By Antonio S. Lopez

What has the COVID-19 pandemic wrought?

For the Philippines and for the rest of the world, it is the earth’s worst health crisis in 100 years.

For the Philippines and for the world, the pandemic triggered the worst economic crisis in 100 years.   In the case of the United States, it resulted in the ouster of President Donald Trump, the first sitting president to lose reelection since 1992, after George HW Bush.

The damage of the pandemic on the Philippine economy has been unprecedented.   The just released Financial Stability Report (FSR) relates the costs to the economy by the pandemic. The FSR was issued on Nov. 18 by five government agencies – the Bangko Sentral, Department of Finance, the Securities and Exchange Commission, the Philippine Deposit Insurance Corp., and the Insurance Commission.

Aside from macro-economic factors like labor, income, and productivity, the report focuses on the lingering effects of the socio-economic damage wrought by the pandemic.

There are two possible effects.  One is short term, on the wholesale and retail trade and on the financial market when the stimulus or relief measures are ended by the government.

Slow-burn contagion  

The long term effect is the snowballing or spillover effects of the adverse impact from one sector to another, where “each chain branches off to other transactions, effectively creating a network where the shocks can amplify or dampen depending on how the chains are structured.” “This is the notion of the slow-burn contagion,” says the report.

The contagion begins with an economy in recession because of the pandemic.   GDP fell by 9% in the first half of 2020.  It could decline by between 8.3% and 10% for the whole year. 

During the first half, majority of companies showed unprofitable or reduced profitability results.  The losses or lower profitability have raised the possibility of a number companies, half of the companies in the FSR study, not being able to pay even just the interest on their debts.  These companies which cannot pay the interest account for more than 90% of “debts at risk” of 174 firms studied by the FSR.

The FSR suggests it is up to the banks to assess the risks involved in their lending.  “The quality of credit receivables will deteriorate moving forward,” says the FSR. “Vigilance should be the preferred approach,” it suggests.

Take the long term view

But heightened risk-aversion does not mean the banks should not take calculated risks.   They should thus take the longer-term view. “Aside from the prospects of the borrower, additional consideration can be made of how the firm, its economic activity fit into the overall dynamics of the economy,” urges the FSR. 

At this writing, Nov. 22, the Philippines has lodged 418,818 cases—the 26th highest in the world and the second highest in the ten-member ASEAN.  Deaths have reached 8,123. The number of cases per one million is 3,802, (the world average is 7,565, with the US reporting 37,937 per million population).   The Philippines has 74 deaths per million people—the highest in ASEAN.  Indonesia’s is 58; Malaysia 10; Singapore five; Thailand 0.9; and Vietnam 0.4. 

On the labor and consumer side, what they call the supply side of the economy, the impact has been equally bad. 

The low-skilled lowly paid workers have been hit hardest.  They were among the first to be laid off.  And even if hired back, they were lodging fewer hours of work a week.   They are also not ready for the digital economy because they don’t have the skills to adapt to it. They are left out.  Adding to their woes is that they don’t have enough savings to give them a buffer.  The result is a rapid and large loss of income leading to a higher incidence of poverty in the future.

Unemployment triples

 From January 2020 unemployment of 5%, the number of jobless as a percentage of the work force swelled to a record high 17.7% by April, after only a month and a half of the total lockdown in Luzon, from March 16, 2020.  The main island accounts for 71.9% of the nominal Gross Domestic Product (GDP). The 17.7% unemployment meant 7.3 million workers suddenly jobless. 

The 7.3-million joblessness is even understated.  There were another 3.9 million workers who had jobs in January but lost them in April 2020.  They were not looking for work.  It was futile to do so since nearly every other worker had no job. 

Not looking for work meant, however, they were not counted as part of the labor force by government statisticians. As a result. the labor force participation rate dropped to a record low of 55.6%.

Unemployment was effectively 27%

So 7.3 million plus 3.9 million is 11.2 million jobless.  Divided by labor force of 41.24 million, unemployment in April 2020 was effectively 27.15%.  One of every three workers who had work in January 2020 had lost his/her job by April 2020.

By July 2020, however, the ranks of the employed increased by 7.5 million.  Many of them were not the same workers who had lost their jobs in April 2020. About 1.035 million newly employed came from agriculture, where the number of workers increased from 4.754 million in April 2020 to 5.789 million in July 2020. 

Between January’s 4.855 million agricultural employment and the April figure of 4.754 million, agriculture lost only 101,000 workers. Deduct that number from 1.035 million and the net increase, in seven months, January to July, in agricultural employment was 934,000.  Impressive.

2.17 million net losses in jobs in seven months

The 934,000 additional workers in agriculture distorted the decrease in employment of 1.237 million, from 42.543 million to 41.306 million.  Without the 934,000 rise in agricultural jobs, the job losses were actually a huge 2.17 million.

