PH economic slowdown seen to persist through Q1 2021

The COVID-19 pandemic is likely to gnaw sharply on the Philippine economy until the first quarter of 2021 alongside a steeper global economic downturn and the tightening of global financing conditions, think tank Fitch Solutions said.

While Fitch Solutions does not expect an economic shock to the extent seen during the 2007-2008 global financial crisis, it said in a research note issued yesterday that this outbreak was likely to drag on the Philippine economy through the fourth quarter of this year and the first quarter of 2021.

Fitch Solutions thus sees the Philippine gross domestic product (GDP) coming in at its slowest pace since 2011. It has revised its Philippine GDP growth forecast this year to 4 percent from 6 percent, in line with downgrades to most other economies elsewhere in the world. The think tank noted how the Philippines would suffer from the COVID-19 pandemic through four channels: tourism, remittances, supply chain disruption and weakening of foreign direct investment (FDI) inflows.

“Indeed, tourism has all but stopped as of March, remittance flows will likely suffer given the global growth slowdown, supply chains have been affected across continents and FDI inflows will have dried up as businesses globally face short-term liquidity constraints,” Fitch Solutions said.

It said the outbreak had gotten worse since its previous downgrade of its Philippine GDP growth forecast to 6 percent, from 6.3 percent. What began as a shock to the Chinese economy has now become a global pandemic and economic crisis, it added.

The monthlong lockdown in Luzon—the most significant contributor to the domestic economy at over 15 percent of output—would result in a sharp contraction in domestic activity, with household consumption and investment activity collapsing, the research said.

“The lockdowns are in place until April 12 but could be extended given initial difficulties implementing the measures and the confusion over what restrictions were in place,” the research said.

Fitch Solutions said household finances, in particular, would be weakened by the outbreak, although lower oil prices could offset some of the impact.

“With remittance flows likely to slow more aggressively as the outbreak spreads to the United States, which accounts for around 40 percent of remittances, a valuable driver of household consumption will shrink. In addition, during the lockdown, workers will likely see income drop, with the self-employed particularly hit, accounting for around 25 percent of the labor force,” the research said.

Fitch Solutions also flagged risks of rising unemployment, given the collapse in tourism and likely cash flow difficulties for small and medium enterprises during the lockdown.

“This will weigh on growth over an extended period and risks turning the shock into a more sustained decline in domestic demand. That said, lower oil prices will cushion some of the impact on disposable income, with prices over 50 percent lower than end-2019,” it said.

At the same time, the research noted that the deterioration in global activity might be more pronounced, with a recession expected over the coming months, which would hamper exports and disrupt funding inflows from abroad.

Fitch Solutions projected a 1-percent contraction of export receipts this 2020. Exports account for around 30 percent of Philippines’ economy and with demand shocks in Asia, Europe and the United States, export growth would likely suffer, the research said.

In particular, tourism is seen as a sector which will face an even deeper contraction than previously expected and manufacturing activity will also face disruption at least until the fourth quarter of 2020, given supply chain disruptions globally. Such a widespread drop in global growth is seen to feed through to a sharp dropoff in FDI inflows and a weakening of remittances, which combined account for around 10 percent of GDP.

On the impact of a tightening of global financing conditions, Fitch Solutions said the fact that the Philippines ran twin current and fiscal deficits was a reflection of a shortage of domestic savings and a reliance on foreign funding to support growth.

With FDI inflows likely to stall and remittances to be hurt as unemployment rises globally, Fitch Solutions expects the Philippines to “face harsher funding conditions.”