Time to fix our Achilles heels

Is there any doubt at all that we have been moving farther away from the kind of economic growth needed to help more of our people escape poverty?

The past few weeks have seen the International Monetary Fund (IMF), the World Bank, the Asian Development Bank, and a couple of other outfits further cutting our gross domestic product (GDP) growth outlook for this year and next to below the government’s 5-6% and 5.5-6.5% targets for 2026 and 2027, respectively¹, due to the impact of the US and Israel’s war with Iran that has sent oil prices surging. That surge, in turn, upends our inflation target, and risks worsening unemployment (graphically illustrated by the sight of displaced overseas Filipino workers flocking home from the war zone).

To be sure, the Philippines is not alone with these dire prospects, as “[s]lowdown in growth and increase in inflation are expected to be particularly pronounced in emerging market and developing economies,” the IMF said in its latest World Economic Outlook (WEO) report that was released on April 14.²

But we have been identified as the Asian economy that may be worst-hit by the Mideast war-driven oil shock due to a combination of our near-total dependence on imports for our fuel requirements, market-driven pricing, and limited subsidies (as opposed to the likes of India, Indonesia, and Thailand, for instance).³

So, let’s face it: long gone are the years when our economic growth clocked in at 6-7% (between 2010-2017). But even that pace fell short of the sustained 8% which some economists deemed as the minimum needed to make a dent on the grinding poverty that has long ailed our country.⁴

Hardly have we recovered fully from the deep economic scars left by the COVID-19 pandemic, when this new challenge appeared at our doorstep, with no signs of abating for now.

We can no longer say that the Philippines is one of the fastest-growing economies in this region, while more pessimistic critics have said that we are on the cusp of regaining the unsavory distinction of being “the sick man of Asia.”

The current crisis compounds the impact on business confidence of the flood project corruption scandal — of late, business confidence tracked monthly by the central bank has fallen to its weakest point in more than a quarter of a century (plunging to a pessimistic -24.3% in March, as well as -17.3% for the next three months, and 11.7% for the next 12 months)⁵ — and threatens to add 1.34 million Filipinos to the ranks of the poor this year.⁶ Boosting local and foreign investor confidence is key to fighting poverty. Where else will we get the gainful jobs needed to chip away at this blight if we fail to support local businesses, as well as attract and retain foreign firms?

And all this, mind you, just five years after the pandemic was estimated by the Philippine Statistics Authority to have cast 2.3 million folks into poverty between 2018-2021 (swelling the ranks of the poor to nearly 20 million, equivalent to about 18.1% of the population in 2021 from 16.7% in 2018, against the previous government’s 15.5-17.5% goal, and compared to the current administration’s 9% target by the time it steps down in 2028). The game plan when the current administration took office in mid-2022 was to sustain economic growth that would be both fast and deep enough to slash “poverty incidence by five percentage points at midterm, and another four percentage points by 2028.”⁷

How long ago that now seems.

THE OPTICS THAT COUNT
And as if all these weren’t bad enough, Fitch Ratings dealt a worrisome blow to our image on April 20 when it revised our sovereign credit rating outlook to “negative” from “stable.”⁸ While this does not constitute a credit rating action, it does signal the possibility of our standing falling to below-investment grade from “BBB” currently (which is the lowest of four investment grades) within the next 18-24 months if we don’t improve our growth, debt, public investment, and other closely watched metrics.⁹

“Whew! At least we haven’t actually been downgraded!” some may argue.

But, in all probability, the country’s creditors have already started pricing in this perceived higher risk in dealings with us.

In its note, Fitch flagged “rising risks to the Philippines’ strong medium-term growth prospects from recent disruptions to public investment, exacerbated in the near term by elevated exposure to the ongoing global energy shock.

“These challenges could narrow the country’s GDP growth outperformance relative to peers, amid higher post-pandemic government debt and a gradual, sustained deterioration in its external finance position,” Fitch explained.

“The rating is constrained by relatively low per capita GDP and governance scores, though Fitch believes World Bank Governance Indicator scores somewhat overstate this.”

At the same time, the credit rater clarified that, “despite rising risks, medium-term GDP growth will remain robust, supporting a gradual reduction in government debt.”

OUR SLIP’S SHOWING
At this point, I will beg off from citing missteps which the government may have made amid the raging crisis — there’s no lack of criticism from various quarters on this matter. Vision, after all, is 20-20 in hindsight.

But if there’s any good that can be wrested from these extremely negative occurrences and environments, it is that they point us to structural and policy flaws that weaken us. Thinkers through the decades have cited experience, especially of failure, as the best teacher.

Hence, if there is anything concrete that I hope this government and its successor in 2028 will achieve, it is to target vulnerabilities laid bare by the crises that have hit since the past administration and to mend them resolutely and decisively, much in the same way that we have been fixing our financial system incrementally in the wake of the 1997-1998 Asian Financial Crisis and the 2007-2009 Global Financial Crisis in order to make it more robust and more resilient to shocks.

“Fostering adaptability, maintaining credible policy frameworks, and reinforcing international cooperation are essential to navigating the current shock while preparing for future disruptions in an increasingly uncertain global environment,” the IMF prescribed in its latest WEO.

Two out of the three directions in those prescriptions pertain to the quality of policy and structural reforms, so the government has its job cut out for it.

Methinks that while there is no way to be completely prepared for “black swan” events (unpredictability being the very nature of such incidents), there’s wisdom in learning whatever we can from recent crises in order to arm ourselves better for the next one, whatever form it takes.

STARTING POINTS
So, where can we start?

