Focus on the recovery

I was recently asked the question if you have P300 million today, will you buy a penthouse in Shangrila Fort or 2 houses in Ayala Alabang? Straight away I answered that if I have that money, I will buy neither of the two! I reasoned that the economy we are in today sharply projects a K direction. This is because the higher income members of society have not been able to spend as usual in the last 10 months and therefore generated a significant amount of savings. This “excess” savings, I believe, is fueling asset accumulation in stocks and real estate (including crypto currencies)—taking that slack and possibly the advantage as asset prices fell last year.  While individually this is good and secures good returns when the economy rebounds, this is blindsided.

Looking at the employment and economic data of the past year, it makes you wonder how the economy will be able to fully rebound at its current pace. Comparing the full year period from October 2019 to October 2020 of the labor force surveys, we find that more than 10 million jobs were lost across the 4 survey periods. While there were some recovery from the worst unemployment rate of 17.3 percent in April 2020 to 8.5 percent in October 2020, there remains to be a net job loss of about 3.3 million. The worst hit sectors are transport, accommodations, manufacturing and construction. These are the jobs that are mostly in the urban areas and supports strong economic activities. The gradual reopening of the economy might have helped some of them get back job losses in April, but the reality is that the new normal economy has taken out 20 percent of the workers—meaning their skills are no longer relevant in a digitizing environment. In addition, reports of varying degrees of firm closures have been reported last year ranging from 15 percent from the World Bank Survey, 26 percent from the Department of Trade and Industry survey to 56 percent from the Employers Confederation of the Philippines Survey. This January, anecdotal evidence from the business permit renewals showed that a sizeable number of businesses are filing for “retirement” or effective closures.  Just as we are writing this, a well-known hotel just announced a temporary closure beginning February, clearly suggesting that even those with deep pockets are having difficulties navigating through this rough environment.

Our own Eagle Watch forecast this year looks at a subdued growth picture much slower than the government expectations of about 6.5 percent and above. We are looking at 3 percent to 4 percent primarily because we seem not to be pushing hard enough to focus on the recovery agenda. Having an approved budget is only the first step to kick off the growth. We know that it is still confidence that is preventing business and consumers to get back to that growth path we had in 2019. We know that government needs to spend more but that it also has to work on addressing its absorptive capacity constraints. The full year expenditure particularly on infrastructure actually fell instead of growing, preventing any significant pump priming. The Bangko Sentral has flooded the market with liquidity but bank lending growth has now reached flat level—effectively saying that there is very limited confidence in the business sector and banks. If there is no significant change in policy directions, then we cannot expect the growth engine to move up faster.  At this current rate, we will most likely recover the 2019 GDP level by 2023 at the earliest.

What needs to be done is really to focus on the recovery. This means that all distractive elements must be weeded out and put on the sides. There needs to be only one topic again and again in policy making today—how to ensure that our economy and our people get out of this pandemic without losing much of their income and value creating potential. Today this means ensuring a good plan first to transparently get the vaccines, convince and assure people of their efficacy, ensure their availability (and affordability for those who need to purchase), provide the necessary support mechanisms to implement vaccinations. Clearly communicate the strategy for the economy to recover by addressing the choke points of governance capacity. Make people understand that we are entering a new phase in economic life and will not be back to where we were before. Provide training opportunities to reskill for those unable to get back to the economy. Ease further doing business especially those that are severely affected.

Finally, for those who are not affected much by the pandemic, for those who can afford to buy real estate, stocks and other assets, I hope it is not much to ask you to think about the unemployed and small and medium enterprises closing. In your investing strategy, it will be good to think of investing in activities that create jobs and economic value in the real economy and not just wait for asset appreciation. For if jobs and businesses remain close, I wonder if the asset you invested in will appreciate anytime soon.

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