Dominguez has been finance minister of the Philippines since 2016, serving under president Rodrigo Duterte. He has been a key architect of ‘Dutertenomics’, a catch-all term for a mix of policies including cutting red tape, reforming the tax system and improving the skills of the country’s workers. But the landmark economic policy of Dutertenomics is Build Build Build, an ambitious infrastructure spending programme.
The Ps8tr ($165.2bn) plan, accompanied with much faster approvals for new projects, is the core plank of Duterte and Dominguez’s plan to stimulate the economy, particularly rural and less developed areas. But like governments across the world, the Duterte administration’s plans were derailed by the spread of Covid-19 at the start of the year.
The economic impact of the pandemic is undeniable. The economy fell by 16.5% in the second quarter of this year — the government thinks it will contract between 4.5% and 6.6% by the end of 2020. This is partly because of the government’s decision to impose the world’s longest lockdown. It lasted between March and May in much of the country, and even longer in Manila, the Philippine capital.
The government has pledged stimulus worth as much as $34.3bn, according to Standard Chartered. The Bayanihan to Heal as One Act, a $3.4bn relief bill passed in September, is a key plank of the policy response, partly as it included an increase to how much the government can borrow from the central bank.
GlobalCapital talked to Dominguez about the fall-out of the coronavirus — and how the government is responding.
Let’s talk about the economic impact of Covid-19 before we get into the policy response. How bad will things be for the Philippines, both in terms of the hit to GDP by the end of this year and also the longer-run impact on the economy?
The first thing you have to remember about this contagion is that it’s so uncertain. We don’t know how long it will last. We’re just now starting to see how it behaves. We’ve reached a period where we’re starting to flatten the curve but you still get spikes.
We have now opened up our economy and it has responded very well. I just hope we don’t get a spike. What I would consider a spike is when our healthcare facilities exceed 70% of capacity. That’s when we get worried. We’re doing everything we can to encourage people to wear masks and face shields. We just have to hope for the best.
The basic assumption is that sometime in the middle of next year we will have an effective vaccine but I’m not even sure about that. We could be looking at a longer period, which is why we need to keep our powder dry. We can’t spend all the money in the first blast. It doesn’t seem to be a situation where you throw money at the problem and then it’s solved.
How are you allocating your spending?
First of all, we have to allocate our spending to healthcare. Second, we are really accelerating our Build Build Build programme. It’s only in this way that we can restart the economy. We’re building things we need, we’re creating good jobs and we’re pump-priming the economy, in a rational way. At some point, we’re going to have to start helping out companies that have liquidity and solvency problems.
The goal is to protect the productive parts of our economy. I hate to say it but there are some parts of our economy that are not going to make it and in those areas we’re going to retrain the people. But in areas that need liquidity support, we’re prepared to do that. Especially now when we passed our second Bayanihan act.
We have allocated $1bn of capital to our state-owned banks. We want those banks to buy loans from private sector banks to stimulate the economy. We feel that approach could yield us maybe 10 times value in terms of credit.
We are also proposing that our banks be allowed to set up a company that will address solvency problems, allowing us to make investments in the private sector. We want to invite investment from multilateral lenders like IFC or the private sector fund of the ADB, as well as private sector companies. Some airlines might need equity rather than loans; that’s the type of thing I want to prepare for.
We also want this legislation to be passed to allow banks to set up special purpose vehicles to off-load assets [note: this is effectively a ‘bad bank’ plan].
In the Asian financial crisis, it took the government five years to set up SPVs. By the time they were ready, most of the problems had solved themselves. I’m now asking Congress to give us authority to set them up earlier because I think at the end of this year or the first quarter of next we’re going to start to see some companies going belly up. That’s why the banks will have to act quickly. This should also give the banks confidence that they can manage their books.
How worried are you about the impact on the banking system?
Our banking sector is pretty robust. Of course, we have problem banks but they are mostly our rural banks, which account for maybe 2%-3% of overall financial assets in the country. Our big banks are mostly healthy and over the course of this year they have already started provisioning. They have been quite conservative, so we’re very confident about them.
The problem now is to get them to start lending. It’s normal: they don’t know what’s going to happen so they’d much rather put their money in government bonds.
We have a lot of leeway in supporting the liquidity of the banks because we still have a 12% reserve requirement which, incidentally, this administration brought down from 20%.
This crisis is strange. We don’t have a liquidity problem. Our peso is strengthening. Our foreign reserves are sky-rocketing. It’s very different from the 1997 and 2008 crises.
How do you make sure that the Philippines is one of the countries that emerges strongest from this crisis? What policy moves can you make now towards that end?
We’re being very conservative about spending. We’re watching our fiscal deficit very carefully. My goal is to land in the middle when you rank the fiscal deficits of our neighbours and our rating peers. I don’t want to be the highest or the lowest. When you’re right around the middle, you don’t attract too much attention. And so far, so good.
For once the executive and the legislature is on the same track — we’re going in the same direction. I asked Congress to pass a spending bill that would add Ps140bn of additional spending. They actually only spent Ps165bn, which is not so bad. There were some bills proposed that would have meant us spending Ps1.3tr. It’s still a struggle but I’m very happy that Congress has helped us.