Pandemic tests limits of Philippines fiscal ammunition

MANILA, Philippines — No one could have imagined the events  that would transpire this year. Aside from the tragic loss of life, the impact of the coronavirus pandemic on the global economy, including the Philippines, has been especially devastating.

To slow the spread of the coronavirus and protect its citizens, the Philippine government had to impose stricter mobility restrictions in Metro Manila and other parts of the country. An unprecedented lockdown was imposed on people, resulting in a near-total shutdown of social and economic activities.

The health crisis induced an economic crisis and soon, the government had to prepare its fiscal ammunition to support struggling Filipinos and businesses caught unprepared for the onslaught of the  raging virus.

The government formulated a socioeconomic strategy that relies on four pillars: the provision of emergency support to vulnerable groups, gathering of resources to fight COVID-19, fiscal and monetary actions, and the implementation of an economic recovery plan.

In line with the first pillar, Finance Assistant Secretary Paola Alvarez said Congress in March passed Republic Act 11469 or the Bayanihan to Heal as One Act, which granted President Duterte emergency powers to respond to the health crisis.

“It gave us the flexibility to implement programs to tide over affected families, businesses and employees as we prepared for the gradual reopening of businesses under the new normal,” Alvarez said.

The law made possible the provision of subsidies to 20 million poor households under the Social Amelioration Program.

It also enabled the government to implement the Small Business Wage Subsidy program for more than three million workers in micro, small and medium enterprises (MSMEs), as well as other forms of assistance to farmers, fisherfolk and other affected sectors.

The country’s health system likewise received the necessary boost, improving its capacity to respond to the COVID-19 crisis. The law expired on June 25, 2020.

On Sept. 11, Republic Act 11494 or the Bayanihan to Recover as One Act was passed, providing an additional P140 billion stimulus package to help hard-hit industries and sectors bounce back from the debilitating effects of the pandemic, plus a standby fund of P25.5 billion.

Alvarez said the measure seeks to strengthen the health sector, provide appropriate cash-for-work programs, assist affected economic sectors, and infuse capital in government financial institutions (GFIs) for lending to productive sectors of the economy.

According to data from the Department of Budget and Management (DBM), the government has released a total of P498.51 billion in allotments to key agencies as of Dec. 11 to support their  respective COVID-19 response efforts.

About P386.14 billion of the amount was under the Bayanihan 1 and so far, Bayanihan 2 has already released a total of P105.78 billion.

Is it enough?

Estimates from the International Monetary Fund showed that the Philippines’ total fiscal package for COVID-19 response amounted to P595.6 billion as of Dec. 3, which is equivalent to 3.1 percent of the country’s 2019 gross domestic product (GDP).

“While no country in the world was prepared to take on a global health crisis of this scale, the government immediately mobilized resources for COVID-19 response and recovery, balancing the importance of saving lives and protecting livelihoods for millions of Filipinos,” Alvarez said.

She said the Department of Finance (DOF) supported the two stimulus packages upon an “exhaustive” search for fiscal resources.

However, other sectors have questioned the administration’s fiscal response, and called for much bigger stimulus spending.

Nicholas Mapa, senior economist at ING Bank Manila, said that while the government’s fiscal response has helped cushion the impact of the pandemic, a bigger rescue plan “could have gone a long way to help preserve the fast-fading growth potential.”

“Any form of spending to help offset the downturn caused by the pandemic is welcome, although given the fiscal space available to authorities and the hole the economy is currently in, we would have preferred a more forceful response to the crisis,” he said.

Mapa said that the fiscal response from the government has been very modest, with the Philippines doling out the most austere COVID-19 stimulus package in the region.

“The Philippines is now the worst performing economy in ASEAN and perhaps the size of the stimulus may have an impact on our growth trajectory,” Mapa said.

“Furthermore, the already modest stimulus plan is heavily laden with capital infusions to Landbank and DBP (Development Bank of the Philippines) with authorities banking on the money multiplier to bolster growth via lending, which has had very little impact so far,” he said.

On the other hand, Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the government’s fiscal package can still be considered “relatively decent” amid lack of government funds.

But like Mapa, he said additional stimulus may still be needed for those sectors which have been hardest hit by this health crisis, including MSMEs and poor households.

The Asian Development Bank, which estimated the Philippines’ COVID-19 response measures at 5.5 percent of GDP as of June 15, also said that the size of the  government’s fiscal package  may still not be adequate.

“The package of the Philippines…is small in absolute value ($188 per capita) and several of the models indicate that the package ought to be larger,” the ADB said in a report titled “An analysis of the worldwide response to the COVID-19 pandemic: What and How Much?”

As of Nov. 30, the ADB said the Philippines’ COVID-19 response was equivalent to 5.88 percent of GDP or about $202.95 per capita

Ateneo De Manila University’s Department of Economics, in a working paper titled “The Philippine Economy During the COVID-19 Pandemic” published last September also said the government should deploy a stronger fiscal stimulus against the pandemic.

“The Philippine government needs to shape up in both fighting COVID and addressing the economy by establishing a stronger fiscal stimulus to a collapsing economy. It has one of the weakest economic stimuli in the world. The Philippines should be forward-looking,” the ADMU paper stated.

Meanwhile, lawmakers have also pushed for the passage of a third stimulus measure in Congress, dubbed as Bayanihan 3, to rescue Filipinos from the impact of the health crisis and the typhoons that devastated the country in recent months.

Fiscal prudence

But despite these calls, economic managers have been reluctant to put in place a stronger stimulus plan, citing the need to practice fiscal prudence.

“The packages were what we could afford and implement, given our time and absorptive capacity constraints,” Alvarez said. “Government agencies will have to be more efficient in using their resources. It will be unwise, for example, to provide more funding to an agency that has a history of underspending.”

