Corporates in the Philippines Can’t Save the Country

Ever since the Philippines identified its first COVID-19 patient within its national border, the number of cases in the country has shown nothing but a relentless surge. To curb the spread of coronavirus, the federal government has aptly declared an enhanced community quarantine on the Luzon region, a place where 50 million Filipinos call home. What followed was the immediate suspension of public transportation, closure of non-essential businesses, and a curfew, among other things.


Accountable for 73% of the country’s economic output, the Luzon region’s lockdown could possibly push the Philippines into a negative territory of 0.8% GDP contraction this year. Note that its most recent contraction dates way back to the Asian Financial Crisis when its economy shrank by 0.58%. Even in the aftermath of the financial crisis in 2009, the country had posted a modest growth of 1.15%. The current situation, therefore, is extremely dire in comparison. With that in mind, in an economy bolstered by huge conglomerates, is the corporate sector doing anything to relieve the country of its pressure?


Fortunately, the Philippines appears to be living up to its good name as a community-based country as numerous corporates have stepped up. For starters, under the instruction from the Department of Finance, most (if not all) lenders have granted payment extensions on different types of borrowing, including personal and housing loans, so as to alleviate Filipinos’ financial burden in the absence of income. To provide support for medical front-liners, SM Investments and Gokongwei Group have each forked out P100 million ($1.98 million) to acquire personal protective equipment and testing kits. In an equally heroic gesture, Universal Robina Corporation and San Miguel Corporation also donated food products to medical workers and starving daily wage earners.


Meanwhile, two of the country’s biggest telecommunication companies, Globe and PLDT, are also supplying mobile phones with preloaded call and text credits to relevant parties, such as healthcare workers, police forces, and the military. Among all corporate efforts, the most sizable one is perhaps Ayala’s P2.4 billion ($47.60 million) response package, which encompassed wages, bonuses, leave conversions, loan deferments, rent coverage for Ayala partners, and financial support for all Ayala employees under its subsidiaries. Thus, it is evident that local companies are striving to sustain the economy within their means in the face of adversity. Admittedly, despite various efforts from the private sector, it is downright unrealistic to expect that they can keep it going for any longer. This is because as business activities dry up, companies draw down on their cash reserves and eventually face the need to save up in the wake of a downturn. For that reason, support from the government is needed.


As with many other countries, the Philippine government has shown its commitment to stimulate the struggling economy. To elaborate, a stimulus package worth P27.1 billion ($530 million) was launched, of which more than half (P14 billion) is reserved for the tourism industry, the most affected sector. The program also provides financial support for acquisition of testing kits, workers and business affected by COVID-19, farmers and fishermen, free courses for upskilling and reskilling of displaced workers, as well as microfinancing and loans for MSMEs. Besides, the government has introduced a cash handout program of P200 billion ($3.9 billion) to support 18 million low-income households who have lost their sources of income amid the pandemic. In its most recent stimulus package announcement, the government brought to light a P51 billion ($1 billion) wage subsidy to employees of small businesses


Notably, this is not the first time that the Philippine government has taken matter into its own hands. During the 2008 financial crisis, the Philippine government rolled out a ‘bazooka’ that was called the Economic Resiliency Plan. At a size of P330 billion ($6.5 billion), the fiscal package mainly provided funding for government employment, social protection programs such as scholarship and food product subsidies, agriculture support, individual and corporate tax cuts, as well as large infrastructure projects. Owing to that, the country managed to sidestep a recession with GDP growth of just over 1% in 2009.


All things considered, seeing that the COVID-19 outbreak is expected to have greater implications on the Philippines’ economy than the global financial crisis, bigger stimulus packages might be needed to avoid a recession – ones that pack a stronger punch than the Economic Resiliency Plan. However, it should be mentioned that the country’s fiscal deficit is under great stress as the NEDA suggests that it might balloon to 5.4% of GDP, a level not seen before. In that case, would the Duterte administration risk ballooning the fiscal deficit to an unprecedented size or to let the economy go into free fall?

Indonesia Well Poised to Weather Extended Market Downturn

Indonesia’s struggle against COVID-19 has pit its economy and policymakers to their greatest challenge yet. In response to the outbreak, the Indonesian government has announced a comprehensive stimulus package amounting to IDR 405.1 trillion (USD 26 billion) targeting the underprivileged bottom 40 and sectors of the economy that are at highest risk from the recession.


