We’ve heard the Arroyo government boast that the economy is the strong pillar on which stands the President’s ability to remain firmly in power. In her State of the Nation Address Mrs. Arroyo said the economy was poised for takeoff, if only the opposition would allow the entire nation to move on. We’ve been called “bobo” by one of her key supporters for failing to see how well the economy is doing under Mrs. Arroyo.
So far, official data for the first half of this year show, at the very least, a resilient economy, after a record growth in real GNP of 6% in 2004. (In other words, despite the economy running on the “motherboard” of an obsolete XT computer model-no intel inside, unfortunately-it managed a reasonable performance in the first semester.) Data on real growth, on portfolio capital inflows, on the stock market index, on foreign direct investment inflows, all look good.
These are the statistics that are thrown at us, oftentimes with “in your face” taunts.
I will not dispute the veracity of the data although I am beginning to doubt some of it. For one thing the jueteng connections of the Arroyo family and the wiretapped conversations recorded on Garcillano’s cellphone were revealed to the public in the second quarter of the year. So the impact on the economy of these revelations will be felt more in the second half of this year and thereafter.
For the moment, too, I will ignore the fact that imports from 2002 to 2004 were understated by up to $4 billion each year. Or that rather than adjust the GNP/GDP figures downward following this understatement, the government issued an erratum wherein GNP/GDP figures were adjusted upward. Nor will I belabor the fact that the new definition of unemployment, based on what could be a misguided reading of the ILO definition, has resulted in unemployment in the Philippines now being lower than that of Germany . Or that for two straight months the BIR’s tax revenue report was padded. “Will I lead by more than a million votes” seems to be creeping into the realm of official statistics of a government bent on hanging on.
A confidence game
For the moment I will ignore all that, and focus on the real issue, which is this: The problem with the Arroyo story line is that the credibility of the chief executive is itself the very prop needed by the economy, in order for this to fortify her overstay in Malacañang. Can a lying, cheating, stealing president who makes no bones about lying cheating and stealing actually convince the international creditor community that she can be depended on to put the state and the economy in order?
At this point, credibility may be the most important thing the economy needs. Especially since the Arroyo government, more than any other government-even the shortlived one of Joseph Estrada-is most vulnerable to an economic meltdown. The importance of credibility is explained by Prof. Nouriel Roubini, who has studied countries in crisis throughout the world. He says:
“A credible government can run larger fiscal deficits in the face of a temporary adverse shock without creating concerns about its future solvency. A government with large debt stocks, large fiscal deficits, and a primary balance insufficient to assure long-term debt sustainability may be able to lower its borrowing costs if it can credibly commit to future fiscal adjustments that will assure its long-term solvency. On the other hand, doubts about a country’s commitment to future adjustments can immediately increase borrowing costs, and higher borrowing costs in turn make future solvency more difficult. If a country loses market access because creditors doubt its commitment to make the adjustments needed to service its debts, it almost always will eventually run out of funds and be forced to default, absent a rescue loan or emergency restructuring.” (Nouriel Roubini and Brad Setser, “New Nature of Emerging-Market Crises,” in Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies, August 2004, Chapter 2, pp. 37-38)
Takeoff or meltdown?
Mrs. Arroyo’s men say it’s the economy under Gloria “which is helping thwart all the Ibagsak plots.” (Philippine Daily Inquirer, 21 August 2005 ) Respectable growth notwithstanding, the fact remains that:
¤ The Philippines is one notch lower in the global human development index.
¤ The industrial sector is weak, contributing less and less to total gross domestic product over the long run.
¤ Redefined unemployment notwithstanding, the number and percentage of unemployed Filipinos continues to rise.
¤ Job creation is not enough to absorb all Filipinos of working age. Nor is it enough to stop the unemployment rate from continuing to worsen.
¤ The quality of employment is deteriorating: less full-time employment, less salaried workers, and more of the employed wanting more work.
¤ Among the poorest 30% of families, there are proportionately less children in school, and proportionately more children at work.
¤ Among the poorest 30% of families, the percentage of families with access to safe drinking water has fallen between 2002 and 2004.
¤ The poorest 30% of families have a slightly higher share in total family income between 2000 and 2003. But their dissavings grew over the same period, so that their share in total family savings worsened. The richest 30%, in contrast, saw their share in total family savings grow from 88% to 90% between 2000 and 2003.
No jobs, no money, no savings, no education, no safe drinking water. But the poor have a Philhealth card. According to the APIS 2004, [1] the proportion of poor families with a Philhealth card jumped from 7% in 2002 to 28% in 2004.
Indisputably, there are two things that are not growing as fast as this economy: taxes and jobs. And there are two things today that are rising faster than this economy: debt and prices. As the economy grows, the tax collectors have to run hard just to stay in place. And unemployment-even the redefined one-remains at record high levels.
