured that market liquidity supply is more than sufficient.
Easy monetary policy has distributional consequences. Retired individuals and fixed income earners suffer from reduced income because interest rates have dropped sharply.
Nobel Laureate Joseph Stiglitz (The Price of Inequality, 2013) argues that cheap money is a hidden subsidy to the banks.
For some, lower interest rates could dampen consumer spending, instead of pushing it up. People about to retire, or those saving for the future — probably because they are more economically and financially literate — would decide to save rather than to consume more. Those who feel they could be retrenched save more given uncertainty and lower deposit and investment income. In the last few months, higher bank deposits, lower loans-to-deposit ratios, and lower credit growth prove this point.
With the lockdown, there is practically nowhere to splurge as malls and shopping centers are quarantined. Restaurants are operating only at half capacity, if not closed. Many firms have folded up. Monetary policy transmission is rarely functioning; the virus is at work.
Indeed, confidence is lowest and sticky upward. Lower interest rates or excessive supply of money will not perk up positive sentiment during this time. Rather, it is assurance of strategic and credible public policy which will help us bounce back. It is seeing a legislature that allocates more of the national budget to health and education, as well as in vital infrastructure and other social services, rather than in the discretionary and intelligence funds, that will revive the economy.
There should be lower daily COVID-19 confirmed cases, fewer deaths and more recoveries. Science and evidence-based pronouncements will gradually open up various economic activities and public transport. Only then will the public start to buy more products and services and invest again in manufacturing and marketing of goods here and beyond domestic borders.
The erosion of public sentiment in the economy’s immediate prospects is reflected in various surveys on the public’s fear of the pandemic, perceptions about being poor, and the BSP’s own business and consumer expectations surveys.
This is also confirmed by the recent survey conducted by the World Bank in partnership with the Department of Finance and the National Economic and Development Authority from July 7-14. The survey was on the impact of the coronavirus on operations of 74,031 companies in the Philippines. Despite the selective reopening of economic activities, as this broadsheet reported last Wednesday, “most businesses in the Philippines continued to feel the pain from the coronavirus disease 2019 (COVID-19) pandemic in July…”
In numbers, this means four out of 10 companies temporarily suspended operations in July, either voluntarily or by government mandate. Some 15% permanently shut down. Only 45% reopened. Of this, only 5% are at full capacity. This breakdown of economic activities was felt most heavily in the NCR, Calabarzon, Central Luzon, and Cebu.
What we are seeing from these numbers is very bleak. First, hours of operations and jobs were reduced. This explains sustained high unemployment and underemployment. And second, wages have been reduced. This explains the sharp drop in sales. Nearly in all stores that are open, we see discounts of 50% to 70% offered by establishments selling appliances, clothes, shoes, and other consumer items. What is most discouraging is that their premises remain virtually empty.
This state of things is not static; it’s bound to affect future decisions in investment and employment. As the World Bank pointed out, “business activities are expected to stay subdued for an extended period.”
It is uncertainty that drives the decision to go full blast in business operations or in half-hearted engagement or shut downs. Uncertainty fuels business decisions to avoid risks and higher exposure.
SWS surveys report that people are still fearful of viral infection. Many feel poorer today. While the pathogen discriminates against no one, it is the poor in small dilapidated boats who get the brunt of the viral storm.
Going back to the PSA report, true, core inflation theoretically shows some demand build up in the last few months. But before we celebrate, we need to remind ourselves that last month’s headline inflation was nearly three times the 0.9% inflation rate in September 2019. Month-on-month reckoning also illustrates some price momentum.
This rate hit everyone, especially the 10% of the labor force who were out of jobs as reported by the PSA for July 2020. This unemployment rate translates to some 4 million unemployed Filipinos. Underemployment remained high at 17.3% — about 7.1 million Filipinos. They could be among those reported by the World Bank as still working but with reduced wages.
Both average actual headline and core inflation rates are comparable with their average levels in 2019 when real GDP expanded by 6%. It is difficult to sustain the meaning of “benign inflation” in the context of economic contraction. This means that the unprecedented monetary easing did not yield the desired support for output growth. Instead, it motivated last year’s price momentum in a period of lost output, lost jobs and diminution of wages. The fiscal space should have been maximized, rather than having monetary policy doing the heavier lifting.
What about the bottom 30% of all income households?
Inflation for the very poor was higher than the average for everyone else. September inflation for the very poor stood at 2.8% compared with August’s 2.7% and the year-ago level of 0.2% or 14 times higher. Commodity-wise, the poor paid more for public transport, their only option in going to their places of work. Rate-wise, inflation remained highest for alcoholic beverages and tobacco. Against year-ago levels, inflation for food and non-alcoholic beverages for the bottom 30% of all income households was three times higher.
This is one of the saddest narratives of the viral scourge. Their skills already made redundant by the lockdown as well as by the alternative on-line services, the very poor have experienced job and income loss or reduction. Cash transfers and support of MSMEs are welcome mitigants but with budgetary constraints, they are unsustainable in the long run.
The new epidemiologic-macroeconomic literature in various simulations for the UK indicates that risk aversion and physical distancing, whether voluntary or mandated, have cut down both consumption expenditure and labor supply. This is also happening in the Philippines and portends the long and winding road to recovery to higher levels, and not necessarily, to pre-COVID-19 levels. Out of economic wounds, scars could be permanent, a lasting testimony to uncertainty. The pandemic has altered human behavior.
This is hysteresis. This sets the stage for perhaps more survey results of increased poverty incidence. Would our authorities tolerate what Mahatma Gandhi would refer to as the worst form of violence?
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.