The country’s manufacturing industry is at the center of various tax breaks and incentives; the industry contributes to 20.5% of Indonesia’s GDP, and the fact that up to 50% of its raw materials are imported from China has put it at a risky position. Cash transfers and other non-cash initiatives such as providing free electricity to the disadvantaged and giving out staple goods are also aplenty. But will these be enough to get the country back on its feet and inspire confidence in the markets?


If investors were impressed, then market was not reflecting it; one week after the announcement of the package, the Rupiah reached levels that were last seen in 1998.  The Jakarta Stock Index (JKSE) also saw 37% of its value wiped out since the beginning of the year. These were spurred by massive foreign capital outflow that amounted to at least USD 4 billion in rupiah denominated bonds, and USD 600 million in Indonesian equities. The Ministry of Finance has also mentioned that they are anticipating the currency to drop to as low as IDR 20,000 per USD, a level unseen in the nation’s history.


Global institutions seem to share a similar sentiment, as evident from their revisions of the country’s GDP expectations for 2020: The World Bank’s revision places it at 2.1% from 5.1%, and the IMF recently posted a somber revision of only 0.5% from 5%. Indeed, Indonesia’s own Ministry of Finance is anticipating a worst-case scenario of a 0.4% contraction. These estimates present the archipelago’s worst GDP growth since the Asian Financial Crisis (AFC) – is the specter of the 1998 crisis hanging over Indonesia once more?


Our view is otherwise; though it is indeed true that economic activity has slowed down to a crawl, the country’s fiscal posture is healthy, and fundamentals are solid – nothing like it was during the AFC. The years before the crisis, Indonesia’s short-term external debts amounted to almost 90% of the Central Bank’s reserve levels at the time – as the currency went into freefall, the debts overwhelmed corporations and sent the economy over the edge. This time around, Indonesia is much more conservative with short-term debt, and is armed to the teeth with foreign currency reserves.


The capital flight and JKSE crash can arguably be attributed towards portfolio reallocations, rather than due to a real shift in fundamentals. Although foreign ownership of rupiah bonds dropped by 7%, Indonesia is still the Asian country with the highest foreign proportion of bond ownership. Furthermore, the government’s very recent issuance of “Pandemic Bonds” was met with abundant demand – the bond issuance was two times oversubscribed in the Singapore and Frankfurt Stock Exchanges, indicating positive market sentiment.


The government is also taking steps to make sure they can continue their support if the outbreak persists for a long period. President Joko Widodo recently signed an executive order to overturn a budget deficit cap, giving the government more breathing room for outlaying continued stimulus. The Indonesian Central Bank was also one of the few that was able to secure a repo facility with The Fed worth USD 60 billion, ensuring dollar denominated liquidity when and where needed.


The trauma from the AFC has taught policymakers the best way to deal with crisis. The 2008 Global Financial Crisis barely left a dent on Indonesia due to astute fiscal policy and post-AFC policy reform; the country’s current Covid-19 response appears to be taking pages from that playbook, and – if history serves us right – could see the archipelago emerging victorious from the virus outbreak.


Political unrests, floods, droughts, what’s next for Thailand?

As the COVID-19 pandemic spreads across the globe, many have been speculating the potential economic implications on different countries. Being troubled by its internal factors, Thailand’s economy has been slowing down and appeared to be stagnant prior to the emergence of the novel coronavirus. This is potentially attributable by the long-lasting political unrest which led to a coup in 2014 and several large firms dominating the economy, which led to lack of innovation and competition driving the economy growth.


In 2019, it merely grew by 2.4%, representing its weakest pace in 5 years. The Thai economy has been severely impacted by the strong Thai Baht and recent US-China trade war, as it is strongly dependent on exports. Throughout the last decade, the economic growth of has not been too appealing either. The country’s growth rate from 2009 to 2019 is around 3.6% on average, lagging behind its neighbouring countries namely Vietnam, Philippines and Malaysia that registered an average growth of 6.5%, 6.3% and 5.3% respectively.


On March 25th, Thailand’s Prime Minister Prayut-Chan-o-cha has declared a state of emergency in Thailand in efforts to contain the virus outbreak that would last until the end of April. While the country is already experiencing one of its worst drought in possibly 4 decades, the Thai economy is on the verge of collapsing as the widespread pandemic hits the critical tourism industry which employs about 7% of the total workforce and accounting for 12% of overall GDP with an estimated 40 million tourist arrivals last year. It is unlikely that consumers will resume travelling, at least in the next 6 months due to fears of further waves of virus outbreaks.