By the end of last year the public sector debt stood at 741% of government revenues and 108% of GDP. Indonesia and Argentina , both of which suffered a severe crisis several years ago, never had their public sector debt this bad. Not enough taxes, not enough jobs, mounting debts and rising prices are a sure recipe for disaster.
Poised for takeoff? Please.
Narrowing Fiscal Space
Take a look at the official data in the table above [Not reproduced here - see on IPD website], the ones that rarely get thrown in our faces. Look at the diminishing fiscal space for this government. Early this year, the Consultative Group for the Philippines -read, the country’s “donors” aka lenders-noted that the window of opportunity for the government was narrowing. Mind you, this was said even before Garci made the headlines. See for yourself just how narrow the fiscal space is for this fake president.
As the previous table shows, it is only the Arroyo administration whose tax revenues fail to fully cover such obligatory expenditures as interest payments, net lending to government corporations, salaries of employees, and allocations to local government units. Between 2001 and 2004, a lilliputian yearly average of PhP3.5 billion was all that remained for programs and infrastructure. Take note: This balance has yet to cover the National Government’s principal repayments, which totalled PhP856 billion from 2001 to 2004, or a yearly headache of PhP214 billion for the Arroyo regime. Yes, that’s PhP214 billion per year against a residual balance of PhP3.5 billion per year.
It therefore comes as no surprise that social spending under the Arroyo government is weak. The World Health Organization ranks the Philippines as the 50 th country whose government spends least on health on a per capita basis. [2] Next year, the Arroyo government plans to raise the budget of the Department of National Defense by PhP215 million more than the increase it plans to allocate to the Department of Health. Furthermore, its proposed new appropriations in 2006 for the Department of Education and State Universities and Colleges amount to only 2.2% of GDP, way below the UNESCO-recommended level of at least 6% of GNP.
Social spending is taking a backseat to political survival. But the nagging question remains: Where is the Arroyo government getting the cash to fund its desperate attempts to cling to power?
Last year, it took PhP8.8 billion of the Marcos wealth in order to reduce the deficit. That money should have gone to pay for land acquisition for agrarian reform beneficiaries. This year it’s auctioning off Imelda’s jewels. Until Parayno quit last July from the BIR, its efforts to raise taxes were producing positive results. The tax effort, [3] which had deteriorated from 13.5% of nominal GDP in 2001 to 12.4% in 2004, had improved to 13.6% in the first half of this year. But rather than continue the work of Parayno, the BIR today has been reduced to padding its votes, I mean, its tax collection report.
If it can’t raise more taxes, then the Arroyo government will just have to keep borrowing.
From whom will it borrow? Fortunately for Mrs. Arroyo local investors are highly liquid. In the final analysis, what will keep this government afloat despite its total lack of legitimacy and complete absence of morality is hard cash, the two steady streams of which are OFW remittances and borrowings, domestic and foreign.
Why would lenders be willing to keep doing business with a fake president? For one thing desperation is a good opportunity for rent seeking. The riskier it becomes doing business with the Arroyo government, the more profitable it can be for those with hard cash. Why should she care how much interest is paid on the cash she borrows if the people (especially those who don’t like her) will foot the bill? As the desperation grows, the vultures come circling. She who is fake says of course, let’s push mining. Yes, let’s enter into non-bidded contracts. Why, let’s even amend the Constitution (basta stay ako hanggang 2010, hah). Every dirty trick in the book is employed to stay in power. Fire this general and courtmartial him. Fire the Makati businessman’s brother turned undersecretary. Arrest Brother Eddie. Arrest rallyists. Spot a plot in every corner. Who’s next? What’s next? Anti-Terrorism Act? Emergency powers? Martial law? Hmmmmmm.
Desperation is a double-edged sword. Acts of desperation might serve a narrow purpose, such as keeping people off Mendiola. But they cannot and will not boost confidence in this government. What is even dangerous is that acts of desperation are hurriedly deliberated upon if at all. Because they are seldom carefully thought through, they may trigger totally unplanned or unexpected negative outcomes. As the desperation becomes more intense, acts of desperation become more daring, more vicious, more risky. In short, they generally only add to uncertainty at a time of severe political turmoil and economic downturn.
When will all this uncertainty rub off on bankers, credit rating agencies, multilateral lenders, and institutional investors, who no doubt are closely following these developments? Will there come a time when even they will say they have had enough? When will that be? What will trigger such an adverse reaction?
Your guess is as good as mine. Maybe Garci knows. For all we know, the President has already called him.
Take a look at the table below [Not reproduced here - see on IPD website], on portfolio investments, from 1999 to the first quarter of this year. There are two vulnerabilities indicated in this table: the risk of capital flight (Filipino elites taking their money out of the country), and the risk of portfolio investors letting go of the Philippine government bonds they are holding.
