Bernardo M. Villegas
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Light and Shadow During Pandemic (Part 1-3)

          For over more than fifty years, I have been briefing business executives and other professional people, both in the private and public sectors, at least twice a year in what we termed Mid-Year and Year-End Economic Briefings  for “Friends of CRC” in the early years and later on “Business Economic Club” (BEC) as CRC evolved into the University of Asia and the Pacific.  The one organized by the BEC last August 27, 2020 was the first ever Mid-Year briefing in which I participated that was completely online.  If the GCQ doesn’t change much from now to December 2020, it is most probable that the Year-End Briefing will also be delivered online.  Another distinguishing feature of our last briefing was that, unlike previous ones, it did not start as usual with a forecast for the whole economy or to use the technical term, a “macroeconomic forecast.”  It immediately started with a look into a specific sector of the economy, the digital industry.  The very manner in which the briefing was being delivered to some 200 participants through Zoom was an eloquent testimony that anything related to digitalization and e-commerce does not even need a V-shape recovery.  It does not have to recover because this sector that represents the so-called Industrial Revolution 4.0 has been growing great guns precisely because of the pandemic.  As an anecdotical example, the owners of Zoom have become multi-billionaires overnight!  Those who organized this webinar also wanted to dispel the very gloomy mood that resulted from a previous announcement that the GDP of the Philippines tanked by 16.5 percent in the second quarter of 2020.  We wanted to deliver the message that there are sectors like the digital industry (together with food and agribusiness, health and wellness and education and manpower resources) that do not even  need a V-shape recovery because they have still been growing in the midst of the pandemic.

         The first speaker in the briefing who covered Digitalization and E-Commerce is one of the most prominent practitioners of digitalization, having been one of the first digital natives at the highest levels of management in such industries as telecommunications and the airline sector.  Danilo (Bong) Mojica II combines marketing expertise with advanced knowledge of digital technology.  He is a management consult helping both big and small businesses to adapt to digitalization and e-commerce.  He is also an educator, being in the business faculty of UA&P.  An entrepreneur himself, Bong is the investor and founder of Tailwind Digital Solutions.  That is why at the very beginning of the briefing, he was able to immediately uplift the mood with his bullish forecasts for the Philippine digital sector.  Consistent with his being an educator, he first made sure he defined his terms such as digitalization and e-commerce.  The first he defined as the use of digital technologies to change a business model and provide new revenue and value-producing opportunities; it is the process of moving to a digital business. The second term he defined as a business model that lets firms and individuals buy and sell things over the internet.

 

         To counteract the pessimism about certain sectors of the economy that will be permanently hurt by the pandemic (such as some sectors of the travel, tourism, entertainment,  retailing, and restaurant businesses), he painted a bullish picture of the impact of digitalisation on the economy, which has been given a big boost by the pandemic.  The digitalization of the economy goes much beyond the generation of employment, especially of highly educated and skilled manpower.  it also improves the quality of life, expanding access to education, sanitation and healthcare and boosting citizens’ access to public services.  This latter benefit is increasingly visible in such smart cities as Pasig in Metro Manila and Balanga, the capital city of the province of Bataan whose poverty incidence is one of the lowest in the Philippines at 4 percent of the population (vs. 16.5 percent before the pandemic).  Digitalisation also allows governments to operate with greater transparency and efficiency, enabling society to be more transparent, increasing public participation and the government’s ability to disseminate information effectively.  Digital initiatives could also lead to greener environments since 26 billion tonnes of net avoided CO2 emissions are estimated to be achieved from 2016 to 2025 through the widespread use of digitalisation and e-commerce.

 

         Worldwide, e-commerce  was valued at $572 billion in 2010, swelling to $246 trillion in 2019.  In the US alone, e-commerce amounted to $169.1 billion in 2010, growing to $595.5 billion in 2019.  Digitalisation has tremendous potentials in the Philippines, despite its still being a low-middle income country.  Already 67 percent of the population are internet users even before the pandemic.  With instant changes happening the way people work at home, go to school online, order daily necessities though the internet, etc., that percentage is expected to grow by leaps and bounce in the next two years.  Filipinos are well known worldwide as the top users of internet services at 9 hours and 45 minutes daily compared to the global average of 6 hours and 43 minutes daily.  Of course, there is still the question of whether or not  all these hours of use make for productivity at work.  But they spell a big demand for digital devices and services.  As an anecdotical information, because of changes in the way public education is being delivered during the ongoing pandemic, even the poorest households in the rural areas are bartering  their livestock for second-hand cellphones to enable their children to participate in blended learning. 

