International Finance
Economy Magazine

Is the Philippines prepared for the Covid-19 recession?

The pandemic has steamrolled the country by forcing it into a recession — a first in 20 years

The shadow of the pandemic is now having a ripple effect on the Philippines, as economists have downgraded its economic outlook for 2020. It is reported that the Philippines economic recovery will lag behind its Southeast Asian peers because of slow coronavirus containment.

The impact of the pandemic can be seen on global trade, tourism, job loss and economic growth. In the first quarter of the year, the Philippines’ gross domestic product contracted by 0.2 percent year-on-year. Notably, it marks the end of 84 quarters of growth since 1999 as a result of the Taal Volcano’s eruption and the protracted pandemic.

Assessment on the Philippines economy in 2020
In March, Previously, the central bank of the Philippines was ready to cut lending rates and purchase billions of dollars in government debt in an effort to preserve its $350 billion economy. The central bank Governor Benjamin Diokno told the Financial Times that they will do everything necessary to prevent the country from slipping into a recession.

Despite all efforts, the Philippines has entered a recession as economic contraction deepened in the second quarter of the year. The country’s lockdown was at its peak in April and May largely affecting production sectors. The Philippine Statistics Authority’s latest Missi report found that the volume of production index fell 59.8 percent year-on-year in April — recording a 20-year low. Exports and imports in the country had also dropped severely during that month.

In June, the International Monetary Fund downgraded the Philippines economy, projecting its gross domestic product to contract by 3.6 percent this year. The World Bank, on the other hand, has pointed out that the Philippines economy is likely to contract by 1.9 percent this year on the back of local volcanic eruption and the pandemic.

Even the Institute of International Finance had lowered the country’s economic output forecast for ASEAN-4 region comprising the Philippines, Indonesia, Malaysia and Thailand to -3.2 percent. A report titled ASEAN-4: Worst recession since the Asia crisis said, “Widespread lockdowns and travel bans will have a substantial impact on the tourism industry as well as domestic demand, while weakening activity in major trading partners will be a drag on exports. Forecast downgrades are largest for Thailand and the Philippines, where Q1 data already show substantial weakness, and Malaysia, where a longer-than-expected lockdown will be challenging for the economy.”

The Philippines is among the word affected in Southeast Asia
Oxford Economics, a leader in global forecasting and quantitative analysis, in its report found that the Philippines, Malaysia, Thailand and Vietnam were the Southeast Asian economies affected by the pandemic at the same time. In March, the five governments began implementing stringent restrictions on the movement, especially in the Philippines and Thailand.

Meanwhile, an independent macroeconomic research consultancy Capital Economics cited that the economic recovery is the brightest in China, Taiwan and Vietnam, while the Philippines, Indonesia and India are performing at a low level. “In Vietnam and Taiwan, which appear to have eliminated the virus, the Recovery Trackers are not far off pre-crisis levels… In contrast, in the Philippines, Indonesia and India, where restrictions on movement and commerce are still in place and case numbers are showing little sign of coming under control, our Recovery Trackers are still at least 40 percent below normal levels,” it added.

Oxford Economics in a report said that the two countries have made progress in terms of containment but not decisively. Since the end of April, the impact of the coronavirus pandemic along with restrictions on mobility and the economy have been quite significant in Malaysia and the Philippines.

Another key finding in the report is that it measured the recovery paths of 12 economies across Asia Pacific based on the following criterion: health and economic vulnerability, series of lockdowns, efficiency in containing the infection and macro policy support.

The Philippines recorded the second-lowest score after India, while Vietnam demonstrated positive recovery prospects in the region. “At the bottom are India, Philippines, and Indonesia. All three are clearly still struggling to get past the peak of the pandemic, which is a major headwind to their outlooks,” the report said.

For Southeast Asia, the Institute of International Finance is positive that central banks will continue to inject liquidity through bond purchases and open market operations while continuing to implement policy rate cuts. The organisation expects the region to perform better than most emerging markets with a healthy recovery next year. Based on Oxford Economics’ scorecard, Vietnam, South Korea, Taiwan, Japan, China and Hong Kong have demonstrated stronger prospects for economic recovery compared to their regional peers.

The Philippines’ response to the pandemic
The Philippines’ pandemic response is conflicting. It was reported that the country’s policy, fiscal and monetary responses by the government and the central bank of the Philippines to wrestle the social and economic crises stirred by the pandemic were suitable. On the contrary, Oxford Economics in its report added that “At the same time, the fiscal policy response has been quite meager in both India and Philippines, especially compared to the stringency of lockdowns they had imposed — which at one point were not only among the most severe in Asia but also globally.” The Asian Development Bank’s Covid-19 policy database also showed that the Philippines government’s response package to the pandemic is the sixth-largest in Southeast Asia and the fifth-smallest in terms of population.

It appears that the implementation of the Enhanced Community Quarantine had faced negligences. For example, the authorities failed to keep up with the preventive measures introduced by neighboring countries and underestimate the infection. In addition, the lockdown being its last resort led to a myriad of problems including public health and safety.

Because the lockdown stalled the country’s economic growth to a significant extent, the government is required to provide monetary assistance to low-income households and displaced workers. In fact, economists remained doubtful whether the government has enough existing and new resources to support the people if necessary. However, the Philippines Stock Exchange index bounced back to level above 6,500 in mid-June on the back of easing lockdown restrictions — pointing to the fact that investors are eagerly waiting for the country’s economic rebound. In fact, investment corporation First Metro had anticipated the pandemic to alter consumer behaviour and slash corporate profits by 21.9 percent in the first quarter of the year.

The country will have a potential rebound to 2021
On the bright side, the Philippines is expected to show economic recovery in 2021. For example, the International Monetary Fund has predicted that the country will revert to a 6.8 percent growth in 2021. In another example, the Institute of International Finance has forecasted that the country’s gross domestic product will rebound to between 8 percent and 9 percent next year.

First Metro said “The 2021 outlook appears brighter with the 2020 lost output overtaken by a rapid 8 percent to 9 percent GDP expansion. With a huge $30 billion stimulus plan in the works and normalisation of business operations, we project a notable rebound in GDP growth in 2021.” On top of that S&P Global Ratings recently published a report reaffirming the country’s BBB+ credit rating two points above minimum investment grade standard with a stable outlook. Even the Japan Credit Rating Agency has given the Philippines -A grade.

The pandemic has pushed crude oil prices down, crushing the Middle East economies — with high unemployment rate and job losses for overseas workers in the region. This means the impact is likely to be felt on the world economic growth and also weaken consumption spending in the Philippines.

But it is important to realise that the Taal volcano eruption followed by the new coronavirus pandemic and strict lockdown have reduced tourism and overseas remittances. As a result, these events have disrupted supply chains, manufacturing and trade plus financial market upheavals which are all contributing factors to the World Bank’s overall assessment of the Philippines economy. That said, international investors have demonstrated strong interest in the economy — reinforcing confidence in its potential to rebound.

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