ARISE Philippine Act: Flatten the Curve, Not the Economy

Presentation of Rep. Quimbo during the FNF Learning Series featuring a discussion of ARISE Philippines Act (House Bill 6815) on 15 June 2020
News05.08.2020By Hon. Stella Quimbo, PhD Representative, 2nd District of Marikina City
ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

As we all know, economic recovery is very relevant; it is in everybody’s mind today.

As we speak, many businesses are closing. Our unemployment rate is at all time high at 17.7 percent. As of April 2020, 7.2 million Filipinos are without jobs. We think that it will be difficult to reverse this situation without government action. On the part of Congress, our response is in ARISE--Accelerated Recovery and Investments Stimulus for the Economy of the Philippines.

The ARISE bill was approved on third and final reading last June 4 and has been transmitted to the senate. This calls for a 708 billion pesos spending for the remainder of 2020 and about 650 billion for the next three years.

Early on, the first time I filed this bill was eight hours before the announcement of the lockdown on March 12. What we had in mind was  a stimulus package that would promote business continuity. This would be the way to protect workers from the risk of layoffs. So, this bill is really about protecting workers.

Ideally, we would have wanted to have an economic stimulus package in place as soon as the lockdown was lifted.

Restarting after Reopening

What are the obstacles in reopening of the economy?  There are at least two major factors.

First is the “fear factor”.  Even if the lockdown was lifted, people are still afraid of contracting the disease. Even if the malls are open, consumers are quite wary. The reason for this is that early on, we did not have access to mass testing.

The second one is the liquidity concerns of firms. During the almost three months of lockdown, many of the nonessential businesses were not allowed to operate. Being closed, they had no revenues and yet they incurred expenses like salaries, loans, rent and other overhead expenses. By the lifting of the lockdown, it is expected that these firms would be cash strapped.

What would happen if these concerns are not addressed? 

First of all, there will layoffs of workers. Remember at this point in time when asset prices would be very low, it would be more difficult to get rid of your asset capitals like factories and trucks than to layoff workers. Unfortunately, at this time, humans are more dispensable than physical assets.

Secondly, if the fear factor among workers and consumers are not addressed, then expect absenteeism in the workplace and the marketplace.

It is very important to have an economic stimulus package that would protect workers against layoffs and we do that by reviving business confidence and removing the fear factor and making sure that businesses continue.

The fourth point I’d like to make is that many of the proposed interventions in ARISE  are based on data. And the reason why we are committed to be data driven is the substantial amount of money: 7.8 billion to be spent in the next 6 months. We want to make sure that those numbers are correct. More importantly, the proposed interventions are well-targeted and impactful.

These interventions will have labor conditionalities; i.e., you able to avail of these forms of assistance if you promise to keep your workers.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

Labor Retention and Payroll Maintenance

We have about 41 million workers in our economy and of these, about 9 million are not affected by COVID-19. These are the ones who are assured of keeping their jobs including government employees,  household workers, and employees of ECQ essential business which are allowed to operate during the lockdown. These businesses would most likely not experience liquidity problems and are expected to keep their employees. 

But around 29 million workers are employed in nonessential enterprises that are not allowed to operate and would most likely be cash strapped so, workers will be at risk.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

Business Continuity to Avoid Layoffs

What would be the most affected sectors? With or without the lockdown, tourism and exporters are the most effected since these businesses rely on the movement of people, services and goods.  As of early January when there was  news of COVID-19, many of the tourists who wanted to visit the country cancelled.  Tourism has 6.5 million workers and if the workers in all other sectors that support tourism are included, these represent 30  percent of the entire workforce.