 

         As regards digital transactions in the Philippines, there are 48.9 million of us who are making digitally abled payment transactions with a total annual value of digitally enabled consumer payments amounting to $7.35 billion (an increase of 20 percent from 2019 to 2020).  The average total annual value of digital payment transactions per digital payments  is $150.   Those who searched online for a product or service to buy was 91 percent of internet users and those who actually purchased a product online amounted to 76 percent of internet users.  Since it is expected that the threat of the COVID-19 may linger for at least the next two years, one can imagine the continued large increases in these figures in 2021 and 2022.  As a guide to consumer behaviour, E-commerce spending by category is as follows:  video games,  32%; travel and accommodations, 31%; electronics and physical media, 11%; fashion and beauty, 10%; food and personal care, 7%; toys, do It yourself (DIY), 7% and digital music, 2%.

 

    Entrepreneurship in the digital space has literally exploded during the pandemic.  Just before the first big lockdown on March 15, 2020, business names registered under retail sale via internet numbered, 1,753.  As the economy went from one lockdown to another as a result of COVID-19, this number swelled to 67,589 representing an increase of an astronomical 3,756 percent.   In the whole of 2019, there were only 1,600 businesses under retail sale via internet.

 

         Those looking for opportunities in the digital industry in the so-called New Normal that will come after the pandemic is put under control are given a list by  Mr. Mojica of the trends that have to be watched very closely.   These are: online shopping and robotic deliveries; digital and contactless payments; remote work; distance learning, telehealth; online  entertainment; supply chain 4.0; 3D printing; robotics and drones; and 5G and Information and Communications Technology (ICT).  If we want to see our future now, I would recommend that we take a very close look at what is already happening in China today.  China is and will be the most digitalised economy in the world in the coming years.  We cannot wait for tomorrow to come.  Mr. Mojica suggests that the government, private companies and academic institutions should cooperate to launch varied upskilling programs to fill the gap in digital skills amid tight labor market.  I suggest that we start  these upskilling programs by targeting first the 1.2 million workers in our BPO-IT sector, especially among those who are employed in the voice-oriented segment of the industry, the most vulnerable to being rendered obsolete by robotization and Artificial Intelligence (AI).  (To be continued.)

 

 

 

Light and Shadow During Pandemic (Part 2)

October 13, 2020

        

         There is no doubt that the so-called Industrial Revolution 4.0 has been advanced a good number of years, if not decades, for our country because of the pandemic.  Responding to these opportunities, however, will not be a walk in the park.   True, physical distancing, lockdown and other measures implemented to combat COVID-19 have resulted in an increase in consumption of online delivery of goods; in online use of teleconferencing and streaming of videos and films; in demand for medical supplies, household essentials and food products and of internet and mobile data services.  These opportunities, however, have accentuated such problems as delivery delays and outright cancellation of orders; price gouging or unreasonable increases in prices; product safety concerns; deceptive practices; cybersecurity concerns; the need for increased bandwidth; and other development-related concerns.  There will be an increased pressure on the Government to improve the regulatory institutions that will address these challenges to the promotion of consumer welfare.  A  bullish market for digital devices and services will require improved measures of regulating competition in a free market setting.

 

         In contrast with the bright prospects faced the digital industry is the rather gloomy outlook for travel and tourism.  Secretary of Tourism Bernadette Romulo Puyat did not pull any punches when she described a bleak outlook for the sector.  In 2019, just before the pandemic, travel and tourism generated P2.48 trillion, accounting for a significant 12.7 percent of GDP, larger than remittances for OFWs and earnings of the BPO-IT sectors,  the two most  heralded engines of growth.  There were 5.71 million people employed in the tourism sector, accounting for 13.5 percent of the labor force.  In the months of January to July 2020, there were only 1.3 million tourist arrivals from abroad, representing a decline of 72 percent from the same period in 2019.   Some 82.5 percent of tourism workers had their incomes directly affected by the pandemic.  There are 27.6 percent of them who are on leave without pay.  Among the tourism workers, 15 percent belong to the category of no work no pay.  Some 14.7 percent actually lost their jobs. Those who were forced to close their businesses accounted for 25.5 percent of the total.  As more lockdowns are expected with new surges of the COVID-19, it will take at least the next 12 to 18 months before Filipinos can travel more freely from one province to another, from one island to another.