From deploying ‘ninja robots’ in hospitals, banning alcohol sales to curb social gatherings, to providing free COVID-19 tests, various measures have been taken in the country to contain the spread of coronavirus. Thailand corporates are also offering great help. Central Group has provided rental waivers and discounts as well as free accommodation to support medical staffs, while CP Group has invested around $3 million to build a mask factory to produce surgical face masks for free distribution to medical staffs and the general public.


The government has indeed spurred a larger amount in the economy in efforts to prevent further spillover effects of COVID-19 in its economy. Comparing stimulus packages in the past and the current coronavirus crisis, the amount of stimulus package unveiled by the current government has almost tripled from the 1997 Asian Financial Crisis rescue package from IMF. To date, the COVID-19 stimulus packages totalled up to nearly $74.15 billion. However, the question remains – can the temporary increase of government spending and tax cuts stimulate actual economic growth in the country when people are locked down at home?


Despite the economic stimulus packages introduced to the economy, an economy contraction is inevitable. Out of Thailand’s 38 million workforce, an estimated 7 million people in Thailand have lost their jobs to date. It is forecasted that the figure would go up to 10 million if the crisis drags on for another 2-3 months – putting Thailand’s unemployment rate at extremely high levels which would lead to a series of social issues. Even more recently, Thailand has been busy battling its forest fire in the northern parts of the country on top of the widespread coronavirus crisis. IMF has downgraded Thailand’s growth projections in 2020, making it the worst performer among Southeast Asian countries at a 6.7% contraction.


While Thailand has already been through many crises, we wonder if the country is ready to take the hit from COVID-19.



The Rippling Effect of the Oil Crisis

The current oil crisis affects every corner of the world in more ways than one. While Saudi Arabia and Russia may be pursuing their own respective agendas in the ongoing price war, the shockwaves that the crisis has created are certainly felt across the entire oil and gas industry, chief amongst them being the American shale gas industry which has been struggling to stay afloat at current crude oil prices which are well below the required levels for sustainable shale gas production. Other nations are also feeling the pressure, particularly oil-producing nations that rely heavily on petroleum-derived revenue to fund its national budget – case in point: Malaysia.


The Malaysian federal government has long relied on petroleum revenue to fund its national budget annually. Despite efforts by the government to reduce its reliance on petroleum-derived revenue over the years, in 2019, Petronas’ total dividend contribution to the nation’s coffers alone amounted to RM54 billion, representing 20.3% of Malaysia’s federal government revenue for 2019. While the total share of petroleum-derived revenue has reduced substantially from 41.3% seen in 2009, the 30.7% share 10 years later still represents quite a significant portion, putting the nation’s coffers at risk particularly during a slump in oil prices.


On 11 October 2019, the Pakatan Harapan government unveiled a national budget amounting to RM297 billion. At that time, the national budget was formulated based on a base projection of $62 per barrel for crude oil prices, a far cry from the $28 average price traded over the past month. It is estimated that for every $1 per barrel drop in crude oil prices, Malaysia’s petroleum revenue will reduce by RM300 million. To add further pressure to the strain, the Malaysian federal government has announced a string of economic stimulus packages worth more than RM260 billion over the past month in light of the recent nationwide shutdown. This certainly begs an important question – does Malaysia have enough funds to fulfil its latest fiscal measures?


Prior to the slump in oil prices, Petronas had in February announced that it would distribute a regular dividend amounting to RM24 billion to the Malaysian federal government this year. With the amount of economic stimulus packages announced by the federal government ballooning by the day with no clear end in sight on the recovery from the current COVID-19 pandemic, calls for Petronas to declare another special dividend on top of its initial RM24 billion commitment are greater than before. A glance at Petronas’ financial statements will reveal that as at the end of last year, the national oil and gas company had a healthy cash pile amounting to RM141.6 billion. However, Petronas, in its latest statement on 3 April 2020 stated that it will now reassess its ability to fund its ongoing operations, service debts and other obligations in considering its declaration of any special dividend over and above its initial commitment, acknowledging the pressure it is facing and effectively depriving the government of a funding channel for its additional stimulus measures.


