The truth in Aso’s statement is that denying health care to the most vulnerable is the inevitable outcome of socialized medicine: By making health care seem free, universal health insurance increases the demand for medical services. That drives up the price of the services, putting the squeeze on the government’s budget—Michael Tennant “Hurry up and Die”
In this issue
Three Recent Events Favoring the USD Php: The Universal Health Care Act, Political Allocation of Credit and the BSP’s New Charter
-A Risk ON Fueled Rally of the PESO Won’t Last
-The USD PHP Will Be Boosted by The Universal Health Care Act
-Universal Health Care’s Unseen Costs: Free Lunch Politics equals Ballooning Deficits and Productivity Erosion
-Universal Health Care’s Unseen Costs: Using Free College’s Crowding Out Syndrome as Example
-Universal Health Care’s Unseen Costs: The Centralization of the Industry, Resistance to Change, Deterioration of Services
-Universal Health Care’s Unseen Costs: Deepening Social Dependency and Erosion of Civil Liberties
-Summary: 10 Unseen Costs of the Universal Health Care
-The Expanded Maternity Leave Act, and the SSS Hikes
-Increasing Political Allocation of Bank Credit Should Push USD PHP Higher!
-Buy the USD Php: Wow! The BSP’s New Charter: Let Money Rip!
Three Recent Events Favoring the USD Php: The Universal Health Care Act, Political Allocation of Credit and the BSP’s New Charter
A Risk ON Fueled Rally of the PESO Won’t Last
The Peso rallied by .7% this week to pull year to date gains to .99%.
Figure 1
Much of the strength the Philippine peso can be attributed to the revival of the global RISK ON environment, where China and currencies of major ASEAN nations have rebounded strongly. The Thai baht, the Malaysian ringgit, the Indonesian rupiah, the Thai baht, and China’s yuan have rallied 1.35%, 2.31%, 3.1% and 2.4%, respectively, in 2019 as of February 22.
The US Federal Reserve Chairman Jerome Powell led Global Central Bank PUT backed by the massive injections of the PBOC last January, must have been influenced the chunk of this recovery
For the peso, outside recent liquidity injections and promises to keep a flood of liquidity by global central banks and the revival of risk appetite, the most significant internal influence has been the tightness of financial liquidity as evidenced by the drastic slowdown in money supply growth and the flat to inverted yield curve, in spite of falling rates. For instance, a BSP officialallegedly signaled “hawkishness” last week which helped stanch the USD’s recovery.
So the relatively tight domestic financial conditions in the face of loose external liquidity, which combined by a massive risk ON sentiment, produced a strong rally of the peso.
Because of the artificiality of current conditions, the peso's strength will barely last.
The National Government’s fiscal deficit in 2018 ballooned to a staggering record of Php 558.3 billion. This number, I believe, has been understated.
The BSP has financed nearly half or 48% of this historic deficit. And the rollover of the peso should commence upon the currency market’s realization that this chronic addiction to free money, financed by the BSP’s digital and printing press, won’t subside anytime soon. In contrast, the politics of free lunches is about to expand massively.
And a comeback by the risk OFF climate will either bring to the surface the peso's structural infirmities or escalate the peso’s fall.
The USD PHP Will Be Boosted by The Universal Health Care Act
Three recent events should add to the structural defects of the peso.
First, the ratification of the Universal Health Care Act
“President Rodrigo Duterte on Wednesday signed a law giving all Filipinos access to health care services. The Universal Health Care Act expands PhilHealth coverage to include all citizens of the Philippines, and its services to provide members free medical consultation, laboratory tests, and other diagnostic requirements.
The President hailed the new law, saying it “guarantee[s] equitable access to quality and affordable health care services for all Filipinos.”…
“The Universal Health Care Act enrolls all Filipino citizens in the National Health Insurance Program, either as “direct contributors” or as “indirect contributors.”
“Direct contributors pay health premiums, while indirect contributors are sponsored members like senior citizens and indigents.