 

         According to Secretary Puyat, in the Tourism Response and Recovery Plan, domestic tourism is considered the backbone of the revival of the industry.  In 2019 alone, there were 109 million domestic trips, indicating the potential for domestic tourism.  In a survey during the height of the pandemic, 77 percent of the respondents expressed willingness to travel domestically even if a vaccine is not yet discovered.  In the National Capital Region, one of the hardest hit by infection of the virus, one can observe such a pent-up demand for domestic travel.  As soon as the area transitioned from Modified Enhanced Community Quarantine (MECQ) to General Community Quarantine (GCQ), weekend traffic to the tourism spots of Cavite, Laguna and Batangas showed a large increase.  Secretary Puyat presented a short list of possible tourism destinations that can quickly recover as a result of domestic tourism.  In Palawan, El Nido is undergoing improvements in waste management while Coron is undergoing the restoration of four tourism sites.  In Panglao, some $62 million are being spent to improve water supply and solid waste management.  In Siquijor, a solar power project is improving the access to electricity.  Boracay and Baguio are receiving help to increase the confidence of travelers.  Despite her pro-active role in helping to create the so-called “tourism bubbles”, Secretary Puyat is determined to give  the highest  priority to health and safety and has made it clear that there is no pressure to revive local tourism. 

 

     There is an emphasis on the principle of subsidiary in the recovery plan:  let leading LGUs implement their respective programs to attract domestic tourists with the help of the Department of Tourism.   Unlike the digital industry, however, no spectacular recovery is expected in travel and tourism.  It will be the so-called L-shape recovery, slow but sure. It is commendable, however, that Secretary Puyat, like the many stakeholders of the tourism and travel industry, are not throwing the towel.  They can see the light at the end of the dark tunnel because they are focusing on the lasting trends facing the Philippine tourism industry rather than the temporary blips occasioned by the pandemic.  No virus, no matter how virulent, can take away the fact that the Philippines, with 7,641 islands, has among the richest natural endowments in the world for tourism.  Palawan was just adjudged by the international magazine Travel and Leisure as the best island resort in the world.  Palawan, with its 2,000 islands, faces no volcanoes, no earthquakes, no tsunamis like Bali and other island resorts in Southeast Asia.  Palawan is also the only tourism destination in the country with three international airports:  Coron, Puerto Princesa, and San Vicente.  The optimism of Secretary Puyat is quite justified.  Fortunately, she can count on the various stakeholders of the sector who believe strongly in what Secretary Puyat said at the end of her briefing at the Business Economic Club:  “Tourism  is everybody’s business.”  (To be continued.)

 

Light and Shadow During Pandemic (Part 3)

October 30, 2020

        

         After the “Light and Shadow” presentations of two sectors on the opposite end of post-pandemic recovery, the usual macroeconomic forecast was made by Dr. Victor Abola who gave as usual a well- researched outlook for the world, regional and domestic economies.  Of greatest interest to the man in the street were the figures on unemployment which increased from 5.1 % last year to 17.1 % during the same period in 2020.  Employed persons were down a devastating 8.9 million from January 2020.  The global economy is expected to decline by -4.9 percent for the whole of 2020, with advanced economies shrinking by as much as -8.0 percent.  Emerging markets to which we belong are expected to suffer a decline of -3.0 percent with the Philippines  doing worse at a range of -7.5 to -9.5 percent (during the second quarter the GDP decline was -16.5 percent).  Dr. Abola had good news about our financial strength, which was recently highlighted by a report of  The Economist that considered the Philippines among the top ten in financial strength in the world and by an upgrade of triple B+ to A- in credit rating given to us by the Japan Credit Rating Agency.    Our economic managers have been very responsible in keeping our debt-to-GDP ratio at a low of 30 to 40 percent so that we can now afford to borrow significant amounts of money to  fund the government programs that address the needs of the millions of households who have been impoverished by the pandemic and to subsidize the numerous micro and small and medium scale enterprises that have suffered huge declines in their incomes. 

 

         In his macro briefing, Dr. Abola painted an encouraging picture of the Gross International Reserves (GIR) that may reach a record of $100 billion accounting for 8.5 months of imports.  Always defending the view that it is better for the Government not to allow the peso to appreciate, he expressed the opinion that the peso may settle at P50 to P51 to a US dollar by the end of 2020.  This may be more of a wish than a forecast considering how strong the Philippine peso has been hovering at an average of P48 to $1 from some months now.  I do agree with Dr. Abola that it is counterproductive to allow the peso to appreciate, prejudicing  millions of households who depend on the dollar remittances of OFWs. A strong peso also does not help our exports to be competitive, including exports of services like the BPO-IT sector.  

 

         There is good news on the inflation front.  Inflation for the whole year of 2020 could average a low of 2.5 percent.  This would encourage our monetary officials to keep interest rate levels also low.  Agriculture could still post a positive growth for the entire year, together with services that can grow at a minimal rate of 1 percent.  The industry sector will experience the largest drop of -17.5 percent with manufacturing being  the worst hit.  Going beyond purely macro indicators, Dr. Abola lists the winners during and after the pandemic:  agribusiness, telco, IT services, logistics, training and education.  I would add health and wellness products and services that are directly related to addressing the COVID-19 challenge.

 

         When it came to my time to integrate what the various speakers covered, I chose to focus on the lasting trends facing the Philippine economy rather than getting distracted with the temporary blips, the most important of which is the ongoing pandemic.  To do this, I relied on the very positive assessments issued by independent think tanks and financial institutions in different parts of the world about the long-term prospects of the Philippine economy.  Some of these very complimentary long-term forecasts were issued as far back as fifteen to twenty years ago when the Philippines was still notoriously known as the “sick man of Asia.”  Others came out just over the last six to twelve months when it has been generally known all over the world that we have a President who has a bad mouth, seems to be   mentally challenged and is accused of tolerating extra-judicial killings.  In fact, some of these long-term positive forecasts were made during the height of the pandemic when the outside world witnessed the glaring mismanagement of our health sector by incompetent managers, not to mention the rampant corruption among some public health officials.   Despite the many challenges our society still faces, these foreign individuals and institutions  consider the Philippines as one of the most promising emerging markets, not only in the Indo-Pacific region but also in the whole world because of lasting trends they perceive.

 

         These lasting trends I summarized as follows.  The first and most important is the demographic dividend we are still enjoying and will enjoy for at least the next twenty years. We are among the very few countries in the Asia Pacific region that have a young, growing and in our case English-speaking population which gives us a competitive  edge in supplying many rapidly ageing  developed countries with the human resources they lack through our exporting manpower in the persons of the OFWs and exporting services through our booming BPO-IT sector. This young and growing population, which at present is already at a level of 110 million and expanding by an annual rate of 1.6 percent, is also the largest engine of growth  since domestic consumption accounts for more than 70 percent of our GDP.  Another lasting trend is our being at the epicenter of the most dynamic economic region in the world for the next twenty years, the Indo-Pacific region in which  countries have not been inflicted with the economic disease of ultra-nationalism and anti-trade policies like the  “America First” policy of President Trump or the Brexit of the UK.  In fact, we are considered as one of the most promising members of the ASEAN Economic Community (together with Vietnam and Indonesia) that is trying  replicate the good points of the European Economic Community in achieving the free flow of goods, services, capital and investment for mutual development.  Then there is the temporal dividend:  the present young generation have been born at the right time when the Philippines is transitioning from a low-middle income status to an upper-middle income one, which following Engel’s Law, will result in an explosion of the demand for all types of non-basic consumer goods and services which make up a highly industrialised economy. 

 

         These lasting trends have been  complemented by our achievements in institution building over the last twenty years.  We have managed to strengthen our institutions and build up a large talent pool in the area of monetary and fiscal management, the main reason why financial institutions and think tanks abroad give us high rankings in financial strength.  We have one of the best central banking systems among emerging markets and our fiscal managers have exercised utmost restraint over at least the last decade or so, keeping our fiscal deficit below the prudent 3 percent of GDP and our debt-to-GDP ratio at a very comfortable 30 to 40 percent.  We have a large pool of young and talented economists and bankers who can always take over from the present monetary and fiscal managers to continue sustaining our financial strength.   With the Build, Build, Build program we are addressing our handicap of inadequate infrastructures.  There is still much to do to improve our agricultural productivity and address the problem of corruption and poor governance.  Independent institutions abroad, however, see that we have enough strengths to counteract our weaknesses so that over the long run, they consider us as winning the economic marathon even if we will fail miserably in the one hundred meter dash.  For comments, my email address is bernardo.villegas@uap.asia.