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Bigger budget deficit not expected to hurt Philippines’ credit profile

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A MAN wearing a protective mask sits outside a building in Makati City as the government implements an “enhanced community quarantine” in Luzon to contain the coronavirus pandemic. — REUTERS

By Luz Wendy T. Noble, Reporter

THE PHILIPPINES still has room for a more aggressive fiscal response to blunt the impact of the coronavirus disease 2019 (COVID-19) pandemic, according to credit raters who said that the expected widening of the budget deficit will not affect the country’s credit standing as long as the debt rise is temporary.

Moody’s Investors Service and Fitch Ratings have “Baa2” and “BBB” debt ratings for the Philippines — both a notch above minimum investment grade — while S&P Global Ratings upgraded the country’s rating in May last year to “BBB+”, a step short of single “A” grade.

The International Monetary Fund (IMF) said separately that the country has enough buffers to cushion the pandemic’s economic impact.

“Fiscal accommodation will be a key part of a multi-faceted policy response to mitigating the economic and public health fallout from the coronavirus outbreak,” Christian de Guzman, senior vice-president at the Sovereign Risk Group of Moody’s Investors Service, said in an e-mailed response on Tuesday to BusinessWorld’s questions.

A recent report by the National Economic and Development Authority (NEDA) said the government’s budget deficit could balloon to as much as 4.4-5.4% of gross domestic product (GDP) this year, as “aggressive efforts to contain COVID-19, including the Luzon-wide quarantine, could by itself add pressure on the country’s fiscal position.”

President Rodrigo R. Duterte has signed into law a measure that gives him extra powers to combat the pandemic, including the ability to realign savings from the 2020 budget of agencies under the Executive branch. Around P200 billion will go to a emergency subsidy program for 18 million low-income households for two months.

Finance Secretary Carlos G. Dominguez III on Wednesday said the government is looking to borrow up to $2 billion from multilateral lenders to support increased government spending.

Mr. De Guzman noted that budget deficits are not the only indicator to gauge a country’s institutional strength.

“For example, despite the widening of the budget deficit in 2019, the government was able to record an improvement in other key metrics, such as debt as a share of GDP (public indebtedness) or interest payments as a share of government revenue (debt affordability),” he said.

Data from the Bureau of the Treasury (BTr) showed the budget deficit soared to a record P660.2 billion in 2019, breaching the P620-billion deficit programmed for the year and surpassing the P558.3-billion deficit in 2018. This brought deficit to GDP ratio of 3.55%, slightly higher than the 3.25% set for the year.

Debt-to-GDP ratio was marginally down at 41.5% in 2019 from 41.8% from the prior year despite a higher national debt of P7.731 trillion.

“Given improvements in these metrics over the past decade, the Philippine government has the space to implement fiscal stimulus measures without threatening its overall credit profile, as long as any consequent rise in debt or deterioration in debt affordability is temporary,” Mr. de Guzman said.

Stephen Schwartz, head of Asia Pacific Sovereign Ratings at Fitch Ratings, noted the country’s general government debt ratio is still well within the average for its similarly-rated peers and has seen a downtrend in the recent year.

“The Philippines’ general government debt[-to-GDP] ratio of around 36.5% in 2019 is broadly in line with similarly rated peers (the ‘BBB’ median is about 36%),” he said in an e-mail.

Mr. Schwartz said that they would watch supplementary spending measures from a rating perspective in the context of the country’s medium-term fiscal health. “We would typically seek to assess whether such measures are temporary, and what implications they may have over the medium term,” he added.

Moody’s Mr. De Guzman also noted the fiscal stimulus complements the central bank’s monetary easing and liquidity management.

The Bangko Sentral ng Pilipinas has already slashed its benchmark rate by 50 basis points (bps) and granted regulatory relief to banks. It is also buying P300 billion in government debt, and reducing the reserve requirement ratio for universal and commercial lenders by 200 bps.

POLICY BUFFERS
At the same time, IMF’s resident representative to the Philippines, Yongzheng Yang, said the country has enough policy buffers to deal with the economic fallout from the COVID-19 outbreak.

“The Philippines does have considerable policy buffers. It has a high level of [gross] international reserves (GIR), a relatively low level of public debt, and a sound banking system, just to mention a few,” Mr. Yang said in an e-mailed response to BusinessWorld’s questions.

Data from the central bank showed that GIR as of end-February was at $87.606 billion, higher than the January level of $86.868 billion and the $82.78 billion seen in the same month of 2019. This GIR level is equal to 5.4 times the country’s short-term external debt based on original maturity and 3.8 times based on residual maturity, according to the BSP.