“Under the new law, all Filipinos may seek primary health services even without PhilHealth identification cards.
“The law also requires all graduates of health-related courses whose studies were funded through government scholarships to serve for at least three years in public hospitals.
“Implementation of the law requires P257 billion in the first year, but it is given only P217 billion in the proposed P2019 national budget that the President has yet to sign.
Federalism?
Like the free college education, such mandate effectively centralizes the healthcare industry that swells the welfare state.
Like the free college education, such represents the next stage of the transition towards a neo-socialist state.
The forthcoming nationwide coverage and institutionalization of the conditional cash transfer scheme, the 4Ps (Pantawid Pampamilyang Pilipino Program), should be next phase of the entrenchment of the welfare state.
And as the National Government (NG) races to spend with reckless abandon the nation’s finances and resources through infrastructure boondoggles, programs to expand welfare and the bureaucracy should intensify the widening chasm of political expenditures and revenues.
Universal Healthcare (UHC) has come to mean different things in different contexts. But the general concept is that everyone should have access to healthcare services. The funding models for UHC in different countries have been distinct. Furthermore, many countries have adopted UHC when their economies have reached already a state of prosperity. Paradoxically, the US andChina (a self-declared communist nation), the two biggest economies, has yet to attain a Universal Healthcare system!
Universal Health Care’s Unseen Costs: Free Lunch Politics equals Ballooning Deficits and Productivity Erosion
IT’S all about supposed benefits when it comes to populist politics. And the costs? These are assumed to be neutral or have teeny weeny effects on the economy.
But, incentives drive social policies! And such incentives are expressed in economics.
Just who wouldn't want to have free stuff?
Since healthcare is free, so what’s stopping everyone from using or exploiting the system to the hilt?
These free lunches will promote hypochondriasis or the Illness Anxiety Disorder (IAD). Feeling discomfort or unease from stress? Go to the doctors, it's free!
If it involves only an individual, that would be manageable. But when it becomes a multitude, then that’s where the problem comes in.
In the basic economic context, at zero price, demand will vastly exceed supply.
Because of this zero price effect, free lunch healthcare will beget the “tragedy of the commons”. According to Investopedia, the “tragedy of the commons” represents “an economic problem in which an individual tries to reap the greatest benefit from a given resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits”.
Many will try to exploit FREE healthcare services to their advantage. Shortages would signify the tragedy of the commons syndrome.
The fundamental problem will be the patent mismatch between demand and supply.
Since supply will be limited, the National Government would have to rapidly expand healthcare services to at least provide a semblance of catching up with demand.
The centralization of the healthcare services would entail, not only a phenomenal spending on related infrastructure and logistics but more importantly, a massive buildup of the bureaucracy by mass recruitment of labor!
Free lunch healthcare will, thus, involve a seismic transfer of resources, finances and manpower to the government!
And because the government generates no organic resources of its own, the cost of such transfer would encompass the need for PRESENT INCREASE in taxes and or BSP’s expanded MONETIZATION of such deficit (inflation) and or the acceleration in the amassment of debt (FUTURE HIGHER taxes)
The assumption is that raising sin taxes and current contributions to Philhealth will be sufficient for the provision of such free services.
Unintended consequences will shroud such simplistic assumptions. Why? Because of the NG’s inability to reckon accurately with the ever fluid-dynamics of demand, economic mismatches would only mount.
The socialist calculation problem from free lunch healthcare would translate to a dramatic SURGE in DEFICIT spending, massive supply SHORTAGES, and a LOPSIDED POLITICAL DISTRIBUTION of healthcare services.
And again, the source of funding matters. Higher present taxes will penalize investments and consumption. Or, if financed through borrowing or debt monetization, such would magnify the nation’s credit risk and undermine economic productivity, as well as, put the peso under severe pressure.
And because the government would barely forecast with precision the changes in demand, supply shortages would extrapolate to the RATIONING of healthcare services. The complexity from specific circumstances of the health conditions of individuals will determine changes in demand.