In other fields, the gain in employment was misleading.  Workers who got their jobs back were actually lodging fewer hours of work, from 42.1 hours per week in 2019, to 35 hours in April 2020 before inching up to 38.1 hours in July 2020.  From end-2019 to July 2020, the loss in average work hours per week was three hours.

The massive 17.7% unemployment in July 2020 means a huge loss of income.  This means a decline in purchasing power.

Eroded household income

 Says the FSR:

“Household income has been eroded… because (1) jobs have been lost, (2) some of those still classified as employed are not getting compensated, (3) a significant portion of those employed rely on economic activity rather than salaries and wages, and (4) those working a longer workweek are doing so for monetary purposes.”

Adds the FSB with caution: “ The effects of the COVID-19 crisis continue to linger. This then suggests that not only have incomes already been lost, there is also the question of whether the cash flows can be reinstated in the future.”

Impact on productivity

“This decline in purchasing power – both current and possibly in the future, at least for some segments of society – must also consider productivity,” alerts the FSB.    “The decline in the number of hours worked in a week is a concern. Despite the sharp rise of those working longer hours in their desire to earn more, on average the workweek is in fact shorter. This seems to contradict various reports which indicated that work-from-home arrangements have actually lengthened working hours, converting some of the commute time into work-related activities.”

With more workers going digital, “from online retail shopping, to remote schooling to telemedicine”, the government is worried about “low-skilled workers in low-paying jobs who are more exposed to shorter working hours and higher risk of displacement due to their manual and routine work.”

Mismatch in jobs and skills

The International Monetary Fund has also highlighted the growing mismatch in jobs and skills alongside the shift in the working environment from being labor-intensive to capital-intensive. This would lead to a reduced demand for and the wages of occupations performing routine tasks.”

“What COVID-19 has done is to amplify the mismatches. Not only will technology play a greater role moving forward, the immediate impact of COVID-19 has been on families that rely on the informal economy or have irregular pay-offs,” the FSR says. 

This mismatch, the government report warns, “reduces inclusive growth and productivity due to the imbalanced distribution of the labor force and lack of firm-specific knowledge.”  The FSR adds:

“As digitalization changes the task composition of jobs, such job transition and occupation switch will be much more difficult for the low-skilled, especially the large share of informal sector workers who are already laboring under low wages and capital investment, with little access to social protection coverage.”

Adding to the woes of the low-income workers is that they don’t have enough savings to give them buffer in hard times.  The bottom 30% of families account for only 5.3% of national savings. The top 30% account for 71.4% of total savings.

Pressure on poverty incidence to rise

The income effect of COVID-19 is significant,” says the FSR, adding  “those who unfortunately are less endowed likely lost incomes and have limited financial saving on hand as a fallback. The added irony is that these vulnerable households are also experiencing higher inflation in key expenditure categories: health, utilities, and transportation.  With the proverbial savings lifeline limited and rising expenditure costs, the increased pressure on poverty incidence is very real.”

Supply side impact

The outbreak has hit businesses hard too.  Hardest hit have been “leisure-related services (travel, food and accommodation) and transportation. Manufacturing (was) adversely affected while industries such as finance and information and communications technology (ICT) which can operate, at least in part, without physical contact grew on a year- on-year (YoY) basis. Wholesale and retail trade which contracted by a modest 13.1%.   “The fuller impact on wholesale and retail trade may still lie ahead,” the FSR speculates.

On corporations, the effects of COVID-19 have been bad as well.  To be sure, some companies were already losing money even before COVID.  In a sample of 234 companies, 49 companies were already losing money as of end-2019.   This increased to 70 by June 2020.  In the 2020 second quarter, of the 234 companies studied, 104 reported losses during the period, up from 85 in the first quarter of the year.

Red flag on capacity to pay interest on loans

Incurring losses is not bad per se.  “Where this matters is the ability to service immediately maturing obligations,” the FSR points out.  The formula is one-on-one—liquidity matches maturing obligations.  In the second quarter, half of the 174 companies covered by the FSR study were below unity or the minimum interest coverage ratio (ICR). “This is a red flag,” warns the FSR.

The amount of income

affects corporate viability

“Liquidity concerns can, under certain conditions, escalate into a solvency problem,” warns the FSR.  “This converts a one-off anomaly into a viability concern, from temporary to structural effects.”

The FSR cites the Altman-Z score which predicts whether a company, especially manufacturing, is headed to insolvency, and worse, bankruptcy on the basis of its profitability, borrowings, cash flow, and activity. 

In the FSR data, 38 companies of the 174  were classified as “distressed” in the second half of 2019.   Their number increased to 46 in March 2020 and 45 in June 2020.  The firms accounted for “a significant portion of the debts carried by the firms in the sample.”  These debts are what is called debt-at-risk.  In the sample, debt-at-risk increased from 82.7% in December 2019 to 91.6% of total debts in June 2020.