There’s another interesting thing about the table below. In the first quarter of 2005 a huge inflow of portfolio capital entered the country. Foreign portfolio investors bought up Philippine equities and Philippine government bonds. It will be interesting to see if they continued to do so after Gloriagate and Juetenggate.
When the debt crisis exploded in the early 1980s, the Marcos government was forced to declare a moratorium on debt payments because it had no dollars. When the international lending community learned that the country’s international reserves were overstated by the Central Bank, all hell broke loose and the economy collapsed. The ADB’s recent assessment (see the section below) on the government’s debt sustainability says that the government would not be able to withstand an adverse economic shock. The hypothetical shock they used in their study was a peso devaluation. Given the current state of our economy, the trigger could come from anywhere, from the least expected corner (bird flu?). That’s how vulnerable our economy is to a crisis.
Whatever the case, the IMF and the World Bank are worried, so worried in fact that the World Bank’s country director for the Philippines , Joachim von Amsberg, issued a warning to the Arroyo government. If the new value added tax law were not implemented, he said, the Philippines “risks losing its credibility.” (BusinessWorld, 15 October 2005 ) Whether “losing credibility” is a euphemism for “losing access to loans” will remain subject to speculation. But the warning is clear.
Signs of distress and vulnerability
At this point, the economy poised for takeoff is highly vulnerable to a crisis. The factors working against stability are beyond the control of even the Justice Secretary. World oil prices are high, major financial interest rates are likewise increasing. This will be felt in the Philippines with higher oil prices, higher electricity rates, higher cost of transportation, and higher cost of servicing debt, which will translate to higher prices in general. Without jobs and sufficient incomes, most Filipinos are already finding it difficult to cope with rising prices of basic commodities, of transportation, utilities, and higher taxes. The stress on people’s lives is evident in surveys, both official and private: less food on the table, less children in school, more hunger, more deprivation. This situation will be felt by all income classes, but the “choices” the poor face are more cruel and inhuman.
The government is itself highly vulnerable, and I am not talking about the current political crisis. The ADB in a study has found that the Philippine government “is playing a weakly feasible debt Ponzi game.” (A Ponzi game is one wherein old debt is paid with new borrowings.) The “weakly feasible” assessment means that right now, the government can still continue to pay off old debt with new borrowings because the interest rate it pays on its bonds is lower than market lending rates. “In other words, the Philippine government bonds are still perceived as having relatively low default risk.”
The operative word here is “perceived”. In the end it is all a matter of credibility.
But the more crucial finding of the ADB is that this weakly feasible Ponzi game is not sustainable. In fact, “the government is facing a high risk of running into a debt crisis in the event of a major adverse shock to the economy.” (Duo Qin, Marie Anne Cagas, Geoffrey Ducanes, Nedelyn Magtibay-Ramos and Pilipinas Quising, “Empirical Assessment of Sustainability and Feasibility of Government Debt: The Philippines Case,” Asian Development Bank ERD Working Paper No. 64, February 2005, p. 19)
Barely four months after “hello Garci” became public, there are early indications that the economy is weakening. The multilateral banks, even the Arroyo government itself, have lowered their growth forecast for 2006. The National Economic and Development Authority likewise lowered its growth forecast for this year, citing the rising price of oil and the Supreme Court restraining order against the implementation of the VAT law as the reasons for the downward adjustment.
Merchandise exports in the first eight months of the year grew by only 4.1% over the same period last year. Electronic product exports, which account for more than half of total exports, grew by even less-2.2%. This performance is below government’s export growth target for this year of 10%; analysts say the target will not be met.
The BIR failed to meet its revenue target in September. It had padded its preliminary report on its monthly revenue collection for the months of August and September. The corrected figure for September shows that the bureau was short of its monthly target by P800 million. ( Philippine Daily Inquirer , 17 September and 10 October 2005 )
In July 2005 6.7 million employed Filipinos were looking for more work. That’s 1.1 million more underemployed workers than in July 2004-and it’s more than the 889,000 new jobs created during the same period. Globally, the country has slipped one rank lower in the UNDP’s scale of human development index. And its global competitiveness ranking likewise dipped.
As Mrs. Arroyo hangs on to her seat, refusing to step down, the options available to her government diminish. Each time she chooses political survival over the public good, the noose tightens around the economy. Each desperate move she makes will translate to dire social and economic consequences for the poor and the middle class, for whom the public safety net has become crippled if not vile.
Should we be wishing for a crisis to hit the economy? That would be like praying for a miracle, and getting it along with the raging fires of hell. But it’s not really up to us, since it is Mrs. Arroyo, and no one else, who is pulling the trigger.
Notes
[1] This is the Annual Poverty Indicators Survey conducted by the National Statistics Office.
[2] See the World Health Organization’s World Health Report 2005. Per capita Philippine government spending on health has fallen from $16 in 2000 to $11 in 2002.
[3] Defined as the ratio of tax revenues to nominal gross domestic product (GDP) or gross national product (GNP).