Bernardo M. Villegas
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Time To Be Cautiously Optimistic (Part 1)

          Have I lost my optimism about the future of the Philippine economy?  This is a question I have been asked by friends when they compare my GDP forecast for 2021, which is at 4.0 percent, to others which can range from 4.70  percent (ING Bank)  to as high as 7.60 percent (Fitch Solutions), the median of  14 forecasts being 6.55 percent, as reported by Doris Dumlao-Abadilla in The Inquirer (February 10, 2021).  Why have I temporarily relinquished my usual monicker as the “prophet of boom”?  The plain and simple answer is that I foresee that our Government (both at the national and local levels) will continue to do a poor job of handling the COVID-19 pandemic.  If we had the worst GDP performance of a negative 9.5 percent in the whole of East Asia for the year 2020, it was mainly because we had the longest lockdowns and the slowest response to the pandemic.  I have reasons to believe that we have not seen the worst of the negative impact of COVID-19 on the Philippine economy.

         We should not be lulled into complacency because there are signs of consumers—the largest component of the economy—regaining their confidence in the first weeks of 2021. Traffic seems to be heavier in the main thoroughfares, malls are filling up with more people, even churches are now allowed to admit 50 percent of their capacity.  These can change overnight as lockdowns are reinstated (as we are witnessing in some key cities like  Davao, Cebu and Baguio). In fact, I think that the Mayors of the cities in Metro Manila are right in objecting to the opening of movie theatres to the public.  There is a great probability that the Philippines will not be spared the scourge of the new, more virulent, and more infectious variants that have appeared in the UK, South Africa and Brazil.  These variants may hit our country much before there can be any massive distribution of the vaccines.  We still have to be prepared for the worst because our avoiding more paralyzing lockdowns in  the whole of 2021 will depend on how fast the new variants can spread, how will today’s vaccines win against them and how soon will new vaccines better attuned to them (and the other variants which will surely turn up over time) be available.  Even more fundamental challenges still have  to be met by our Government:  deciding which vaccines to procure to combat the existing variants; how to convince many reluctant citizens to agree to be vaccinated; how to improve contact tracing to avoid rapid transmission of the existing and new variants;  addressing the logistical nightmare of distributing the vaccines across hundreds of islands.  To paint an even darker picture, we are being told by the experts that there is no guarantee that those who have been vaccinated will not be infected again and will not transmit the disease to others.  Only time will give the answers to these imponderable questions.

         Given all these, I cannot but be pessimistic about prospects of the Philippine economy over the next twelve to eighteen months.  I don’t expect any meaningful rollout of the vaccines until the last quarter of 2021.  Realistic answers to the questions about the new and more dangerous variants and the effectiveness of the vaccines to put the pandemic under reasonable control may have to wait till the second quarter of 2022.  That is why, I expect a strong recovery of consumption expenditures to happen only by that time.  Meanwhile, the only really strong engine of growth we can rely on is the Government with the huge stimulus program that will be financed by large borrowings that can bring our debt-to-GDP ratio to close to 70 percent and our fiscal deficit to about 10 percent.  The good news is that our Government, having been fiscally prudent in the past has a lot of leeway to borrow, having attained A- credit standing (from Japan Credit Rating Agency).  Assuming the Government can improve its ability to spend its operating budget on such priority items as education, health, social amelioration program, and financial assistance to MSMEs and to do a better job than it did in 2020 to implement its Build, Build, Build program, a GDP growth of 4 percent for the whole year should be a realistic target, with most of the growth coming in the last quarter of 2021.  A little help to achieve this growth will come from the election-related spending that usually spikes during the two quarters preceding a national election which will be in May 2022.

         The high rate of inflation expected to top the 4 percent limit set by the Government and the high unemployment rate reported at 8.7 percent (which is probably higher in reality). together with the uncertainties about the pandemic enumerated above, will put a lid on consumer spending.  Not much can be expected from private investors (both domestic and foreign) until consumers regain their confidence.  There will be a few exceptions.  The rapid digital transformation that practically all sectors are undergoing will benefit all the industries related to the Industrial Revolution 4.0:  telecommunications, social media, digital devices and services, IT-BPO, and the creative industries.   These attractive market opportunities in the digital industry will continue to attract investors in the telecom industry in which the existing duopoly is being increasingly challenged by some newcomers, such as Converge and Ditto.   This more competitive climate will be enhanced if in the next two to three years, the  amendment of the restrictive economic provisions in the Constitution or the enactment of some legislation redefining the concept of a public utility will enable  foreign investors to acquire larger equity stakes in telecom and media enterprises.

         Another sector that make me cautiously optimistic is the agribusiness sector.  The raging controversy about the rising prices of hogs and vegetables that mainly explain the higher rates of inflation in the first months of 2021 should not blind us to some real improvements in the entire food and agribusiness sector in the last twelve months.  Despite the large plunge in the national economy during the second and third quarters of last year, the agriculture sector was the only one to manage a positive growth.  The only reason why such a growth could not be sustained in the last quarter of 2020 was the onset of some very destructive typhoons that ravaged standing crops towards the end of 2020.  To a certain extent, the pandemic has been a blessing disguise to the agribusiness sector.  It finally opened the eyes, especially of people in Government, that food security should be given the highest priority in policy decisions and budget allocations.  Thanks to the more enlightened leadership that is now prevailing in the Department of Agriculture, the ongoing crisis  is focusing a much greater attention on the need to muster all of our resources, both public and private, to address the problem of food security.  A sign of this increased awareness about the primary importance of addressing the supply or productivity issue in agriculture is the recent food security summit convened by the President to address the sticky issues of increases in pork prices, drop in farm-gate prices of palay, spread of the African swine fever and other current issues affecting the country’s agricultural sector.  More and more professional economists, led by Rep. Stella Luz Quimbo representing Marikina in the House of Representatives, are being consulted by government officials who are responsible for the agricultural sector.  I am also encouraged by the fact that a large percentage of the budget of the Government in the Build, Build, Build program is being spent in the rural and agricultural districts and not in the urban areas.

         There is also reason for moderate optimism when we observe that the lower middle-income households who benefit from the more than $30 billion worth of remittances coming from Overseas Filipino Workers (OFWs) suffered the least in the over-all drop in income.  Despite an estimated 300,000 of the OFWs being forced to come home because they lost their jobs abroad, especially in the Middle East, the total drop in remittances for the whole of 2020 did not exceed 1 percent.  A sign that these households are relatively better off than the higher-income professionals like those in travel and tourism, automotives, entertainment, restaurants and high-fashion goods is the continuing increase in the demand of housing units among the low-cost and economic housing segments (with prices ranging from P800,000 to P5 million per unit).  There have been large drops in the demand (and prices) of the more expensive residential units which are now suffering from a glut.  Much greater effort, however, should be exerted by the housing agencies of the Government—in tandem with private developers— to increase the availability of socialized housing which caters to the lowest-income households.  (To be continued)