Abstract
A slide of the economy into recession is avoidable thru a whole of nation approach. The index of fear must be mitigated to improve investor perception and encourage consumer confidence on the economy. Government must strengthen public trust by resorting to good and appropriate choices on managing the epidemic and extending its hand on assisting businesses get thru an expected economic fallout. Private firms including those in the financial sector should recognize the importance of adjusting their respective growth projections and prepare to absorb risks on the short-term. Three variables give us firm assurances of recovery: first, the certainty of flattening contagion curves; second, rise of spending due to the incoming election year and third, sustained gains from OFW remittances.
Malaysian Prime Minister Mahathir Mohammad describes what’s happening as worse than the 1928 Spanish flu pandemic, and a “terrible blow to economies around the world” while Mohamed El-Erian, Allianz Chief Economic Advisor sees this as a “generation-defining moment.” Christopher Smart, Barings Chief Global Strategist thinks that the US economy would enter into a recession by the second and third quarters. It will be, says Smart, a “brutal recession.” Small and medium-sized firms will be hardest hit.
These perceptions are widely shared and by now, global markets are reacting based mostly on speculations of the dire effects these coronavirus pandemic would impact the global economic system. However, not all economic experts share the same thinking.
Raphel Bostic, president of Atlanta Fed, says what’s happening is a health emergency, incomparable with the economic disruptions of the past, and therefore, markets are expected to recover and apocalyptic prognosis may not be as dire as largely thought of. Yes, based on projections, Bostic believes that there would be contractions of the economy, yet, for him, this is induced. “ A lot of projections will depend on how the US government addresses this medical emergency,” says Bostic. The Federal government has given up on the second quarter GDP growth—that is already a goner. Bostic however, is optimistic that the US economy would eventually rebound in what he describes as “robust” growth beginning on the third quarter. There is a caveat though— this rebound depends much on the choices the US government will make in the next few weeks. By acting strong and resolute, Bostic is confident that the US will surely weather the possible economic fallout.
Nobel peace prize winning economist and former World Bank (WB) president Joseph Stiglitz basically shares the same perspective. While he believes that the US$2 trillion economic stimulus package may tide the US economy thru on the short-term, everything still depends on the choices which the US will take in the next coming weeks. Stiglitz criticized the US government for not benefiting from the lessons of the 2008 financial crisis. He disagreed with perceptions of a strong US economy pre-crisis levels. Stiglitz eventually came to a conclusion that the global economic system would eventually resort to a global response similar with what happened in the 2008/2009 financial crisis where the G20 countries gathered themselves together and collectively pooled their resources to avert an economic contraction of pandemic proportions.
Such an scenario where states will again gather together and agree on a collective global response will counter wide-spread perception of the inability of multilateralism in addressing this virus pandemic. Stiglitz believes that multilateralism will again trump populism and relegate this ideology to irrelevance.
“There will be some populist states which will take advantage of the situation…we need resources, we need markets, we need ideas from one country to another. We are inevitably globally integrated…the ideology that foreigners don’t matter have already been undermined….” (March 27, 2020 interview of Bloomberg).
Roberto Azevedo, the director-general of the World Trade Organization (WTO), does not share the optimistic view of Stiglitz since he predicts a global economic slowdown. However, unlike the financial recession of the thirties and the 2008/2009 financial crises, Azevedo thinks that the on-coming crisis is of a different kind. Whereas the financial crisis of the past was structural, Azevedo says the present crisis is mostly cause by demand shocks. Markets are jittery because of concerns that demand has massively slowed down due to decisions by political governments to lock down their territories. Azevedo believes that a similar cooperation would arise among states particularly of the G20 and that would eventually arrest the possible slide on a slippery slope of the global economy.
Two differing perspectives based on one pandemic event. What differentiates and determines which perspective is correct, if you take a close look at it, is the level or rate of trust the analyst repose on the existing economic system. Those privy to market activities normally express distrust, while those who already took part in executive functions in multilateral organizations know that states have shown a natural tendency to resort to international cooperation to resolve systemic disruptions.
Which is the best perspective? Are we really heading towards a global economic apocalypse?
