What will it take for the economy to recover?

(First of two parts)

Economic recovery: Yes, there is light at the end of the tunnel. Economy recovery: Is there light at the end of the tunnel? was the theme of the second online SharePHIL Summit held last Aug. 28, following the first online summit held on April 29, which discussed the Bayanihan to Heal as One Act in response to the COVID-19 pandemic.

Charting a path towards recovery and resiliency

Finance assistant Secretary Antonio Lambino, who was the keynote speaker, highlighted that while no country was prepared for the pandemic, the country’s strong economic fundamentals enabled the Philippines to cushion the severe impact of the crisis. Among them, a stable inflation rate which fell to 2.7 percent as of July, hefty foreign reserves that can cover several months’ worth of imports and even exceeded outstanding external debt, and with the Philippine peso as one of the best-performing currencies in the region amid the pandemic. Despite the economic slowdown due to the strict community quarantine period, the government estimates that 1.3 to 3.5 million infections had been averted due to government-imposed lockdowns.

There have been signs of economic recovery with the partial easing of quarantine restrictions. Build Build Build must continue to include health and isolation facilities, the economy needs to be investment-driven, and the government must redouble efforts to protect economic gains and ensure that growth is inclusive.

However, legislation is imperative to support economic recovery. Following the Bayanihan to Heal As One Act (Republic Act No. 11469) which allowed the government to reallocate P275 billion from the estimated P438 billion national budget, we have seen a number of high-priority bills such as CREATE (Corporate Recovery and Tax Incentives for Enterprises), FIST (Financial Institutions Strategic Transfer), and Bayanihan 2 to aid the rehabilitation of the local economy.

The gist of FIST, CREATE, and Bayanihan 2

Due to the sharp economic downturn, many financial institutions are dealing with a surge in bad loans and non-performing assets (NPAs). The FIST bill, an improved version of the Special Purpose Vehicle Act following the Asian Financial Crisis is now under consideration in the Senate. This will allow banks to clean up their balance sheets by selling off NPAs to specialized companies licensed by the BSP, and in turn serve thousands of MSMEs and potentially save millions of jobs.

Further supporting MSMEs, which comprise 99 percent of local corporations, the CREATE bill follows the government’s tax reform plans to reduce the corporate income tax (CIT) rate from 30 percent to 25 percent this year, and further by one percent each year until it reaches 20 percent in 2027, in order to be at par with the 23 percent regional average CIT.

The recently-enacted Bayanihan 2, includes P140 billion worth of stimulus funds in high-impact sectors such as healthcare and education, plus a P25 billion standby fund for the remainder of 2020 that can be used for testing and procurement of vaccines and additional capital infusion to government banks.

The country dips into recession territory While the country appears to have weathered the initial shock of the pandemic, the reality is that we are now faced with a recession, opined one of the panelists, former NEDA secretary general Cielito Habito. He cited the 17.7 percent unemployment rate in the second quarter of 2020 (vs. 5.3 percent in Q1 and 5.1 percent in Q2-2019), reduction in economic activity in most sectors with few exceptions: construction, manufacturing (only pharmaceuticals and refrigerated petrol exhibited growth) and services (with the exception of banks and telcos), with only agriculture defying lockdown and exceeding growth from the previous year. Consumption spending has shrunk with the layoffs and separation of employees, and reduction in wage-paying jobs. Nearly two million self-employed individuals and MSMEs have suspended operations or shuttered their business adding to the job market collapse.

How will the country ride its way out of this recession? Habito suggests to speed up the recovery by restoring jobs and incomes, allowing essential industries like food manufacturing, fishing and agriculture, transport and storage, to reopen, supporting essential consumption spending by stimulating demand by putting money in people’s pockets through subsidies. Ironically, the areas with the highest incidence of COVID-19 are the same regions which have the highest contribution to GDP. Given this COVID-19 experience, there should be less focus on Metro Manila and regional dispersal by developing livable cities should be a key strategy for recovery. He also proposes the creation of localized value chains by promoting urban agriculture and home production.