Previous reforms, correct policies: RP’s shield against recession

The next 15 days are crucial. With the President’s decision to extend the lockdown until April 30, the key challenge is to take advantage of the window to accelerate mass testing of at least the vulnerable and symptomatic sector. Opportunity should also be taken to strengthen contact tracing, ensure sufficient protection of frontline health workers, and expand our capacity to treat COVID-19 patients.

We chose human lives over the economic costs. Other countries have taken the same route.

Pursuing economic activities can wait. For former US Treasury Secretary Lawrence Summers, beating the virus is the primary and pressing target.

Such a decision proved wise for two conflicting reasons.

One, recent international data on the day-on-day rate of infection for a number of countries including China, South Korea, Spain, US, and Italy show either a steady or a declining trend. Therefore, two more weeks of patience may establish a clearer trend.

And two, there have been instances of viral resurgence. Recovered Korean COVID-19 patients have been re-infected. In China, recent Chinese returnees from Russia brought back the disease that originated from Wuhan. New York Times reported more than 200 viral carriers from an Aerofloat flight from Moscow to Shanghai and from those who travelled by land from Vladivostok. In Japan, Singapore, and South Korea, travel restrictions and movement of persons were tightened.

The two-week extension for the Philippines was a risk-averse measure.

While we cannot forecast an absolute flattening of the curve by the end of April, any further lockdown will have serious economic consequences unless calibrated down based on relevant considerations. On either side of the fence, the choice will affect human lives as the economy is threatened.

This much is revealed by the President’s Tuesday midnight press conference. He admitted there is no end in sight for this pandemic as both infection and mortality continue to increase. He announced lifting the Luzon lockdown only when an antibody treatment is commercially available. Are we then looking at months, instead of weeks?

But this condition does not square off with the latest findings of the UP Resilience Institute. These are:

One, the Enhanced Comunity Quarantine (ECQ) with other interventions slowed down the pathogen’s spread. The virus used to infect people twice over in only 3 days. Latest figures indicate a longer period of 6 days.

Two, a region-wide ECQ may not be sustainable over a long period. It can unnecessarily undermine local economies. There is a need for granular data to nuance an appropriate response.

Three, a desirable post-April 30 scenario is one of graduated activation of ECQ. This means devolution of decision-making on the extension, lifting or relaxation of community quarantine. This will have to be based on the estimated outbreak threshold.

Before lifting the lockdown, it would be best for the political leadership to heed scientific advice on the effectiveness of pandemic management strategies.

Beyond this, what are the key elements in restarting the economy?

The first order of the day is to neutralize the virus. This will cost money. The Government’s four-pronged package allocates some amount for consolidating community efforts to battle the pandemic. It is surprising that only about P35.7 billion was allocated to the health sector for supplies, medicines, and related expenses. Our health authorities should assure us that this amount is sufficient.

Next, we must aim for social protection. This will require the quick distribution of the cash transfer to the poorest of the poor. Cash transfers can mitigate their struggle. Some P305.2 billion was set aside as emergency support to vulnerable sectors. Finance Secretary Sonny Dominguez has said that it is unlikely that the budget will accommodate middle-class families who have regular jobs and other sources of income. Another decision involves the grant of wage support to daily earners. We pray that the interagency task force’s mathematics approximate our social needs.

For economic recovery, some P830.5 billion was earmarked for monetary and fiscal action. This would require more details on who are really at the receiving end even as the sources of funding appear to have been identified.

Extending assistance to banks and businesses could be tricky. For example, the BSP’s reduction of the RRR started last year should have led to some levelling down of lending rates. We have yet to see this trend.

The BSP’s reduction of policy rates should have influenced some decline in lending rates. These, however, remain high as interest on deposits continues to go south. Regulatory forbearance was extended to banks to give them greater flexibility in helping clients. Unless moral suasion is exerted by regulators, lowering of interest rates and infusions of additional liquidity during lockdown are no different from pushing on a string. Everyone should benefit from these policy initiatives.

These are extraordinary times.

Helping businesses should be guided by what Summers suggests: “protection of workers and the maintenance of the capacity of the economy to function, not the alleviation of all economic pain, particularly economic pain that is being borne by shareholders.” Shareholders earn higher during good times. They should be last in line when times become tough.

On fiscal policy, realigning the budget would be advisable if only to minimize the need for intensified fund sourcing. With wider spreads of both debt and credit default swaps, the market would definitely extract blood. It would be beneficial to reallocate the budget of delayed infra projects. For example, items that depend on tax revenues and which may not be forthcoming because of the lockdown, can be set aside for next year’s allocation.

For funding the package is indeed a great challenge. The President directed that by all means, money must be found whether from higher borrowing or from selling more government assets. It is good the amended BSP Charter authorized its recent provisional advances to the national government by way of a repurchase agreement amounting to some P300 billion, no interest and payable in 6 months. Government owned or controlled corporations also delivered dividends to the Bureau of the Treasury. External loans from some international financial institutions would also augment the war chest. Nonetheless, borrowing from the capital markets through the weekly auction should remain the republic’s major fund-raising instrument even if interest rates start to climb.

Some might suggest a bigger package but it is important to consider that at mid year, the absorptive capacity of both the government and the economy would require some momentum to maximize its impact. And we are not starting at rock bottom.

If there is any unanimity among international financial institutions like the IMF, the ADB, and even the ASEAN+3 Monitoring and Research Office based in Singapore, it is their dark scenario of a global and regional recession.

Given three decades of undertaking strategic policy and structural reforms, we expect better crisis mitigation in the Philippines. Correct policies today will be our shield in the new normal.