In the trade sector,  considering only the exporters and those that sell domestically but rely onimportant raw materials represent almost five hundred thousand worker.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

In addition to tourism and trade, the ten sectors enumerated in the slide below are also the nonessential businesses. They are most likely cash strapped and if we rank them according to the size of the payroll and the amount of their loan expenses, the top ten most critically impacted are the following:  retail trade,  land transport, construction, crop and animal production, wholesale trade, repair of motor vehicles, manufacture of computer products including semiconductors which is our top export, schools, hotels,  and office administrative and support services which include Business Process Outsourcing (BPOs). These ten sectors would account for  almost 23 million of the 29 million affected workers.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

The COVID-19 affected firms of all sizes from micro to extra-large. The other critically impacted sector are the small enterprises. The bigger ones are more likely than not to cope on their own. For example, bigger companies would be able to take out loans versus the small ones. As a sector, micro, small and medium enterprises (MSMEs) are, by definition, critically impacted.

There are about one million registered MSMEs and of these, 750,000 belong to nonessential businesses. I estimate that 4.5 million are in the informal sector. Of course, we don’t have an official number of how many there are but this is an estimate I computed using national survey data. Overall, we are looking at around 5.25 million people in MSMEs affected.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

What is the general approach in helping all these critically impacted businesses? As it would be difficult for government to come up with a tailor fitted solution for each and every distressed firm, the best approach would be for businesses themselves to tell government how they want to be helped. Part of the interventions proposed would be compensation for payroll costs during the lockdown which had to be borne by nonessential business. This is one way to help them move forward and restart their businesses post-lockdown.

Capacity building is important and businesses have to cope with this new normal. Brick and mortar stores all of a sudden needed online sales platforms. I had a small business in Marikina selling shoes. When I lost my brick and mortar shop in Greenbelt, I had to develop my own website, figure out the payment system and logistics. What I spent for all these was not a trivial amount. So that’s the kind of assistance we expect government to provide to small businesses, not only the registered ones but also the informal ones.

Third is zero-interest loans to boost liquidity and assistance to secure these loans. Finally, proportionality of assistance; in other words, make sure that the amount of assistance is the right size, not too small and not too big.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

How big must government spend in order to help the economy recover? And the answer to this frequently asked question is this depends on the extent of the economic damage of COVID.

Before COVID happened, our economic managers were expecting the GDP to grow by 6.5 percent. GDP in Post-COVID is estimated to be negative 3.5 percent. This means we lose the entire 6.5 and another 3.5 or a total of 10 percentage points in GDP. How much is one percentage point of GDP worth? It’s 200 billion pesos, so if we lose 10 percentage  points, that would mean two trillion pesos in terms of the economic damage of COVID.

If that is the case, how much must government spend to reverse that loss? Is it also two trillion pesos? The answer is “no” because of the phenomenon of multiplier effect. For every peso that government spends in a particular sector, construction for example, that one peso spurs activities in other related sectors like cement, hardware, and transportation. And if you add up all these additionally generated business activities, the impact of this one peso  is going to be more than one peso; specifically, it’s about 1.53 pesos. For every one peso the government puts in, the impact on GDP is 1.53 pesos.

Because of the multiplier effect, the government needs to put in less than two trillion. So, you take your two trillion divided by 1.53 and the result is 1.3 trillion pesos. This is the amount of stimulus or pump priming government needs to spend on so that the economy can be back on track.

How will 1.3 trillion pesos be divided between two important economic institutions: Bangko Sentral and national government. According to experiences globally, that is about half and half. We’re looking at 600 to 700 billion pesos that the government must spend directly. The remainder will come in the form of credit stimulus through monetary policy to be issued by Bangok Sentral. So that other half will be in the form of additional loanable funds made available through banks. That’s a rough accounting why we are proposing 708 billion pesos for the rest of 2020.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

Timeline for Business Recovery under ARISE

This is a storified version of ARISE. I am from the country’s shoe capital,  Marikina. My example is Tony  who operates a shoe factory, with 20 employees, specializing in school shoes. During the lockdown, He continued paying the salaries of his workers; he continued paying his loan from an informal lender at “5-6” rates.

After the lockdown was lifted, his workers did not show up for work because they were afraid of getting sick. The answer of ARISE to this concern would be subsidies to COVID testing amounting to 20 billion pesos (10  billion each for 2020 and 2021) coursed through LGUs as a way to assist businesses. 