And since rationing will be used to allocate such services, politicians and the bureaucracy will thus dictate on the priorities or ‘who will get what and when’.
And because the dispensation of healthcare services will be political, political patronage, nepotism, bribery, and other favors will be part of the instruments used in exchange to gain access to such services by privilege.
As such, the political distribution of services would foster a massive outgrowth of corruption!
Even more, a surge in demand in the face of scarce supply would mean HIGHER costs of providing FREE healthcare. The HIGHER the cost of such welfare services, the BIGGER funding required to maintain it.
See where this leads?
Universal Health Care’s Unseen Costs: Using Free College’s Crowding Out Syndrome as Example
And the costs don’t stop here. Free lunch politics will magnify the crowding out effect.
The opportunity costs of such an epic transfer of resources, finances and labor to the government would be the productivity of the private sector.
The Philippine president has recently griped over the shortages of skilled workers for his pet “build, build and build” projects. What more would happen with the combination of free education and free healthcare?
See these are not just theories but economic realities!
Again, the costs of the diversion of resources, labor and finances to the government would extrapolate to the consumption of the nation’s capital.
Figure 2
Despite hitting a 3.2% deficit-to-GDP ratio in 2018, a high last reached in 2009, the public expenditure-to-GDP rocketed to the highest level since at least in 1986. With 2018 GDP likely overstated, the latter’s ratio must be higher. And this ratio represents the NG’s DIRECT expenditures.
Not included in the statistics have been the private sector spending on public works and other political projects. So actual expenditures relative to the GDP must be significantly higher!
Common sense explains that a BIGGER growth of NG spending means LESSER growth for private spending.
Has any establishment experts told you this?
With the implementation of the Free College Education in 2017, the education industry’s share of the GDP has begun to gain ground since. The increase in the GDP has been financed by bank lending to the sector.
Meanwhile, healthcare bank credit, thereby, its GDP has been dropping. With the UHC mandate, the impact to bank credit, and consequently, the GDP, would likely be bigger than the education.
The impending inclusion of the 4Ps will add certainly to the aggregate balance sheet impact of free lunch politics.
The growth rate of public expenditures, public debt, inflation and taxes can be expected to increase substantially.
Who do you think will pay for them?
And here’s more.
And with more of the nation’s resources, labor and finances increasingly devoted to politically directed activities, such will take its toll in the investments to domestic production sectors, which should also affect the productivity of the export sector.
As such, the domestic supply side will become increasingly dependent on imports. And since exports are used to pay for imports, the likely slack in the output of the export industry will possibly generate insufficient proceeds to fund imports. This leaves OFWs and services exports to fill the gap. However, if these sectors will underperform, then NG would resort to external borrowing to cover the trade gap. However, a buildup in foreign debt will translate to increasing exposure to “US dollar shorts”. And once the NG rekindles domestic money supply growth for public spending purposes, such would make up a lethal one-two punch combination against the peso!
Universal Health Care’s Unseen Costs: The Centralization of the Industry, Resistance to Change, Deterioration of Services
The other critical opportunity cost would be the elimination of competition or the process of centralizing the industry.
How will the private sector, which depends on profit and loss from the market-based pricing system, compete with zero priced services?
As noted above, the crowding out syndrome will undermine the supply and labor conditions of the industry. Already handicapped by this, unfavorable competition with the NG services will further aggravate the industry’s conditions by restraining output.
With implied limits to the private sector, the NG, through the UHC, grows at the former’s expense. And for survival purposes, the private sector will be prompted to act as agents of the NG. They will be subcontracted to assume the role of complementing the NG's UHC by plugging the supply shortages, and in return, get compensated with subsidies.
In that way, the private sector would act as an appendage to the NG’s free healthcare services. Ultimately, the NG would thus control the entire industry directly (socialism) and indirectly (fascism).
