Austerity

The Philippine economy has slowed down for the last five quarters, hitting 2.4 percent year-on-year. October headline inflation has hit a 44-month high of 7.8 percent.

But the economy grew only by 0.1 percent in the third quarter compared with the second. That’s one tenth of one percent. We are at a standstill.

Quarter-on-quarter, agriculture, forestry and fishing sectors contracted by 7.7 percent; services sector crawled at a measly 0.4 percent; industry grew by 1.5 percent.

Household consumption, quarter-on-quarter grew by a measly 0.4 percent. This tells us that local private consumption — the powerhouse that usually drives up to 70 percent of the Philippine economy, has plateaued.

For an immediate look at economic health and real-time distress, the quarter-on-quarter number is more revealing. It tells you exactly how policies, inflation and consumer confidence are interacting in the present moment. If the QoQ numbers flatline for consecutive periods, the YoY numbers will inevitably follow them downward.

S&P Global Ratings confirmed that we are actively experiencing stagflation. Some are asking, shouldn’t we be pursuing an austerity plan by now?

I first heard of the word austerity as a kid when I was listening to my parents talk about it on the dinner table. Then president Carlos Garcia declared an austerity program in response to a severe foreign exchange crisis, curb post-war inflation and eliminate rampant government corruption.

What is austerity and why is it so controversial?

Austerity is a set of political and economic measures implemented by governments to reduce budget deficits and public debt. This is typically done through a combination of spending cuts (such as freezing public-sector wages, reducing social services or delaying infrastructure projects) and tax increases.

Austerity measures call for sacrifices on the part of the public as a civic and patriotic duty to respond to a dire national situation. But it absolutely requires the government to lead by example.

Mr. Garcia’s austerity call was like BSP Governor Eli Remolona Jr.’s call for Filipinos to avoid luxury goods, live frugally and prioritize local products to mobilize national savings.

Garcia’s plan aimed to boost local food production (to cut down on rice imports) and reduce reliance on imported fuel and spare parts. All of those sound familiar to us over 70 years later.

The next time the government needed an austerity program was in the early 80s. The Marcoses led an extravagant lifestyle and pampered their cronies. Our pre-BSP Central Bank was eventually caught doctoring the books to show we had more dollars than we actually did.

As a result, we could no longer pay our debts. We sought a debt payment moratorium and the price IMF imposed involved the classic shock therapy: austerity. That included the following:

Slashing the public sector budget deficit (cutting it from 4.5 percent of GNP down to 1.5 percent); tightly choking money supply and domestic credit by issuing high-yield Central Bank bills (Jobo bills) that pushed interest rates sky-high; letting the peso float and devalue sharply and raising taxes and import surcharges while dismantling state monopolies.

Economists observed that while the IMF program successfully stopped hyperinflation and balanced the country’s external accounts within two years, the human and economic toll was devastating.

It caused the deepest post-war recession. Because credit dried up and government spending vanished overnight, there was massive closure of businesses. The Philippine economy contracted by 7.6 percent in 1984 and another 7.3 percent in 1985, wiping out a decade of gains and causing real per capita income to fall by 18 percent.

Shrinking the economy so violently caused the country’s debt-to-GDP ratio to spike even higher, locking the country into devoting up to 45 percent of its national budget to debt servicing for the next two decades.

Are we approaching a similar crisis level now?

Well, we are getting close. The government’s budget deficit is projected at 5.4 percent of GDP (roughly P1.66 trillion) for the full year 2026. Total debt servicing now equals 29.5 percent (P2.005 trillion) of the budget’s total size.

For 2027, debt servicing rises to P2.704 trillion — driven by a 51.5 percent jump in maturing principal payments — representing 39.2 percent of total projected government disbursements.

The peso may now seem to be falling like a rock but unlike in 1983, we are not facing an imminent foreign exchange collapse or an IMF bailout. Most of the government’s debt today is borrowed locally in pesos rather than in US dollars, and the country holds $97.4 billion in gross international reserves (a four-year low). We can still service our obligations without begging foreign creditors for a moratorium.

That is more reason why BBM must try harder to enact self-imposed fiscal discipline to avoid reaching a crisis point where outside institutions like the IMF dictate the terms. Our economic growth is already at a standstill. Austerity forced by the IMF will kill it.

If the government cuts unproductive spending (ghost projects, redundant agencies, non-essential overhead and pork projects like multi-purpose buildings) it will lower its borrowing needs. Treasury yields will eventually fall, forcing banks to go back to their real job of assessing risk and lending to productive private businesses.

We are heading into very turbulent years ahead and by doing nothing, an austerity program may again be forced on us.

BBM should address severe loss of business and consumer confidence by cleaning up the budgeting process now to reduce the need for more debts. Otherwise, we will fall off a fiscal cliff like we did in 1983 under his father.

If our economic indicators continue to severely disappoint, even Sara Duterte will start looking attractive if only because she would be a change from a non-performing BBM. That’s something like Americans voting for Trump because Joe Biden failed them on high prices.

BBM shouldn’t end his term confirming that the Marcos family is totally bad news for government finances and the national economy.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco.