Headroom

Among the few small blessings we can count in these harried days of a pandemic is the fact that when this calamity hit us, we were in a strong fiscal position. That allowed us sufficient headroom to mobilize the funding required to fight back.

The strong fiscal position consists of robust revenue flows because of TRAIN, a much lower debt-to-GDP situation, a credit rating just shy of “A”, eminently manageable budget deficits and an unprecedented level of gross international reserves. In addition, our banking system is at its strongest. Market liquidity is good. The BSP plowed in P300 billion to purchase government notes.

As the global economy threatens to crater, we will have enough fiscal tools to break our own fall and conserve our social order. The caveat, of course, is that the pandemic does not last too long and the global economy does not fall off the cliff into the abyss of an unimaginable depression.

Our government, like many others around the world, assumed a “whatever-it-takes” attitude toward this crisis. The timely passage of the Bayanihan Act will enable the national government to scrape together over P250 billion to protect our most vulnerable sectors during this difficult time.

Impressive as that amount might be, that is only for social protection. We will need much more to refloat our economy after this health emergency passes.

Some fundamental shifts have happened over the last few days. Those were shifts for the worse.

Last Thursday (our time), the US Congress passed an awesome $2 trillion funding package to support the American economy. Impressive as that package might be, it is conceded it will not be enough to refloat the largest economy on earth. Most are conceding a massive and heretofore contraction of that economy.

Before that package could even have a calming effect on the global markets, US employment data showed 3.3 million jobless claims filed in a week. That is four times the worst weekly job-loss number on record. Depression, that ugly word we once thought strong central banking made extinct, reappears in the language of some analysts.

Obviously, the longer the pandemic lasts, the bleaker the economic picture. Right now, businesses are just trying to survive. The smaller the enterprises, the more vulnerable they are.

There is no timeline for this pandemic.  We must prepare to battle for the long haul.

Fitch released an estimate that our 2020 economic growth could climb down to 4 percent. Later another institution downgraded our growth prospects further to a bit over 2 percent. Should a global recession take hold, we must prepare to endure zero growth.

Through tough fiscal reforms, we have been able to bring down our debt-to-GDP ratio from over 70 percent to 41 percent. That achievement now gives us some margin to borrow.

The Department of Finance is at work negotiating an additional $1 billion borrowing. The IMF has signaled it could provide that amount, remarking about the country’s excellent fiscal management.

Borrowing at this point is necessary. Fortunately, we have the fiscal space to do so.

Given the extent to which interest rates have plunged the last few weeks, borrowing today will certainly be well under the inflation rate. We need the money to purchase medical equipment and medicines. We need the money to reflate domestic economic activity.

Our economic managers have indicated we might extend deficit spending to 5 percent of GDP. We tried very hard to keep the ceiling of 3 percent despite an aggressive spending program to build infra and drive growth.

Even the 5 percent ceiling could be breached. Expect revenues to fall as economic activity is curtailed during the lockdown. Many enterprises are in danger of bankruptcy. Even the earnings of the largest conglomerates will be limited by all the donations they are now making to help in this battle.

San Miguel Corp., whose sales account for 6 percent of the country’s GDP, appears to have thrown making profits out of the window. Ginebra San Miguel has shifted production from liquor to sanitizing liquids. San Miguel Foods pushed valiantly to keep production levels going during the lockdown and larger placing orders for raw materials to ensure food availability. This week, the conglomerate donated over half a million kilos of rice for the poor communities in the metropolis.

The conglomerate’s generosity is impressive. But it also means they will be paying less taxes over time. That will affect our fiscal bottom line.

Even as we still do not see the light at the end of the proverbial tunnel, we should start planning for recovery.

The reforms of the last three years reflected in dramatic poverty reduction from around 23 percent in 2016 to about 15 percent before this health crisis descended upon us. The crisis could push that poverty rate back up. But at least we have somehow reduced the burden of caring for the vulnerable at the onset of this critical episode.

As is always the case, the poor will bear the larger sacrifice in coping with this crisis. It is correct that the alleviation measures and the recovery plan we will eventually fashion put priority on helping the poor over any other consideration.

No one knows how much we will need to spend in fighting this pandemic over the next few months. No one knows if we had hit bottom yet. We fight this long battle on a day-to-day basis.

It should be comforting to note that we entered this battle with some amount of fiscal strength. That will be invaluable at this moment as we try to raise the resources we need to win this.