The effect of the current oil crisis is felt beyond just Petronas and the Malaysian federal government. It is estimated that Malaysia is home to over 2,000 Petronas-licensed oil and gas services and equipment (OGSE) companies, of which more than 40 of them are public listed companies on Bursa Malaysia. If crude oil prices continue to remain suppressed below the threshold required for sustainable oil production in the region, there is a strong likelihood of Petronas slashing its capital expenditure for the year. With the nation’s top 10 OGSE companies’ gearing averaging over 1.09x, the effects of a sudden cut in capital expenditure by the national oil company will certainly send strong ripples across the entire oil and gas sector, putting more than 36,000 jobs and estimated RM17.4 billion of petroleum income tax revenue for the Malaysian federal government for the year at risk. Moreover, the collapse of certain corners of the oil and gas sector will undoubtedly cause spill-over disruptions to the entire supply chain and other related industries in the country.


In the wake of WTI prices treading into negative territory recently and Brent dipping below $20, alarms have been raised louder than ever within the federal government – the Finance Minister in a recent statement conceded that the government will resort to adjust its spending if oil prices remain suppressed. The downturn in oil prices have already dealt a significant blow to the government’s coffers, which will only get worse unless the oil crisis recovers. As this is contingent on quelling the pandemic, the harsh reality we face is that 4 months into the outbreak, we are still dealing with virus that we do not fully understand, and the world is still not equipped with a reliable vaccine or treatment to defeat this virus. At this rate, the federal government will continue to bleed petroleum revenue beyond a level that it is able to sustain its national budget and stimulus measures. The pandemic certainly compels the government to look beyond its usual stash within Petronas and instead towards other state-owned enterprises. Who knew that the pandemic will be the event that ultimately breaks the government’s reliance on petroleum revenue, just as the pandemic is forcing every other industry to reshape and redefine its business during times of crisis?

Should the US shale gas industry be bailed out?

America’s shale gas industry has experienced a boom in recent years, catapulting America to become the largest oil and gas producer in the world in 2018. The rise of the American shale revolution has largely hinged upon several key factors. Apart from a blip in 2014 to 2016, crude oil prices have soared well above the required levels for sustainable shale gas production in America since the aftermath of the global financial crisis.

The capital-intensive nature of the shale gas drilling business has also been heavily supported by debt. With a 2016 estimate placing American potential shale resources at 6 trillion barrels, it is no surprise that lenders have shown strong resilience in its ability and desire to fund shale gas production – it is estimated that over $430 billion have already been poured by funders into the industry. This is further supported by federal government subsidies for fossil fuels production – between 2015 to 2016, the US federal government provided $14.7 billion a year of incentives to the industry (excluding consumption subsidies).

The recent global COVID-19 pandemic has certainly rocked the very foundations that the American shale gas industry has been built upon. Declining oil demand due to economic slowdown from quarantine measures across the world further exacerbated by the OPEC+ collapse and ongoing standoff between Saudi Arabia and Russia are among the factors that thrusted crude oil prices to unprecedented levels – as May futures contract approached expiry, WTI crude oil prices plunged to negative $37.63 a barrel on 20 April 2020.

As a result, the recent oil crisis places the American shale gas industry in the crosshairs of Saudi Arabia and Russia. With Saudi Aramco’s average cost of oil production at $2.80 a barrel and Russia’s Rosneft reportedly at only $2.50 a barrel, both countries are certainly well-armed to collapse the American shale gas industry once and for all, getting rid of the thorn in the flesh which has caused severe erosion to their respective market shares in recent years.

Despite the cost of shale gas production decreasing substantially over the years due to improvements in efficiencies, experts still estimate current cost of shale gas production to be between $40 to $50 a barrel, making most, if not all, American producers economically unviable to continue drilling at current oil prices. With massive oversupply flooding the market and oil storages already approaching critical levels, rapid production shut-ins are taking place right now – over the course of 1 week, 44 rigs in the US have shut down.

In fact, some areas in the US are already seeing negative prices for certain crude grades, given the cost and complexity of shut-ins preventing wells from closing overnight. While the world has about 1 billion barrels of available storage capacity now, the reality is most of these storages are inaccessible given that majority of American producers are landlocked and transportation networks being breached by the current demand shock.

On 1 April 2020, Whiting Petroleum became the first American shale casualty in the wake of the current oil crisis, filing for bankruptcy as it faced $262 million debt maturing. Chesapeake Energy, one of the upstarts that spearheaded the American shale revolution, has reportedly hired a restructuring adviser as it sits on $9 billion debt in its books with $192 million due in August 2020. With an estimated $40 billion debt coming due this year for American oil and gas producers, the collapse of the American shale gas industry is certainly imminent. The grim outlook for the industry begs an important question – is a bailout in the cards now?

