Let’s keep the Department of Finance professional

Rumors are rife about a Cabinet reshuffle of key economic managers. One among those said to be replaced is Department of Finance Secretary Benjamin Diokno. Word on the street is that his replacement is a politician, not a financial technocrat.

If there is credence to this rumor, I strongly advise the powers that be to think about their decision very well. See, the reason why the Philippines has not gone the way of Venezuela is because the Department of Finance and the Bangko Sentral have always been independent and uninvolved in partisan politics. Both institutions operate with utmost professionalism and are led by the country’s best and brightest in finance.

So despite widespread corruption, populist leaders and a rubber stamp Congress that fails to serve as a check-and-balance to the executive branch, the Philippines continues to be on the fast-track to prosperity. Our fiscal position remains strong to a point where our sovereign debts have been classified as “investment-grade” for nearly a decade. This is an undeniable validation of our fiscal strength. The last thing we need is financial management that’s driven by populism.

Let me cite an example of how a strong economy can come to quick ruin on the back of politically motivated policies. Let me recount the story of Turkey – a country once celebrated as the world’s fastest growing agro-industrial economies. Today, it suffers from crippling inflation and a currency that lost its value. From living in abundance, the Turkish people are today queueing for bread and cutting down on meat consumption.

From boom to bust

Following the economic devastation of the dot.com crisis of 2002, former Turkish president Ahmet Nacdet Sezer took steps to revamp the economy. He recalibrated the Turkish lira to its true value. He took on more debt to pump-prime the economy. He reformed the bureaucracy and tax regime to make it more attractive to investors. He invested in infrastructure to increase productivity.

The economy transformed in just five years. Gross national product increased by an average of 7.3 percent from 2003 to 2007, putting it in a strong position to weather the global financial crisis of 2008. It emerged from the crisis with only a four percent contraction. Not bad by global standards.

Between 2010 and to 2019, the Turkish economy grew by an average rate of 5.85 percent driven by electronics, textiles, auto manufacturing, mining, iron and steel and tourism. The Turkish people were growing in wealth. By this time, President Recep Tayyip Erdogan was already in power, having been elected in 2014.

But underneath the seeming good economic performance were two festering problems. The first was a growing current account deficit. For those unaware, a country’s current account is the surplus (or deficit) after taking into consideration trade in goods and services, investment incomes, remittances, travel receipts, debt service and fund transfers. In Turkey’s case, there were much more outflows of foreign exchange than there were inflows. Normally, a deficit of 2 percent of GDP is acceptable. But Turkey’s deficit was at 8.9 percent in 2011, 4.7 percent in 2017 and 5.4 percent in 2022. The problem was serious.

The culprit was Turkey’s balance of trade. The country was importing 40 percent more than it exported. This is because Turkey is 80 percent dependent on imported oil and gas and 80 percent dependent on imported wheat. Price hikes on these commodities after the Wuhan outbreak and the Ukraine war aggravated the deficit.

The second problem was a rapidly depreciating currency. The Turkish lira was valued at four liras to one US dollar in 2017. Today, it is valued at 28.1 liras to the dollar.

A vicious cycle emerged. As Turkey’s import bill increased, it borrowed more to pay its bills. Its debts ballooned from 38 percent of GDP in 2011 to 60.31 percent in 2022. The debt burden put a strain on the country’s foreign reserves which, by 2019, was down to just $60 billion or just three months of imports. In response, the Turkish government committed the cardinal mistake of printing more money. This resulted in runaway inflation and a quickly depreciating currency. This caused immense suffering to Turkish households.

The proven financial remedy to address high inflation is to increase interest rates. This should have been done years ago. But Erdogan refused. Elections were coming in 2023 and Erdogan needed to please the electorate. He defied the principles of good economics and rather than increase interest rates, he decreased it from 19 percent in 2021 to 10 percent before elections in 2023. The move was popular but it wrecked the economy. Inflation peaked at 84.39 percent last January and the lira to lost 700 percent of its value.

True enough, Erdogan won his third term. Now he is on a mad rush to undo his politically driven, disastrous policies. He raised interest rates six times since June, jacking it up from 8.5 percent to 40 percent today. It is a bitter, aggressive move – one that comes at the expense of the people’s suffering. Ordinary citizens are struggling to keep up with the cost of food and rent.

The Philippines has similar problems in terms of a festering current account deficit (due to severe import dependence). The deficit stood at 4.4 percent as of the end of 2022. Similarly, our debt levels have grown to 60.2 percent of GDP. While still manageable, we must handle our finances astutely according to sound economic principles. The worst thing we can do is impose popular but damaging economic policies to gain political equity. These are what politicians do.

I don’t think anyone can criticize Secretary Diokno’s performance in leading the BSP and DOF portfolios. I would rather have him at the helm than a politician.

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Email: [email protected]. Follow him on Twitter @aj_masigan