If you take a serious look at what’s happening, at the heart of this issue, is risk perception. I termed it a “perception” because risks are socially-constructed. Risks exist, yes, and can be calculated. We calculate risks to determine its rate, not because it is there, at this point in time, but we expect to see it in the immediate, whether it will be tomorrow or sometime this year. We are only interested on the levels of risk to protect ourselves but the fact is, we presumed the existence of risks without really determining if it truly exists or not. The expectation of the impact risks generate is what increase market anxieties.
I am not saying that risks are illusions. I am saying that it is constructed. Whether the basis of the presumption of risks depends on a thorough study of history or a deep understanding of the laws of the capitalist system, the point is that risk drives decisions of market players, specifically of investors. Investors are generally risk averse. Behind this behavior is the conventional belief in the ideology of the unpredictability of human behavior. Human behavior, as it is largely accepted, is pretty much hard to understand, more or less predict. No one wants to second guess and hence, the best bet is simply assume the worst case scenario—that by and large, investors will avoid becoming the worst bloke off the block hence, they will choose to hold on to what they have until the volatility simmers down and the risks become lower than what it is today.
I don’t want to go on a lengthy philosophical discussion about how wrong this is. The bottom-line really is choice. Investors choose to be cautious due to perceptions of huge risks. What most do not understand is that, compared to previous decades, human behavior has since been known to be predictable. This is what history has shown us.
Science has provided us a glimpse of how the global system recovers from various crises which had pandemic impact. Our knowledge of how crises or contagions behave have greatly improved over the years. We know that global systems recover after a series of crises. We have recovered from the Spanish flu pandemic, the financial crises that hit the world in 2008 and 2009, and we largely survived the Ebola, SARS-COV1 and the MERS outbreaks. We know that contagions follow a definitive pattern and this pattern can be graphed based on mathematical models, like the modified SIR model. And the model shows us of at least four stages: an outbreak, a steady rise which eventually leads to the attainment of a peak. When the peak is reached, the curve expectedly flattens.
What is important is that viral infestation does not continue perennially over time. The rate of infection depends on the extent of intervention.
If you take a serious look at the issue at hand, the shape of our future depends much on choices—choice of global players participating in markets and political decisions or choices made by national governments. These choices depend much on the quality and extent of information which reach decision-makers. Here lies the problem.
What most think is that this virulent strain of the corona virus is unpredictable. That we know less of it than other viruses. This adds up to the anxiety people feel because they are being fed information and are exposed to gruesome images of chaos, of uncertainty, of helplessness that this contagion is causing even to strong states, such as China, the United States and Europe.
Investors do not want to move because they are not fortune tellers and they don’t know what would happen the minute they participate in the markets when there are massive slowdowns of economic activities. When investors stop investing, the entire system comes to a slowdown because the next agent in the capitalist system, the banks, behave like investors—they usually don’t second guess and will largely be on a “see-and-wait” position before they agree on processing loans and extending credits because the more they do that, the more exposed they are of the risks.
This affects manufacturing and suppliers who are largely dependent on funds sourced from banks. When manufacturing activities slow down considerably, it impacts on the markets and influence perception. The cycle goes on, until demand stops and the economy grinds to a halt.
Let’s somber up
The capitalist system depends much on exchange. People create exchange. When you lock an economy down, you practically stab the economy right at the heart. Hence the general perception is a lockdown of an economy means an unilateral, across-the-board stop of all economic activities. That all sectors of the economy ground to a halt.
It does not. In reality, a portion of the economy remains alive. Whether a biological or fiscal crisis occurs, there is still a portion of the global economic system that remains active. What portion of a state’s economy is that depends much on the level of development of a particular economy. In a highly developed economy, where the systems are mostly interconnected, it is heavily reliant on capital accumulation. Capital accumulation depends on performance of markets.
In economies not exactly as highly connected with the global economic system, capital is basically dependent on localized economic activity. We see a more vulnerability for these economies because they are dependent much on economic activity. However, studies show that regardless of the size of the economy, a portion of it remains.