In an interview with ABS-CBN News Channel, Mr. Yang said that the country should ensure its debt is sustainable although its current level is relatively low. “[Y]ou (Philippines) can certainly go up… The purpose for having buffer is you use it for crisis like this. So my view is that you should be using the spaces the government has accumulated and fight this virus and to protect the people to get the economy back running,” he told ANC on Thursday.

Mr. Yang said the IMF will lower its current growth forecast of 6.3% for the Philippines to reflect the impact of the COVID-19 outbreak.

“Like in most other countries, the COVID-19 pandemic is having a significant impact on the Philippine economy. It is affecting tourism, trade, retail, investor sentiment, etc. We will revise downward our current growth forecasts to reflect the impact in these areas and release the revised forecasts during the IMF/World Bank Spring Meetings next month,” he said.

The NEDA on Tuesday released a study showing economic growth may slow to -0.6%-4.3% this year. This compares to the 6.5-7.5% government target, which was set before the COVID-19 pandemic began.



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U.S. Futures Fluctuate, Stocks Slip; Dollar Jumps: Markets Wrap

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(Bloomberg) — U.S. equity futures fluctuated and stocks slipped on Monday as investors weighed a weekend full of negative coronavirus news against the stimulus measures that triggered a bounce in risk assets last week. The dollar rebounded, Treasuries edged higher and oil sank.Contracts on the S&P 500 Index swung between losses and gains after President Donald Trump abruptly abandoned his ambition to return American life to normal by Easter. Abbott Laboratories surged in the pre-market after unveiling a five-minute coronavirus test. Shares in Europe followed earlier declines across much of Asia, though they came off their lows. The dollar was on course to snap a four-session losing streak.Core European bonds rose after the outbreak killed more than 3,000 in Spain and Italy over the weekend. Pessimism returned to credit markets, where the cost to insure high-yield debt jumped in both Asia and Europe, as Moscow and Tokyo joined other cities urging residents to remain at home. Brent crude extended recent losses and was set for its worst month in history, down about 54%.Investors are beginning the week digesting word that the biggest economy will stay crippled for longer after Trump heeded advice from the government’s top doctors that re-opening the U.S. in two weeks risks greater loss of life as the coronavirus outbreak accelerates. The president said in a news conference “social distancing” guidelines would remain until at least April 30, while his top infectious-disease expert said 100,000-200,000 may die.“Markets are still in uncharted territory,” said Medha Samant, director of investment at Fidelity International. “When you look at the stages of this pandemic, you’ve gone into escalation,” she said. “The epicenter has shifted to the U.S.”In the latest stimulus moves, China’s central bank lowered short-term funding rates and injected cash into its financial system, Australia announced a job-support program and limited public gatherings to just two people, while Singapore unveiled an unprecedented easing in policy.“The assumption that we can turn a switch in a month or two and everything is going to be okay is a faulty opinion,” David Kotok, chief investment officer at Cumberland Advisors Inc., told Bloomberg TV. “We are waiting to see the closer timetable of treatment, testing, and vaccine — that’s very important to us.”Elsewhere, Australian shares were the notable exception to broad declines, with the equity benchmark surging by a record thanks to the new stimulus measures. Emerging currencies including South Africa’s rand and Mexico’s peso tumbled amid concern about debt downgrades.Quarter-end strains could add to investor nervousness on Monday and Tuesday as financial firms rein in collateral lending to shore up balance sheets, while Japanese banks face their fiscal year-end. The MSCI gauge of global equities is down about 23% since the start of the year, on course for its worst quarter since the end of 2008.These are the main moves in markets:StocksFutures on the S&P 500 Index advanced 0.4% as of 12:27 p.m. London time.The Stoxx Europe 600 Index decreased 0.8%.The MSCI Asia Pacific Index dipped 0.9%.CurrenciesThe Bloomberg Dollar Spot Index jumped 0.7%.The euro declined 0.8% to $1.1048.The British pound decreased 0.5% to $1.2398.The Japanese yen fell 0.1% to 108.06 per dollar.BondsThe yield on 10-year Treasuries decreased two basis points to 0.66%.Germany’s 10-year yield decreased six basis points to -0.53%.Britain’s 10-year yield declined six basis points to 0.305%.CommoditiesGold fell 0.1% to $1,625.72 an ounce.West Texas Intermediate crude decreased 5.2% to $20.39 a barrel.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.



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Finding a middle ground to tackle the coronavirus crisis

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Good morning.