America is certainly no stranger to government bailouts in times of crisis. Since taking office in November 2016, President Trump has allied closely with fossil fuel producers. With Trump’s presidential re-election due in November 2020, one can certainly expect the shale gas industry to be rescued by the Trump administration.

Efforts have already been made, with the Trump administration ordering the US Department of Energy to grant immediate access to 30 million barrels of Strategic Petroleum Reserve storage capacity to American producers (another 47 million barrels capacity to follow suit) following rejection by the US Congress of a $3 billion proposal to purchase oil from American producers.

Just as the COVID-19 outbreak is reshaping every other industry, the pandemic has set the stage for the energy sector to react to the current downturn with a revolution of its own. In a world where climate change is taken more seriously by the day, America ought to accelerate its investments into clean and renewable energy instead of pouring money into bailing out the harmful and obsolete fossil fuels industry.

With a $23 trillion national debt weighing down its pockets and growing amount of government aid needed to combat the ongoing pandemic, the call has never been greater for America to rethink its priorities and focus its efforts on developing the energy of the future. However, given Trump’s nonchalance towards climate change and sustainable energy – the recent spat with 17-year old Greta Thunberg comes to mind – one can certainly expect the clean energy revolution to be kicked down the road even further.

How The Pandemic Will Make Vietnam Rise

Possibly unfamiliar by many before the outbreak of COVID-19, Vietnam being a small country just south of coastal China with a population size of 97 million has now earned its stripes as a winner against the invisible enemy that is causing a turmoil in the world. Just as how it managed to keep the SARS outbreak under control back in year 2003, the country once again has been praised by the World Health Organization (WHO) on the efficiency of its response measures in fighting the deadly virus. As of 14th April 2020, Vietnam has kept the total number of cases at only 266 with a fatality rate of zero.

Following the footsteps of countries like Philippines and Malaysia, the Prime Minister of Vietnam has mandated a strict social distancing throughout the country for 22 days. Restriction of such in multiple countries undeniably will leave a long-lasting impact on the prospects of the country.

While most industries are adversely impacted by the pandemic, it is apparent that the big winners are businesses that revolve around E-commerce, particularly those fulfilling the basic necessities of people, for instance food retail, food service and delivery businesses. A change in consumer behaviour can be observed when the switch to online grocery shopping from the typical wet markets or traditional retail stores is happening at an accelerated rate – 57% of Vietnamese consumers has proclaimed the switch to online shopping according to a March survey by Ipsos MORI. Apart from that, E-wallet services are also starting to gain momentum in this cash-based country following the advice of State Bank of Vietnam (SBV) to limit cash usage, in order to reduce the risk of infection.

This shift from offline to online could be expected to stay even after the virus subsides. The reason is simple and straightforward – the number of phone subscribers have reached 129.5 million, and more than half of the country has access to internet. While the state of digital economy in the country poses a low-hanging fruit, the current pandemic acts as a trigger to push for higher adoption. Consumers having a taste of making purchases online during the period of strict social distancing are likely to value the convenience they could enjoy, forming a new habit of filling the carts with clicks. The growth in the E-commerce sector would in turn flourish the E-wallet sector, as this would be the only digital payment option for the unbanked population, which constitutes about 37% of Vietnamese adults.

Looking at the macroeconomic level, Vietnam is a rising star as a manufacturing hub in Asia due to its low labour costs, attractive tax regime, geographical advantages and open trade policies. Even before the virus outbreak, many Vietnamese manufacturers have skillfully integrated themselves into the supply chain of Chinese firms that are relocating due to rising wages at home, particularly in industries which China wants to exit, in order to focus on higher-end products.

The supply chain disruptions caused by the pandemic have hit the world hard, noticing the over-reliance on China for production. Businesses could be expected to consider diversifying and relocating their supply chains out of China as they learn the importance of not to put all eggs in the same basket. This could eventually result in a shift in the global supply chains and investments. As such, Vietnam undoubtedly would be a big beneficiary, winning over foreign direct investments (FDI) in the foreseeable future. The accelerated movement of production facilities from China to Vietnam during the breakout of US-China trade war would serve as great precedence.

Apart from the above, there are also other notable impacts or trends that are likely to remain after the situation returns to normalcy, for example remote working, remote healthcare, digital community and others. Having these online practices transitioned into a new norm would help Vietnam in upping the game of digitalization, while a surge in FDI for manufacturing would also boost the GDP growth of the country. All in all, despite the temporary damage to its economy, Vietnam will soon be back on the rise, moving a step nearer to the other more developed countries.