Furthermore, she said additional funding “is not always the answer to structural problems.”

“For instance, country-by-country statistics show that there seems to be no direct correlation between stimulus package size and the drop in the gross domestic product (GDP),” she said.

“It appears that no matter how much money countries pump into their economies, their GDP would have shrunk massively, anyway. It is not the sheer size of the stimulus package that matters now and whether it is actually saving the productive parts of the economy. The issue is no longer a systemic contraction or a cyclical bust. Simply, mobility restrictions necessary to control the pandemic hamper aggregate demand,” she said

Earlier, Finance Secretary Carlos Dominguez also said the government must “keep the powder dry” as no knows  until when the pandemic will last.

“The battle against COVID-19 is going to be a marathon, not a sprint. We need to maintain our fiscal stamina. We should have ample ammunition to outlast this enemy,” Dominguez said.

According to the finance chief, the government wants to keep its deficit-to-GDP ratio at the median among its neighbors in the ASEAN and credit peers around the world.

He said the 7.6 percent deficit-to-GDP level, based on the latest estimates of the Development Budget Coordination Committee (DBCC), would place the Philippines right in the middle of the pack.

The country’s debt-to-GDP level, meanwhile, is expected to settle at  53.9 percent by end-2020, following the government’s borrowing spree to raise funds for COVID-19 response amid weak revenue generation. This is still considered manageable, being relatively lower than the international threshold of 60 percent.

According to the Bureau of the Treasury, the government’s gross financing has already reached P2.835 trillion from January to October, accounting for 95 percent of the P3 trillion program. The bulk or P2.26 trillion of the amount came from domestic lenders, while P574.43 billion was sourced from foreign creditors.

“This conservative approach will allow us to continue accessing the financing we need at favorable terms for the Filipino people,” Dominguez said.

Moreover, Dominguez had also said that pouring more fiscal stimulus is not the way to bolster the economy, but rather by instilling more confidence in the people, encouraging them to go back to spending.

But for Mapa, stimulus spending would be a more effective strategy in propelling the economy and stimulating demand.

“Authorities appear to favor debt metric optics over pump priming spending and this may have some benefits in terms of preventing some panic. However, we believe the better use of funds and a more effective use of borrowings would be to pump prime the economy and stimulate demand,” Mapa said.

He said the lone hope for economic growth was government expenditures, but with spending now also in the decline, recovery may take longer.

Disbursements shrunk by 6.84 percent to P289.6 billion in October compared to last year’s level, representing the second consecutive month that spending declined.

“With the national government signaling reluctance to spend in the coming months, we are now bracing for fourth quarter GDP to fall by 11.9 percent.”

“Government continues to shy away from spending in the name of fiscal sustainability. However, the longer the economy remains in recession, the deeper the hole to get out from, which ironically would require an even bigger fiscal response to get address the crisis,” Mapa said.

He also said that a lower growth trajectory may constrain revenue streams over an extended period of time, limiting the ability of the government to repay its debt at favorable rates.

Ricafort, for his part, acknowledged the benefits of exercising fiscal discipline, particularly in maintaining a manageable debt, as well as a good credit rating. However, he said there is a need to balance this with the need to spend more to address the crisis.

“There is a need to strike a delicate balance of increasing government spending, wider budget deficits, and more borrowings to finance the various COVID-19 programs – as also experienced by many countries around the world – while also ensuring fiscal discipline to make overall debt management more sustainable and acceptable over the long-term,” he said.

Road to recovery

The pandemic has put the Philippines into a recession, with the economy contracting for three consecutive quarters, 0.7 percent in the first quarter, a record high of 16.9 percent in the second quarter, and 11.5 percent in the third quarter.

Following its latest meeting on Dec. 3, the DBCC forecasted a full-year contraction ranging from 8.5 to 9.5 percent, deeper than its previous estimate of 4.4 to 6.6 percent.

Economic managers, however, are optimistic of the country’s recovery prospects, with the GDP seen growing by 6.5 to 7.5 percent in 2021, and eight to 10 percent in 2022.

Meanwhile, private economists and think tanks expect the Philippine economy’s recovery to take a longer time, saying that GDP growth may go back to its pre-COVID-19 level only by 2022.

Budget Secretary Wendel Avisado said the timely passage of the P4.506 trillion national budget for 2021 would serve as a huge stimulus for the economy, coupled with further easing of lockdowns and faster government spending.

Furthermore, Dominguez said the DBCC has agreed to extend the validity of the 2020 budget, including unspent funds under the Bayanihan to Recover as One Act, if there is any. This should provide additional stimulus to the economy, he said.

The finance chief said economic recovery also hangs on the availability of a vaccine, as this would inject confidence back into the economy. The government is ready to spend as much P73 billion to provide vaccine to 60 million Filipinos, which would enable the country to achieve “herd immunity.”

For Ricafort, slowing down the increase of COVID-19 cases in the country would be crucial for the bounce back, as it would allow the further easing of quarantine measures and reopening of the economy.

“Further increase in government spending especially on infrastructure would help pump-prime the economy,” Ricafort said.

He said the passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill, other stimulus measures, and further monetary easing measures would help spur economic activity, attract investments and create more jobs.

Alvarez said CREATE seeks to provide immediate tax relief to corporations, especially MSMEs, which would then help the country attract more foreign investments.

She said the DOF is also pushing for the passage of the Financial Institutions Strategic Transfer (FIST) Act and the Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery (GUIDE) Act.

FIST would allow banks to dispose of non-performing loans and assets, thereby enabling them to extend more credit to more sectors in need, while GUIDE aims to enable government banks to extend their support to businesses through a special holding company.