President Trump’s talk of reopening the economy on Easter, which he has now backed off of, has helped launched an important debate. At the moment, we seem stuck between two unrealistic alternatives: 1) a quick return to work, or 2) a widespread lockdown until a vaccine is ready (a year or more in the future). Both alternatives could lead to social and economic breakdown. But no one has articulated a clear vision for what the reasonable middle ground would look like.

What might it look like? The elements of a possible strategy are beginning to emerge. It will probably involve a nationwide lockdown that lasts at least through the end of May. Then, the return to work needs to roll out gradually, and include the following elements: continued protection/isolation for vulnerable populations; continued restrictions on large gatherings; increased production of protective equipment and ventilators; some proven therapies for treating the most vulnerable; priority given to those who can’t work from home over those who can; staggered start times to minimize rush hour crowding; widespread and rapid testing so new infections can be spotted quickly; sharp restrictions on travel so new infections can be isolated and contained; and antibody testing so immune individuals can be identified. The world should be watching China, Hong Kong, Singapore and South Korea as they probe the parameters of such an effort—even though more democratic societies will struggle to mimic many of their less democratic tactics.

Government needs to lead this effort; but business plays a critical role.   Fortune will be holding a virtual gathering of members of its CEO Initiative tomorrow, to begin a conversation on this topic. I’ll have more to report on Wednesday.

In the meantime, former Honeywell CEO Dave Cote—who successfully navigated the Great Recession and added $60 billion to his company’s market value before stepping down in 2017—has some advice for CEOs in the midst of this crisis.  You can read the full interview here, but some excerpts:

Focus on leadership, not consensus. “What matters is getting feedback from all your people, then making a decision.”

Hope for the best, plan for the worst. “Pick a plan and start executing as if you expect the worst to happen.”

Keep workers around for the recovery. In the recession “we did very few layoffs… Instead, we relied on furloughs.”

—In a crisis, don’t take a bonus. “When workers asked me if I intended to take a bonus for 2009, I’d say that was up to the board… That was a big mistake.”

More news below.

Alan Murray
@alansmurray

alan.murray@fortune.com



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Kumu’s KC Montero on creating quality online content

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Earlier this year, KC Montero took on the role of Head of Content at KUMU, the fastest-growing social media app in the country.

Perhaps best known as MTV’s longest-running VJ, KC’s career includes billings as host and producer on a number of shows like Celebrity Car Wars, Survivor Philippines, Discovery Channel’s Worst Vacation Ever, and GOOD TIMES on Magic 89.9. While KC’s star power and marketing talent are undeniable, what helps KC perform in the boardroom is his unique brand of creativity that ensures content on the app stays relevant to a young mobile audience.

As KUMU’s head of content, KC often gets asked, “what is good content?” It’s a question he thinks is fundamentally misguided.

“The term “good content’ can be used in such a broad sense,” he said. “Some would say that if you can watch a piece of content from start to finish, that it should be considered good content. That isn’t totally true because what’s inside that content can captivate you and keep your attention for three minutes but it doesn’t mean, to me, that it’s any good.”

KC believes audiences today want more than just flashy visuals, catchy wordplay, and a coherent aesthetic. What they’re looking for, he says, is something that makes them feel good about themselves.

“I like to use the phrase “quality content” which means that it’s thought-provoking, entertaining, and leaves you with a positive feeling,” KC said. This triumvirate guides every bit of programming KC oversees at KUMU, from the messaging to the technical executions—everything is designed to maximize quality.

The KC recipe for effective content

KC shares these three useful insights to aspiring content creators on how to keep things creative, dynamic, and worth sharing:

  • If it’s a long video, make sure you show a quick look at what happens in the video right away. You have to grab attention as fast as possible.
  • Get close. The closer the subject is, the closer the audience feels, but don’t overdo it. No one wants to see your pores.
  • Know your audience. Know what makes them tick and play into their wheelhouse.

Pushing innovative technology

More than any other device in history, smartphones are the most immediate, on-demand platforms for content consumption. With livestreaming, the bridge between consumption and creation has narrowed nearly to non-existence.

For the team at KUMU, it’s an inmate understanding of the relationships between platform, product, and people that guide their growth into everything from arts to online marketplaces.

This formula proves to be effective as KUMU now engages more than three million Filipinos around the world with its online contests, game shows, celebrity live streams, live e-commerce, and just recently audio streaming features.

“I think that content is really only bound by technology and how it’s delivered,” KC said. “I think at the moment, we’re on the cusp of an e-commerce boom and the faster and closer you can get to humanizing your process the more success you will have.”



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