With the pricing system gradually substituted with political distribution, the evolution to the monopolistic dispensation of healthcare services will entail another significant opportunity cost: Adaptive changes to a complex environment will be resisted by this centralization process, thereby slowing innovation, and subsequently, lead to the deterioration of the quality of healthcare services available.
Universal Health Care’s Unseen Costs: Deepening Social Dependency and Erosion of Civil Liberties
The costs won’t be limited to economics.
There will be social costs too. People will become more dependent on the Government which will likely come at the expense of the family, friends, church and non-political community.
The individual’s self-responsibility will also be compromised. As healthcare is free, indulging in vices will be rewarded.
The other social cost is that of the continuing erosion of the individual’s freedom or civil liberties.
Summary: 10 Unseen Costs of the Universal Health Care
As a final note, contra popular feel-good expectations, expect the Universal Health Care Act to do the following:
1) It would raise public spending massively that would imply higher taxes soon and or HIGHER debt (future taxes) or HIGHER inflation (BSP monetization).
2) The result from excess demand over supply would lead to SHORTAGES of supply, which should consequently result in the RATIONING of healthcare services.
3) Shortages of supply increase the financial cost of such welfare program which should add to the burden of public spending.
4) The rationing of services will prompt for the DEEPENING POLITICIZATION of the distribution of services which subsequent ramifications would be to HEIGHTEN CORRUPTION and cause the DETERIORATION in the quality of services delivered.
5) In the economy, UHC would exacerbate the CROWDING OUT of the private sector, leading to MORE CAPITAL CONSUMPTION and the erosion of PRODUCTIVITY.
6) While the GDP may temporarily rise, the real economy corrodes overtime.
7) Rising DEBT will increase CREDIT RISK. Intensified use of BSP MONETIZATION should spur INFLATION prompting for SUSTAINED FRAGILITY of the peso. Generally speaking, economic risks increase along with the free lunch and bubble spending.
8) With domestic production capped by the Crowding Out syndrome, there will be increased reliance on imports. And the reduction of productivity will erode the competitiveness of exports. If OFWs and BPOs also underperform, there will be a short supply of the US dollar. External borrowings would rise. Surging FX debt heightens the risk of an EXTERNAL default.
9) The crowding out will also curtail activities of the healthcare’s private sector. The healthcare’s private sector will likely become subcontracted agents for the NG’s UHC for them to survive.
10) Increased dependency on the government will be an offshoot to the deepening welfare state. It will lead to increased social friction. And with free healthcare, there will be more people indulging in vices. The welfare state will also gnaw at civil liberties.
The Expanded Maternity Leave Act, and the SSS Hikes
In a related note, ratified and signed into mandate last week by the executive branch was the Expanded Maternity Leave Act.
This Inquirer article demonstrates the starkly divergent views by the “statistics is economics” crowd of experts compared with business groups. The “statistics is economics” crowd of experts say these won’t affect the economy, and therefore, the stock market. On the other hand, most business groups interviewed expressed concerns about the impact of such mandate on women and on small industries.
Since such legislation INCREASE the cost of doing business, small and medium scale enterprises are essentially DISCRIMINATED upon in favor of the BIG BUSINESSES. By raising regulatory barriers, such edicts essentially protect vested interest groups from competition. As such, legal employment barriers like this are in nature protectionist statutes. So the idea that big business won’t be affected is correct.
However, if combined with other regulatory hurdles, such as higher taxes, minimum wages, restrictions on contractualization and etc. to substantially impair operations of small and mid-scale businesses, to the point of the impacting the economy, even BIG BUSINESS will be affected.
Interventionist decrees like this have a more significant operational impact than the recent passage of the Revised Corporate Code, the latter’s liberalization of which is cosmetic. Since incorporation is liberalized, anyone can put up business easily. The Philippines gets a big plus in the World Bank’s Doing Business statistics. However, legal barriers continue to choke on the operations of entrepreneurs from the manifold interventions.
These are like the pseudo liberalization of the telecom industry in 1995 (Public Telecom Policy Act), which ended up with a cartel and the entry of a foreign state-owned enterprise as a gift to its national leader.