In a pandemic for example, the medical sector remains extremely active. When one sector maintains activity, it means that the supply chain is also extremely active, with linked sectors feeding into this sector. You have hospitals. You have medical manufacturers getting tremendous orders. When they do, these firms make orders and these orders rise exponentially. Those who manufacture face masks for example, need suppliers of hospital-grade fabric, for example. And the list goes on. Pharmaceuticals also profit during these times.
Food manufacturing firms stay alive during this time, but with a caveat—they are totally dependent on the continuous supply of materials. Meaning, the supply chain must be moving exactly as expected and even faster. Food distribution firms also gain during lockdowns or quarantine.
The banking sector is also active at this time, providing much needed funds for use by suppliers. Suppliers need cash, and liquidity sometimes is the issue during epidemics and this sometimes lies the problem. Banks depend on bigger banks for their resources. Bigger banks get their resources from a global financial system which relies mainly on the macrolevel exchanges on local bourses. Bigger banks invest on markets so that they multiply the funds they currently have to generate profits. These profits are plowed back to the financial system in the hopes of gaining more. The behavior of banks therefore, is largely on caution. When the markets are down, the obvious way is for banks to either withdraw from the market or stay but absorb the hits.
Liquidity issues
Thinking about it, the fundamental issue during crisis is liquidity or availability of funds, funds that deter the economy from going into what some say as a “deep freeze.” And this is how central banks come to the rescue— issuing fiscal measures that prevent such a deep freeze. Most would think that the liquidity issue is somewhat solve-able by central banks just producing or printing more paper. More monies plunked into the economy solves liquidity. This has been the prescription most central banks did during the 2008/2009 financial crisis.
More monies in the system without the adequate demand devalues the currency. When currencies are devalued it affects exchange. For example, more pesos into the system but without the requisite exchanges creates an artificial demand which impacts on value. A devalued currency impacts on exchange—there will be more pesos to be exchanged for a dollar worth of goods. Traditional economic thinking says this is bad. However, this problem has been solved by governments thru entering into debts and placing on the table what experts call sovereign guarantees.
Among players in the economic system, it is the government that remains as the most stable entity. It has the resources, the cash and the stature. Decisions made by governments influence market behavior. These decisions are mostly pursued by central banks.
Solving the issue
One of the solutions which our economic managers suggest to at least mitigate economic effects of this pandemic is address demands of liquidity. Liquidity depends on availability of monies from banks. As banks are affected during crises, the responsibility then shifts to government.
Government intervention comes either in plunking funds into the markets which is what Finance secretary Carlos Dominguez already did when he asked state pension funds to buy distressed stocks when President Duterte declared the quarantine, or thru directly giving it to consumers. The first intervention was a band-aid solution, while the decision to put the cash directly at the hands of those who need these, is a masterstroke. The plan to put 270 billion pesos into the economy thru consumer spending may actually help in slowly allowing the economy to pick itself up and avoid eventually slipping to a deep freeze.
There is a caveat though. These funds should reach its intended recipients—18 million individuals, which is basically what government considered as the most impoverished socio-economic sector. The 18 million represents 20% of the consumerist market. The huge amount would at least, benefit stores in communities, but unfortunately, that is about it. These amounts would only be spent on food and some amenities, leaving a huge chunk of the service sector practically destitute.
Another issue that remains unresolved is the lack of a concrete plan on how best these funds would surely reach their intended beneficiaries. The lack of a definitive data on this imperils the overall plan, because government intends to get the money out thru local government units.
By giving this responsibility to local government units increases the possibility of politics influencing what is actually an economically driven social amelioration measure. Cities would scramble and use politics to avail themselves of these precious and much needed funds.
How much would be given to small municipalities and how big would a city gets? The conventional wisdom is allocate more to city dwellers than municipalities. This is entirely false if the choice depends much on population size. Allocation should depend on the number of impoverished families in a particular location regardless of size.
The Duterte administration is also correct when it asked banks and financial institutions to absorb some “heat” and allow the extension of credit and loan payments without slapping high financial fees. Utility companies were also requested by the president.
