-9.5%

There were no surprises here. The Philippine economy contracted -9.5 percent for 2020 exactly as most analysts expected.

Last year’s contraction ended 21 years of sustained quarter-on-quarter growth – our longest period of expansion yet. It certainly ruined the dramatic reductions in unemployment and poverty rates expected at the close of 2019.

This is the most severe contraction experienced by the Philippine economy since modern economic data began to be compiled in 1947. It is more severe than the -7 percent contraction we experienced in 1984.

But there are important differences between 1984 and 2020. These differences will spell the nature of the recovery we are expecting beginning this year where our growth is expected to hit 7.7 percent – the highest in our part of the world, matched only by Vietnam.

The economic crash of 1984 was entirely our own undoing. It was precipitated by a debt crisis, sparked when we began defaulting on our obligations. The economy froze when we ran out of foreign exchange to pay for our imports and when international institutions were reluctant to lend us any more money.

It took us about two decades to climb out of the crash of 1984. We had to submit to a painful “structural adjustment” program dictated by the major foreign lenders. That “structural adjustment” was basically an austerity program designed to enable us to pay back what we owed foreign lenders.

The long program of austerity prevented us from making the public investments needed to spur growth. We could not initiate a major infrastructure modernization program nor expand investments in our human capital such as education and public health. We lagged behind our neighbors in the ASEAN region.

Slowly, we had to work down our debt and build fiscal strength. We refinanced what we owed by borrowing at cheaper rates to retire old debt. As our credit risk rating improved, we were able to borrow at lower rates. But we could not leap out of the debt crisis overnight.

When our credit risk ratings were lower, the cost of money was high. That dissuaded investments in our economy.

The decision to mothball the Bataan Nuclear Power Plant was particularly debilitating. That plant was supposed to contribute a major portion of our power supply. Without it, the economy suffered from power shortages. Power supply was not only erratic but also expensive. No one would want to invest in an economy like this one.

Financially debilitated, the only way to build the generation capacity our economy needed was to offer investors sweetened deals such a the onerous “take-or-pay” provisions where we paid for power we did not use but which the generation companies were theoretically capable of producing. We ended up with one of the highest power rates in the world.

To compound things, ideologically driven labor unions mounted strikes for political goals. That drove away many labor-intensive industries, such as our once vigorous garments industry, to countries like Vietnam and Indonesia.

If this was not enough, communist guerrillas kidnapped foreign business executives and once assassinated an American military adviser. That added to the disincentives for investors.

When the first wave of capital migration from Japan happened, it skipped the Philippines and went to Thailand, Malaysia, Singapore and Vietnam. Our economy merely hobbled along, dubbed the “Sick Man of Asia.” The rest of the region, meanwhile, raced to achieve tiger economy status.

Just as we began to consolidate our fiscal and financial position during the Ramos years, the Asian Financial Crisis hit us in 1997. The peso depreciated drastically, forcing many of our enterprises to restructure their debt. The global financial meltdown of 2008 again threw us back.

We are not likely to encounter the difficulties we endured in the aftermath of the debt crisis as we try to rebuild growth momentum this time.

We are in a position of fiscal and financial strength this time. Unlike 1984, when our credit risk rating was basically junk, we now enjoy investment grade rating. Unlike 1984, when foreign exchange had to be rationed, we now have unprecedented gross international reserves amounting to over $110 billion. Unlike 1984, when our banking system was in danger of running short of cash, we now have excess liquidity such that the Department of Finance raised over 70 percent of new borrowing from domestic sources.

At the start of 2020, before the pandemic struck, we had brought down our debt to GDP ratio to about 39 percent. That put us in a better position than most of the other countries. Some EU countries, for instance, have debts over 100 percent of GDP.

As a result of emergency borrowing to fund our response to the pandemic and stimulate domestic economic activity, our debt-to-GDP ratio climbed up to about 54 percent. That is still an eminently manageable position.

We do not need any of the “structural adjustment” programs imposed on us from the late eighties. We do not need to go into an austerity program as we did before, forcing our recovery to stretch for decades. Our large international reserves guarantee against sudden depreciation of our currency.

In a word, because we had the foresight to build a strong fiscal position and the political courage to resist populist demands to subsidize everything in sight, we are better poised to shorten the recovery period.

True, we will probably be the last among the ASEAN economies to recover back to where we all were in 2019. But that will be due to the structural weaknesses in our domestic economy inflicted by many decades of shortsighted economic nationalism.