When Tony checks his fund balances,  he realizes he wouldn’t be able to sell school shoes. He also realized that he was incurring more costs for masks, regular disinfection, and transparent separators for social distancing. He gets desperate and considers laying off his workers. But the ARISE Bill asks employers not to lay off workers first as government is here to provide wage subsidies for two months but with a labor retention clause, meaning the employers promises to keep his workers. The two months here is just for Tony to buy time; for him to figure out what to do in the next 12 to 24 months while waiting for a vaccine.

What happens to Tony in the next 12 months? We suggest that he takes out interest free loans from government financial institutions. For people like Tony who is not used to transacting in the bank (his loans were from informal lenders), ARISE proposes credit mediation services in every municipality to guide them in information, business strategies, financial management and the like.

We also suggest the use of electronic wallets. So, if Tony happens to be a small businessman in the farthest town of the country, he should be able to reach this government window through e-wallets. We propose the use of digital platforms. This also comes with our experience in Bayanihan 1 when we had great difficulty disbursing cash since we were doing that manually.

Tony also worries about his son’s tuition fees. During the lockdown, he spent his savings to keep his business afloat. Now that he has to enroll his son, he is out of cash. The answer of ARISE here would be subsidies to education; particularly the children of workers in critically impacted sectors.

Tony thinks about new business opportunities like manufacturing shoes for medical workers and other protective gear. Again, under ARISE, we will be providing technical assistance through the Department of Trade and Industry (DTI).

That’s for the short run scenarios for Tony. What happens in the medium run? There are bigger problems as well. For example, better connectivity, better roads, and better health facilities would be needed. These are also  provided for under ARISE since we call for a long-term plan for economic resilience.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

Summary of ARISE Interventions                                                    

Here is the full menu of the proposed interventions under ARISE. They are classified into five. First, the general intervention of massive testing through LGUs but ultimately targeted to businesses so that they can screen their workers.                               

We have transitional measures which I mentioned a while back. Wage subsidies will be part of it. Cash for work here is a form of unemployment assistance program, an emergency employment program given to those who will lose their jobs even with wage subsidies.   Businesses really need to trim their workforce because of the social distancing protocols that they need to follow.

We have financial interventions like zero-interest loans, credit mediation services and loan guarantees from government since small businesses may not have the required collateral.

We have sectoral relief programs targeted at the critically impacted industries to include MSMEs, tourism,  globally-oriented manufacturing industries and services or exporters, transportation, and  agriculture. Even though the food sector is essential and did not close, we realize that agriculture is key to having a resilient economy. If the pandemic lasts for a longer period of time and we are unable to import food, we must make sure that our domestic producers will be able to feed all of us.

Finally, we have longer term structural interventions which will include Enhanced Build-Build-Build. 

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

ARISE: Cocktail of Monetary and Fiscal Policies

Economic stimulus is a mix  of both monetary and fiscal policies.  We should be happy that the Bangko Sentral ng Pilipinas is a very proactive institution. As early as February, they have lowered the reserve requirements; and, they issued a lot of policy relief measures resulting to increased loanable funds in the banking system. Early April, we estimated that to be about 700 to 800 billion pesos but in a congressional hearing, BSP said this has increased to 1.1 trillion pesos.

But then, a big chunk of our  population, 77.4 percent, continues to be unbanked. Also, about 82 percent of MSMEs are in the informal economy. We need to build the confidence of the unbanked population to try to access those loanable funds. The way to do that is for government to spend an almost equal amount of economic stimulus mentioned earlier like wage subsidies, zero-interest loans and direct grants for technical assistance.  

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

Budget Deficit=Revenues-Expenditures

This is another frequently asked question: What will happen to our budget deficit if we pursue  economic stimulus?