While I am no crisis response expert, here are my two centavos’ worth of observations on vulnerabilities which the pandemic and the current oil shock have exposed.

First of all, the government can step up its game here by graduating from a largely reactive stance. This it can do by periodically pooling line departments and agencies key to crisis planning and response, together with private sector participation, in order to draw up a framework that will fix our vulnerabilities laid bare by crises of the past.

True, there are crisis response mechanisms currently in place, but they are sector-based (i.e., for natural disasters, epidemics and pandemics, financial shocks, national defense incidents, etc.), fragmented, and even ad hoc in nature.

Credible crisis planning will have to be national-led, cross-sectoral (note that while the energy crisis mainly involves the Energy department, it has required action from the departments of Social Welfare and Development and of Trade and Industry, as well as the central bank¹⁰, among others), forward-looking (think gaming — Israel, for one, learned hard planning lessons well from the nearly catastrophic pan-Arab surprise attack that sparked the 1973 Yom Kippur War), and regularly held.

Second, we need to improve our readiness to weather shocks affecting our economy’s and people’s necessities, including oil, coal, liquefied natural gas and fuel products; rice and wheat; fertilizer; as well as essential medicines and vaccines. There should be plans developed to address external shocks that could impede our access to these strategic items.

Much has been said about how we squandered opportunities to build our manufacturing base by adopting erroneous industrial policies in past decades. But perhaps there are emerging pockets of opportunities. What happened to the vaccine research and manufacturing facilities that were to rise in Batangas and New Clark City, by the way? Then there is the Pax Silica initiative that will slot us into a US-led supply chain for critical minerals, semiconductors, and AI infrastructure and for which a 4,000-acre site in Clark has been designated (although our prospective participation has raised geopolitical and environmental concerns, as well as the question as to whether we have the infrastructure to support our effective participation in the first place¹¹).

It is also time to find ways to speed up the reduction of our reliance on oil and coal, e.g., progressive implementation of energy efficiency initiatives¹², of the development of renewable sources (requiring a review of the Philippine Energy Plan 2023-2050) as well as of more natural gas sites within our territory and exclusive economic zone, etc. Proposals to build a national oil stockpile require careful study, since the cost of maintaining such a system could be prohibitive.

The National Government ought to also move faster in its long-avowed purpose of making our tax system more equitable in order to further reduce the burden on the middle class, many of whom are just a crisis away from slipping into poverty. Already, tax experts have cautioned that this does not mean suspending the excise tax or the value-added tax on all fuels, since doing so will likely benefit the rich more and drastically reduce funds available to help the poor.

Something more targeted like a wealth tax comes into mind — a proposal that is not new and was mulled as far back as the administration of the late Benigno S.C. Aquino III (it was the last stage of envisioned tax reform then) — although experts like former Internal Revenue chief Kim Jacinto-Henares have flagged implementation challenges, starting with availability of reliable public data. Variations exist, e.g., former socioeconomic planning chief’s Solita C. Monsod proposed a 3% tax on those with assets exceeding P3 billion and only during economic crises, while former Finance undersecretary Cielo D. Magno has proposed an asset tax on mansions, luxury vehicles, large financial assets, and other high-value property in tandem with doubling income tax exemptions to annual taxable income of up to P500,000 from P250,000 currently.

Such next steps in tax reform to make the system more equitable go hand in glove with a stepped-up campaign to jail big-time tax cheats. While payment of the right amount of taxes is a civic, even a moral, obligation, the government skates on increasingly thin ice by expecting taxpayers to obey the law even in the face of unpunished wholesale theft of public funds.

Then, we need to drastically speed up the improvement of local government capacities to deliver services across the archipelago, for these units are at the forefront and the face of government in times of crisis, e.g., distribution of targeted assistance in cash and kind. While much depends on the quality of those elected to office — which is another matter altogether that cannot be addressed immediately — stricter, more effective accountability mechanisms can be put in place to whip local officials into shape and line, especially in periods of emergency.

Finally — at least for this column, since the list is endless — the National Government can identify in advance potential additional sources of funding for targeted assistance and other social safety nets during protracted crises, like what we have now, including non-essential pet projects of lawmakers. I am unsure of the legality of this particular source, but emergencies do necessitate out-of-the-box thinking.

Do you know what I fear and hate at the same time these days?

It is that the window for any meaningful, painful reform is fast closing with the approach of the period for submission of certificates of candidacy for the 2028 national and local elections sometime between July and October next year. Experience has shown that political will to act on reforms fades as jockeying heats up way before any official campaign period, even up to a full year before the actual polls are held.

Hopefully, the next administration will build on gains and realizations of its predecessors and shun the typical propensity to automatically spurn as flawed even good moves of the latter.

Else, as George Santayana warned: “Those who cannot remember the past are condemned to repeat it.”

¹  https://tinyurl.com/26jfja2c

https://tinyurl.com/22gnz23j

https://tinyurl.com/23clfg6a

²  https://tinyurl.com/2ba5rcvj

³   https://tinyurl.com/27r2wq7e

⁴   https://tinyurl.com/26k3pvn7

⁵  https://tinyurl.com/2866las4

⁶   https://tinyurl.com/2ddnydd7

⁷  https://tinyurl.com/2j8sz6r4

⁸  https://tinyurl.com/2d9h3k5g

⁹  https://tinyurl.com/2at6yybp

¹⁰  https://tinyurl.com/2666tg4g

¹¹  https://tinyurl.com/24fbldd6

¹²  https://tinyurl.com/26o59shq

https://tinyurl.com/23lt2c88

Wilfredo G. Reyes was editor-in-chief of BusinessWorld from 2020 through 2023.