SONA 2020

[OPINION] Who delivered the President’s SONA? Duterte was not present

Joel Rocamora

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[OPINION] Who delivered the President’s SONA? Duterte was not present
'Duterte seemed bored reading an admittedly boring text.... He seemed out of it, certainly far from delivering marching orders.'

I kept waiting for the President of the Philippines while Duterte was speaking. 

Everyone, pro- and anti-administration alike, expected marching orders on where to go from here. The pandemic is at its worst since the beginning; the economy is tanking. Duterte seemed bored reading an admittedly boring text. When he went off on his own, he went back to old preoccupations: drugs, death penalty, China. He seemed out of it, certainly far from delivering marching orders. (READ: Quick point-by-point summary of Duterte’s SONA 2020)

There is an ongoing debate on the amount and the uses of a stimulus fund which will determine what happens to the economy the rest of the year, into 2021. People looked to the president to resolve it in his SONA. He did not, presumably because it has not yet been resolved.

Like key measures on the pandemic, the government’s seeming lack of urgency is a big problem. We are in the throes of the worst economic crisis since the last years of the Marcos dictatorship almost 40 years ago. It is still getting worse. But the government does not seem to recognize the severity of the crisis, and the urgent need for solutions.

Philippine GDP contracted by 0.2% in the first quarter of 2020. This will seem like good news compared to the following months (April-June) when tight lockdowns were at their harshest. The Banko Sentral foresees a 5.7% to 6.7% contraction for the quarter. Deutsche Bank expects the Philippine economy to contract by a sharp 10%. For the whole year, the administration’s economic managers calculate 3.4% contraction, the ADB 3.8%, both of which will probably be shown to be underestimates. Oxford Economics predicts 6.9% full year contraction.

The consumer and retail sectors were the hardest hit by the lockdowns in Luzon, where 57% of its population resides and which accounts for 73% of the country’s GDP. This was further aggravated by the extended lockdowns in Cebu, the second biggest island economy. Out of the almost one million micro-, small-, and medium-sized enterprises (MSMEs), it is estimated that at least 40% will not survive the quarantine and its aftermath. There are no estimates on the impact of the lockdown on the informal economy, but it is likely that this sector, which is a substantial part of the economy, has been decimated.

First quarter data show that unemployment is now at an all time high of 17.7%. By April 2020, some 7.254 million workers had already lost their jobs. Underemployment also increased from 13.4-18.9%. As recently as January, 42.7 million Filipinos were employed. But in April that dropped to 33.8 million. So it appears that the pandemic wiped out 8.9 million jobs in just 3 months. A whopping 12.6 million Filipinos had jobs but didn’t report to work due to the pandemic. An SWS May 4-10, 2020 survey, showed that 83% of Filipinos got worse off in the past 12 months – the worst quality of life trend in the past 37 years. One in 5 Filipinos suffered involuntary hunger.

The Duterte administration does not seem to think this is serious. DOF Secretary Sonny Dominguez thinks these developments are “a hiccup” that can be easily overcome. He predicts a V-shaped recovery, one marked by a sharp decline, then a rapid rise, to 8-9% growth in 2021. International banks and credit ratings agencies do not share the regime’s optimism. Moody’s projects 5% growth, ING Bank 4.8%, and a “dirty L-shaped” recovery, steep decline followed by several years of stagnation. 

<h1>EGI – Enhanced Government Incompetence</h1>

Given the severity of the problems and the obvious weaknesses of government capacity, one might expect that the government would, as it were, pull out all the stops. Duterte was granted almost total power to control COVID-19 with the passage of the Bayanihan to Heal as One Act (RA 11469) in late March. The law provided the President with overarching powers and resources. It relaxed checks and accountability, including those placed on procurement. As of June 30, government managed to realign about P374 billion of the 2020 budget. Foreign borrowing was programmed at $8.6 billion (P436.9 billion), most of which were already committed by July.

The fiscal response by the Philippine government under the Philippine Program for Recovery with Equity and Solidarity (PH Progreso) is P1.74 trillion (US$ 34.8 billion). While this may sound like a lot, it is in fact half of that of neighboring countries: $73.3 billion in Malaysia, $64.76 billion in Thailand, $72.1 billion in Indonesia. Except for Indonesia, these countries have smaller populations. According to the Asian Development Bank, the Philippine government’s pandemic response package is the sixth-largest in Southeast Asia and fifth-smallest relative to population.

As small as the budget has been relative to the tasks at hand, there has been massive underspending. Of the P374 billion realigned funds, government spent only P260 billion for the pandemic response by the end of June, or merely 6% of the 2020 budget. The scale of under spending becomes more pronounced if you factor in the P541 billion in cash from new loans, grants, and bond issuances in April and May alone. Underspending was evident, for instance, in the emergency subsidy program (ESP) budgeted at P205B ($4.1B) which sought to dole out P5,000 to P8,000 to each of 18 million households nationwide in April and May. It took 3 months to disburse the first tranche for April. The government is still scrambling to distribute the second tranche for May.

