Horrible

The Romans had a term for the sort of year we now close: annus horribilis (a horrible year).

We were in such robust shape 12 months ago. Our economy sustained quarter-on-quarter growth for 20 years. Analysts confidently concluded the Philippine economy had successfully broken out of the boom-and-bust cycle that pestered our development for generations.

All the indicators were good.

Through the first three years of the Duterte administration, we brought down poverty incidence from over 22 percent to a little over 16 percent. That translates into about 6 million Filipinos lifted out of poverty.

We closed the last year achieving the highest credit ratings we have ever been conferred. As a share of GDP, we had doubled our investments in infrastructure from about 2.5 percent (the worst in the ASEAN) to over 5 percent. With the ambitious Build, Build, Build program, we were looking to boosting that to 7 percent of GDP (the highest in the ASEAN).

The infrastructure program was seen to rapidly create jobs, encourage many new businesses and drive our expansion. We averaged 6 percent growth in those three years and were looking to boosting that to over 7 percent. That would have made us the growth leader in the region, no longer the Sick Man of Asia.

We closed 2019 with about $82 billion in gross international reserves. Abundant reserves gave our currency strong mooring. We close this year with about $102 billion in reserves, although this is due mainly to the collapse in purchases of capital equipment by our enterprises. That is not a good sign.

Our abundant reserves strengthened our currency. The last I checked, the peso was trading close to 48 to the dollar. That should encourage purchases of capital equipment, although that has not happened yet because of uncertainty about the quickness of our recovery.

The strong peso, on the other hand, penalizes our exporters and migrant workers who need to remit more dollars to cover their families’ peso-denominated needs. Economists think the natural exchange rate should be about P52:$1. This will not happen soon enough if our imports continue to dwindle.

While our outstanding debt continued to grow in nominal terms, it was shrinking as a percentage of GDP. This means we have been quite successful in growing out of our debt. 

Then the pandemic hit and threw our economy into a tailspin.

The pandemic is a classic “Black Swan” phenomenon. No one expected the entire global economy would be pushed into deep recession because of a health emergency. It was in no one’s radar. None of the risk scenarios our corporations worked with at the start of the year included the economic devastation that hit everyone this year.

 Because of the economic devastation, the Philippine economy is expected to shrink by over -8 percent in 2020. That is a huge swing from the 6 percent to 7 percent growth we had planned for. Never in the entire post-war period had our economy contracted as much as it did this year, not even in the worst episode of the debt crisis of the early eighties.

The economic scarring will be deep. Many of the jobs lost this year may never return. Many of the enterprises forced to close down this year will never reopen. Vital growth sectors, such as tourism, will remain hobbled for years.

All the economic gains won during the 2017-2019 period were wiped out. Poverty and unemployment will remain high in the foreseeable future. Because of its many weaknesses, our economy will not bounce back as quickly as the others.

After decades of admirable fiscal discipline, where we kept deficits below 3 percent of GDP, the economic dislocation will take a heavy toll on our fundamentals. Our budget deficit this year will be over 6 percent of GDP, double projections at the start of the year.

The enlargement of the deficit was unavoidable. Government is collecting less because the economy is shrinking. Unexpected expenditure was incurred giving out direct subsidies to vulnerable sectors, buying medical supplies to fight the pandemic and, eventually, buying the vaccines we need.

This will blow a large hole in our public finances. The only consolation is that every other country is suffering the same financial shocks. The entire global economy is shrinking.

Very few economies are posting growth this year. The three most notable ones, barely shaken by the pandemic, are in our neighborhood: Taiwan, China and Vietnam. We can only hope their exceptional growth will bring wind to our economic sails. But we have to make our own adjustments for that to happen.

The only way we can recover quickly is to reform rapidly. Unfortunately, many of the policies that make our economy weak are enshrined in the archaic provisions of our Constitution. That is a disadvantage.

We cannot, for instance, rapidly build agribusinesses because our land policies encourage inefficient use. We cannot attract investments fast enough because of the negative list for foreign investors. Our educational system is like a dinosaur: it is cumbersome and slow.

Therefore, our economic recovery will be slower than most of the others. If our domestic economy were a person, it would be described as “immune-compromised.”

Therefore, we will have to rely on our fiscal toolbox to get the domestic economy going – mainly by firing up local consumption demand. It will take longer for our supply side, domestic production, to gear up for the new environment.

Notwithstanding, we will have to do our best and overcome the structural handicaps to build a better year ahead. We have no other choices.

A Happy New Year to all!