Last May 13,  our economic managers  announced that the budget deficit has already reached 8.1 percent. Budget deficit is the difference between revenues and expenditures. Typically our target without a pandemic is 3.1 percent so clearly 8.1 percent is a high number. These are extraordinary times, revenues are much smaller because out economy had to be literally shut down. Expenditures are also higher given the need to spend for emergency subsidies for households in Bayanihan 1 and additional health expenditure to control the virus.

Much limited revenues  plus much higher expenditures would equal to a much higher budget deficit. The question is, if we spend more on economic stimulus, will that necessarily mean a much higher budget deficit?                                               

The answer is “no” if two things happen. One is if we use off-budget financing sources. If the national government issues bonds and GOCCs would purchase these bonds—that is an example of an off-budget financing source.  Creative financing sources such as this one would avoid a ballooning budget deficit.  

The second condition is that as we spend on economic stimulus.  We have to make sure that the amount is spent productively so that the GDP also grows. And when we compute the GDP ratio, the denominator is GDP. So, if GDP grows, the budget deficit as a proportion of GDP will not necessarily grow as fast.

With these two conditions, we think that spending on economic stimulus will make budget deficit more manageable.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

In terms of COVID-19 Trends in the ASEAN, the Philippines is second highest, next to Singapore, when it comes to the total number of active cases; highest in terms of total deaths; and fewest in terms of number of beds per population; and one of the lower ones in terms of tests.

In other words, it is a difficult situation.  As I said earlier, the amount of stimulus needed depends on the economic damage of the pandemic. If the pandemic is not controlled today, we expect the damage to be bigger.  And if the damage is bigger, then we should be spending more; and therefore, the budget deficit is expected to be higher compared to the rest of countries.

But if you compare the budget deficits across ASEAN, Malaysia is the highest close to 18 percent followed by Singapore at 15.4 percent. But Lao PDR has 8.8 percent but with zero deaths. Considering that we have the highest deaths per population, then we should expect that our economic stimulus should be bigger than that of, at least, Lao PDR.  So, a budget deficit of say 9 or 9.5 percent is probably the appropriate scale.

But as I mentioned earlier, if we are able to use budget financing and economic stimulus productively,  our budget deficit can, in fact, be managed at say,  7.5 percent

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

Financing

How can we fund economic stimulus? I think the best answer would be loans.

ARISE provides for the possibility of using savings. There are certain government expenditures items, like foreign travel, that certainly would not be used. These savings can be used for funding economic stimulus.

But the best way is to use loans. Firstly, our credit rating has been recently upgraded thanks to our economic managers who have been managing our macroeconomic fundamentals quite well. In terms of  financial health, we are in the top ten in the world, I think number 6, in a ranking done by The Economist.  In other words, we are in a very good position to take out loans. So, let us make good use of recently upgraded credit rating and take out loans for purposes of going out of this recession.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

National Debt

This is just to give you a sense of where we are in terms of Debt to GDP. Again, thanks to our economic managers, we had a very low rate of 39.6 percent in 2019. I think this is a record low in two or three decades. We are now at 49.8 percent after all of those loans have been taken out. Just to give you a sense of whether 49.8 percent is big or small, Malaysia allows this to go up to 55 percent. So, there is still some space for us to take out more loans.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines

COVID-19: A Wake-up call for government to act on economic resilience

Economic resilience is the ability our economy to recover from shocks. A realization is that we are not as resilient as we ought to be. Small things like broadband connectivity, which we clearly need today, is a problem

So, this long run plan for economic resilience, which the bill provides for, must include structural reforms that we have been postponing for the last decades. These include building the capacity of the health sector, more infrastructure projects and improving the database of our government particularly for providing protection, when necessary.

ARISE Philippine Act
Learning Series on Legislation featuring the ARISE Philippines Act of 2020FNF Philippines
ARISE Philippines Act - Presentation by Hon. Stella Quimbo (Part 1)FNF Philippines

This transcript was compiled by the Center for Liberalism and Democracy.

ARISE Philippines Act - Reactors/Discussion with Hon. Stella Quimbo (Part 2)FNF Philippines