COVID-19 concerns

by Romeo L. Bernardo, BusinessWorld, 28 Jun 2020

I am pleased to share with readers recent posts to GlobalSource Partners subscribers (globalsourcepartners.com) written by Christine Tang and me on the recent BSP cut in policy rates and on our concerns on public transportation and the T3 ( test, trace, and treat ) program.

SURPRISE RATE CUT

The Monetary Board (MB) unexpectedly cut policy rates by 50bp, bringing the key overnight borrowing rate to 2.25%. It is evident from its statement that the MB is worried about economic growth. Banks are not lending as hoped, with monies parked in the BSP’s deposit facilities rising from a little over P800 billion in end-April to over P1.2 trillion in the first week of June. Notwithstanding multilateral agencies’ updated GDP forecasts this month that are only slightly below government’s low-end -3.4% target, we think our more pessimistic -7% growth forecast in our May 26 report remains appropriate especially given the difficulties we’ve observed of restarting the economy under distancing protocols.

RESTARTING ECONOMIC ACTIVITY

Most areas in the country, including Metro Manila, were eased out of enhanced community quarantine (ECQ) into a more relaxed general community quarantine (GQC) at the start of June. Since then, activity has steadily picked up under carefully calibrated policies to maintain distancing protocols at the industry level while keeping the elderly at home (see Chart 1). However, two particularly problematic areas where solutions require a level of organization and management largely absent in the concerned public institutions have highlighted key constraints to jumpstart domestic demand.

First on the supply side, the government has set a general one-meter physical distancing protocol that applies to, say, factories, workplaces, and retail outlets, which has the effect of capping output of these businesses below potential. Nowhere is this more evident than in public transport, particularly on Metro Manila’s roads where high congestion and jam packed commuter rails and public utility vehicles already have daily headaches pre-COVID-19. Public transport services, mostly operated by private firms, have been allowed to resume under GCQ but are strictly regulated, e.g., less than half the carrying capacities for mass transit (rails and buses), traditional jeepneys banned, and motorcycle backriding (riding pillion) prohibited. The limits to vehicles’ load factors coupled with unadjusted fares have made operating the vehicles uneconomical which, according to experts, have effectively reduced available public transport to only about 20% of capacity. Even with the current low demand, supply gaps are evident in people resorting to walking or bicycling or missing work altogether.

Experts worry that without a more balanced approach to handling health risks and organizing public transport, including government entering into roughly P30 billion worth of service contracts with private sector providers, the supply gap will only increase as transport demand rises over time, especially if Metro Manila is able to transition into the less restrictive “modified” GCQ (mGCQ). This supply gap has broader adverse repercussions on transportation in general (private cars clog up available road space, safety of bicycling on motor vehicle lanes), labor supply (longer waiting/commuting time, less productivity, not being able to get to work), incomes and consumption demand, and overall economic activity, including school opening.

The other worry, which is of greater concern, is the sheer difficulty of interpreting data on COVID-19 infections and thus, the inability to raise confidence in the government’s ability to contain infections. Health experts have traced the problem to one of governance in the public health system, an issue of leadership as well as the result of decades of underinvestment in the health sector. Contemplated solutions have now moved to involving the private sector which is expected to have the better organizational and management skills to handle T3. Without much improved capacity for T3, every new COVID-19 breakout will only instill more fear among people and leave them with little choice but to protect themselves by minimizing activities outside their homes and postponing discretionary spending, which will not hasten economic recovery.

As it is, a lot of uncertainty still surrounds the coronavirus and its different strains as well as the timeline for vaccine development, with recurrence of infections in some people raising concerns about the durability of immunization. With the much-awaited vaccine possibly still year(s) away and time ticking on finding solutions to address the problems locally in health and transportation, our -7% GDP forecast for 2020 may yet turn out optimistic.