With the Expanded Maternity Leave, the NG is already exploring to tap the SSS for its funding with another possible increase in premiums. Earlier, the pension fund, the SSS, has been slated to hike rates based on a new decree signed last week.Operational obstacles to businesses have been intensifying. And they are coming in from different fronts or directions.
Employees, on the other hand, will see a reduction of take-home pays. The public has borne the costs of inefficiencies of the public pension fund. But that’s how political redistribution works!
...
Increasing Political Allocation of Bank Credit Should Push USD PHP Higher!
Weak peso, it is coming. Political distribution of credit accounts for another critical factor that ensures this.
As part of their compliance with the Agri-Agra Law, several banks have offered to open a P200-billion loan window to finance the banner projects of the Department of Agriculture (DA). “The bankers said they have about P200 billion which they could use to fund agriculture and agrarian projects to comply with the Agri-Agra Law,” Agriculture Secretary Emmanuel Piñol said in a Facebook post. The Agri-Agra Law requires banks to set aside 25 percent of their loanable funds for agricultural and agrarian reform financing, although at present, banks hardly lend to the farm sector due to the perceived risk in investing in the industry. To comply, financial institutions simply invest in government securities that are eligible as substitutes for agricultural loans…From January to September last year, the banking industry was able to carve out 13.74 percent of loanable funds for the agri-agra sector—a significant increase but still way below the 25-percent minimum threshold set by the law. Piñol said the bankers also supported a proposed bond float that would be led by the DA. The proposal was already welcomed by Evardone, Finance Secretary Carlos Dominguez III and Bangko Sentral ng Pilipinas Governor Nestor Espenilla. The secretary earlier said the agency would need P140 billion to finish some 13,000 kilometers of FMRs all over the country, while another P60 billion would be required to finance the mechanization of farms and fishing communities nationwide.
So far the banks have done away with credit risks by investing in the government securities rather than direct lending to the sector.
However, if the NG strictly enforces such lending standard, which is equivalent to the politicized distribution of credit, banks will be forced to take undue risk.
Note that intensifying liquidity and profit strains have been plaguing banking system since 2013. And to mitigate such juncture, the industry expanded their resource base, last December, by imbibing or gorging on an enormous amount of debt.
[See The Banking System in Panic Borrowing Last December as 4Q NPLs Soar and Profit Growth Declined! February 10, 2019]
Any further amplification of the weakness in the banking system will prompt the BSP to conduct more aggressive monetization and or easing of policy rates. And a reacceleration of the nation’s money supply growth should lead the peso southbound.
Buy the USD Php: Wow! The BSP’s New Charter: Let Money Rip!
I’ll tell you, build, build and build, UHC, free education, political allocation of credit, 4PS, increase salaries of uniformed personnel, other welfare-warfare-bureaucratic spending and the new BSP charter all have been interrelated or entwined.
From the BSP: The new BSP Charter embodies a package of reforms that will further align its operations with global best practices, improve the BSP’s corporate viability, and enhance its capacity for crafting proactive policies amid rising interlinkages in the financial markets and the broader economy. In line with current international trends, the law removes money supply and credit levels as basis for determining monetary policy. The focus on these indicators has declined among central banks over the years, as fostering price stability now considers a broader set of indicators. R.A. No. 11211 also restores the central bank’s authority to issue debt papers as part of its regular operation. This gives the BSP greater flexibility in determining the timing and size of its monetary operations. Under the inflation targeting framework, the BSP focuses mainly on achieving price stability, instead of targeting monetary aggregates, as the ultimate objective of monetary policy.
Record fiscal deficit constrained by the legal impediments on the BSP? Not anymore!
The following charts tell us what the BSP’s new charter exactly mean!
Figure 3
Emancipated from any legal encumbrance, the BSP just got the license to let money rip! That is, expect the BSP to use the printing press and bank credit intensely against any prospect of a slowdown.
Buy the USD php on Dips!
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