I had a two-hour lunch interview with Department of Finance Secretary Cesar Purisima last Wednesday. He told me a good story. So in the interest of fair play, I write about it.
One of the stark lessons Purisima learned from the Enron debacle and the destruction of the giant accountancy company Arthur Andersen in 2001 is the primordial value of confidence.
Enron was the biggest audit failure in history and until last year the biggest corporate bankruptcy in the US.
Andersen was represented in the Philippines by SyCip Gorres Velayo and Co. which Purisima headed at that time as chairman and managing partner, from 1999 to 2004.
Ironically, the demise of Enron and Andersen could have been avoided had the former done what its outside crisis managers (which handled the epic Tylenol disaster) had recommended—admit the wrongdoing and shut down its Texas operations. The Texas unit, which accounted for half of Enron profits, resisted the plan, thinking the inevitable could still be stopped. The result was a massive loss of confidence in and credibility by both Enron and Andersen.
Confidence and credibility. Those two mantras were clear in Purisima’s mind in 2009 and into early 2010 when it became clear Benigno Simeon Cojuangco Aquino III was going to be elected President. “I am not a finance person,” Noynoy told his friend and adviser, one of the most prominent CPAs in the land, “so I will be counting on you.”
The President-elect wanted Purisima to lead his economic team. “He [Aquino] empowered me,” Purisima recalls. The new President asked the Northwestern University Kellog School of Management MBA: “What are we going to do?”
Readily, Purisima thought of one word to describe his game plan—confidence, which stated differently, is exactly Aquino’s slogan—Matuwid na Daan.
Purisima had to inspire confidence from three groups of stakeholders—in the government, among investors, and among the people. That is what the Finance chief calls the virtuous-cycle strategy. To restore confidence in the government and in the country, the government must raise revenues, tighten or rationalize its expenditures, and put order in borrowings, here and abroad.
The government had to gain the confidence of the financial markets. That meant fiscal discipline and it must be done quickly, “in six months,” relates Purisima. The target reduction in government deficit was from 3.9 percent of the Gross Domestic Product to just 2 percent, a cut of almost half. Also to be reduced, substantially, was the debt to GDP ratio, which in 2009 was at 54.8 percent of GDP.
Thanks to Purisima’s and his team’s Herculean efforts, the Department of Finance achieved its objectives and even exceeded his ambitious targets.
Today, the deficit-to-GDP ratio hovers at 0.6 percent (0.2 percent in October 2015), down dramatically from 3.7 percent in 2009, while the debt-to-GDP ratio is 44.9 percent as of June 2015, less than half of the value of economic output.
Purisima also reduced debts denominated in foreign currencies (as a percentage of GDP), from 38.4 percent in 2009 to 27.3 percent by end-2014. By June 2015, the ratio was 25.7 percent. The move proved a brilliant one as the peso has devalued.
Bankrupt Greece has a deficit to GDP ratio of over 9 percent and debt to GDP ratio of 177 percent, meaning its debts are 1.8 times its GDP.
The significant reductions, along with complementary reforms, improved the Philippines’ credit standing. Today, the country is investment grade—a first in history. The Philippines actually received 22 positive credit rating actions since Aquino took over. Fourteen of those were upgrades, since 2010.
The positive upgrades and the investment grade ratings mean lower borrowing cost, from abroad and locally.
Consequently, the 91-day treasury bill rate (a benchmark interest rate) went down from 4.19 percent average in 2009 to a historic low of 0.32 percent in 2013, before correcting to 1.24 percent by end-2014 and to 1.77 percent average by September this year.
Lending rates likewise collapsed, from an average of 4.44 percent in 2009 to as low as 1.43 percent by end-2014 and as low as 1.10 percent in January 2015, before surging to the current 3.92 percent due to the gradual hardening of interest rates in the United States.
Still, Secretary Purisima estimates, Filipino consumers have saved some P41 billion on their consumer, car and housing loans, due to the dramatic lowering of interest rates since 2009. The government itself reduced its debt service payments (interest and principal yearly), from P689.8 billion in 2010, P722.8 billion in 2011 and P729.8 billion in 2012 to just P515 billion by 2014.
Says Purisima: “Most people would be surprised at the concrete benefits of improved confidence in our country. These gains reach and are felt at the household level—which is why we have every reason to protect these gains.”
The restoration of confidence brought in investments. Net foreign direct investments ballooned from $1.07 billion in 2010 to $6.2 billion in 2014.
Net investments, which was negative $896 million in 2009 (meaning the Philippines invested more abroad than the investments that came in), negative in the year 2010 by $11.49 billion, in 2011 by $5.3 billion, and in 2012 by $6.748 billion, turned positive $2.23 billion in 2013 and a whopping $10.5 billion net inflow in 2014.
The overall impact has been unbridled economic dynamism. Under Aquino, the size of the economy has expanded from P8.026 trillion value of GDP in 2009 to P12.642 trillion GDP by 2014, an expansion of 58 percent in six years.
Economic growth, as measured by GDP growth per year from 2010 to 2014, has averaged 6.24 percent in the past six years. The economy grew in real terms by 7.6 percent in 2010, 3.7 percent in 2011, 6.7 percent in 2012, 7.1 percent in 2013, and by 6.1 percent in 2014. GDP is to grow less than 6 percent this year 2015, the slowest rate since 2011.
The world has taken notice of the seminal work of Purisima’s work as secretary of finance and as Aquino’s leading economic manager. He has won the Finance Minister of the Year award five times in the past five years, given by various groups and publications.