There is more than enough money for the immediate needs of the government’s efforts against COVID. What needs careful public discussion is how to revive the economy. In early June, the Lower House passed the ARISE bill allocating P1.3 trillion as a stimulus fund to quickly start recovery. Only P700 billion of this would be needed for 2020. It would offer various forms of assistance to micro, small, and medium enterprises and other key sectors affected by the pandemic. The P1.3 trillion would be used to fund wage subsidies and cash for-work programs for displaced workers, zero-interest loans for companies, and loan guarantees for banks. Another House proposal, CURES (COVID-19 Unemployment Reduction Economic Stimulus) is full of pork barrel for its proponents.

ARISE is supported by business groups, by Vice President Leni Robredo. But Duterte’s economic managers, DOF’s Sonny Dominguez and NEDA’s Karl Chua, argue that the lawmakers’ proposed economic rescue packages are “not fundable.” They oppose a supplemental budget, want to stick to the 2020 budget’s P4.1 trillion spending limit. They fear that if the pandemic lasts long, the government may run out of funds and a high deficit-to-GDP figure would result in credit rating down grades. Duterte himself, at various points has echoed Dominguez’ line, saying “we don’t have money.” The proposed extension of the Bayanihan to Heal as One Act (RA 11469) passed by the Senate allocates only P140 billion. 

The position of DOF is hard to understand. If the concern is the budget deficit, why propose a revenue-eroding measure? DOF proposes to accelerate the lowering of corporate taxes in CITIRA (now CREATE), a step that Sec. Dominguez boasts of as the “first-ever revenue-eroding package proposed by the Department of Finance,” a P625 billion revenue loss to government in the next 5 years. Citira would reduce corporate income tax rates by 1 percentage point a year (from the current 30%), but CREATE would immediately reduce rates by 5% and then reduce it again by 1% a year in 2023 until 2027, when it would reach 20%. The tax incentives rationalization part of CITIRA has also been revised; the sunset period for those firms now enjoying incentives would be extended.

The risks are nowhere near as serious as the DOF/NEDA would have us believe. A credit downgrade is unlikely because macroeconomic fundamentals remain stable. 

  1. The country’s balance of payments (BOP) posted a surplus for the second straight month, hitting a 16-month high of $2.43 billion in May. This trend likely continued into July.
  2. International reserves, US$93.3 billion in late July, is at an all time high. 
  3. The government reported an inflation rate of 2.1% in May 2020. This increased to 2.5% in June, well within the government target of 2-4%.
  4. Despite capital outflows caused by heightened global uncertainty, lower export growth, and lower remittances inflows, the Philippine peso has appreciated in the first semester of 2020.
  5. The 6 month budget deficit of P560.4 billion is 25.4% below the programmed P751.1 billion.

The DOF position is ultra-conservative. They want to stick to a budget put together before the pandemic! They do not recognize the crisis, and the tremendous needs generated by the lockdown. The new demands on government are enormous. The healthcare system must undertake more mass testing and contact tracing. Hospitals must keep open and prevent becoming overwhelmed. Despite having one of the world’s longest quarantine measures, we’ve miserably failed to flatten the curve.

The biggest argument against the DOF/NEDA position is that it will not work; it will not stimulate economic recovery. DOF/NEDA want to cut corporate taxes and extend tax incentives in the hope that firms will invest the new money. More likely the money will go towards boosting their balance sheet, buy back shares, or pay down debt. Additional money put into the banking system by the BSP is only going to be invested in government securities. One bank (ING) said growth prospects would largely depend on the government’s fiscal response, noting that monetary authorities have already done the “heavy lifting” with aggressive monetary easing. To date the BSP has injected P1.3 trillion additional liquidity into the market.

We have a consumption-led economy so policy should be geared towards getting people to buy. But government policy, which is geared towards instilling fear – of COVID, of being arrested, of more and more restrictions on movement – is making it difficult for demand to revive. Instead of downplaying the magnitude of the crisis, of claiming gains where there are setbacks, the government should be transparent about the challenges we face. Instead of blaming people for the crisis, it should support and maximize the initiatives taken by private business, civil society, and neighborhood groups. (READ: What now? Netizens confused, disappointed after Duterte’s 5th SONA)

The problem is not just money – it’s the government’s perspective. Staying within a budget finalized before COVID-19 is a perfect example of just waiting out the pandemic then returning to the way things were before. DOF’s revision of its tax reform proposal is mainly going to benefit rich corporations. This perspective does not acknowledge that the pandemic and lockdown have hit the poor in the informal sector and small scale businesses more than the corporations who will benefit from CREATE. This government has to understand: “There is no more old normal to return to. A new normal has to be built.” – Rappler.com

Joel Rocamora is a political analyst and a seasoned civil society leader. An activist-scholar, he finished his PhD in Politics, Asian Studies, and International Relations in Cornell University, and had been the head of the Institute for Popular Democracy, the Transnational Institute, and the Akbayan Citizens’ Action Party. He worked in government under former president Benigo Aquino III as the Lead Convenor of the National Anti-Poverty Commission.

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