However, the window is small—thirty days. It is highly unlikely that after the lifting of the enhanced community quarantine in Luzon by April 12, the economy would normalize. It will not. The basis of this pessimism is the fact that the government cash assistance which is about 8,000 pesos per family will be spent as fast as the intended recipients get it. This will inject some activity, but it will be insufficient, since the spending will just address subsistence and will leave the service industry in the lurch. The manufacturing and import firms will surely benefit but if you take a look at the structure of our economy, this sector is just a fraction. What worries most is the decisive impact this pandemic would cause the services sector which accounts to a bigger slice of the economy.
The stimulus, limited and time-bound, would surely be insufficient. The resultant effects of several sectors of our economy being on lockdown is the possible disruptions in mortgage, loan and credit payments. Expect defaults. When defaults arise, expect rise of interest rates and eventually, possible bankruptcies and bubble bursts particularly on the real estate sector.
Fortunately, our economic managers are already expecting furthering or extending funds assistance. That explains why Secretary Dominguez already came public by appearing before Bloomberg to informally inform the world of the plan of government to enter into foreign debt. Dominguez wanted to impress upon investors that the country is in a very good fiscal position since it already cut its foreign debt to 41% of the GDP in the past. Meaning, we still have about 60% of our GDP and we can guarantee debt payments since we are not exactly bankrupt.
However, we will surely be if after April and May, we see our markets still closed and consumer spending still at extremely low levels. Government will now be caught in the quandary—it will again be forced to undertake a political decision to intervene. I sincerely doubt if the government would risk using available funds from the 2020 budget. Another re-alignment would affect projects pretty much substantially and this would surely impinge our future economic growth. This is what National Economic Development Authorty chief Ernesto Pernia is trying to tell us.
Prescriptions
First, we need to lower the fear index. Choice is inevitably linked with perception. When favorable perception about the economy is weak, the choice becomes limited and obviously one-track. Choice would inevitably result to self-preservation. Investors will exercise caution. Caution on the side of either survival or just avoidance of assuming too much risks is normal, yet, will lead to disaster.
For us to lessen fear, we need to approach this on the whole of nation levels. We need the cooperation of everybody—from national governments to local governments, down to banks and enterprises, and down to consumers. Increase trusts in the economy by improving perception.
Governments must do the right thing—show that it is acting on the best interests of everybody. Ease regulatory strictures. Work closely together with the local business community. Eliminate profuse politicking which depress investor confidence on the country. Lessen issuing statements that destabilize the situation. Try to create a more viable economic environment for local businesses. Have more faith to Filipino firms. I am not saying that we undertake protectionism. Create safety nets to vulnerable sectors while strengthening local conditions for local firms to survive. Encourage competition based on just allowing the natural laws of capital to work.
It is also important for government to ensure the smoother than usual flow of goods and labor. The supply chain should remain liberal and open. The transport and freight sector should not be constricted.
The private sector must exercise prudence, lower growth projections and be ready to shoulder losses on the short term. Do not change plans mid-stream only on the basis of speculations of increased risks. Follow your annual budgets. Do not contribute to the worsening of the problem by resorting to job cuts. Job cuts impact on unemployment rates which are used as basis for investment. Business owners must be ready to sacrifice their profit expectations and realize that they are part of a bigger whole and one false move affects the survivability not just of one sector of the economy, but of the whole.
This also includes banks and financial institutions. Credit facilities should be open not just to accommodate big companies but moreso, small and medium-sized enterprises. This is not the time for profit gains. See this time as what economists around the world consider as “generation defining moment.” For as long as your bottom-line remains stable, and you can fund operations, banks should at least consider assuming some risks and widen credit facilities. Believe in the Filipino entrepreneur. Believe that the economy would recover though not as fast as desired. Bank on the long-term and do not be influenced by uncertainties induced by those who want to profit from disasters and crises.
The silver lining to all of this is the certainty that of recovery and of increase consumer and hopefully investor confidence on the Philippine economy. We will see signs of recovery hopefully when global and financial markets stabilize by the third or fourth quarters of this year.
The best part is this— next year is already election year, and we all know what this means. Businesses not just the manufacturing and import sectors will surely benefit—even moreso, the service segment.
With recovery on the global scale comes stability of jobs especially of the Overseas Filipino Worker (OFW) sector. Remittances which amount to an average US$ 8 billion annually will substantially boost the economy. These two factors will make us survive this pandemic.
—nothing follows–
