The bigger the fiscal bazooka the government could activate, the better it will be for the Philippine economy to mitigate what many expect to be a massive fallout from the new coronavirus disease (COVID-19) pandemic, according to economists.
“The size and scope of the COVID-rescue package will be crucial in determining whether or not the Philippines is able to weather this public health crisis, which has induced a substantial economic challenge,” said Nicholas Mapa, economist at ING Philippines.
A “substantial” fiscal stimulus package equivalent to 1.5 percent of gross domestic product (GDP) against the backdrop of a four-week lockdown of Luzon and other parts of the country could yield a growth of 5.3 percent, Mapa said. The stimulus is equivalent to a fiscal package of over P280 billion.
On the other hand, Mapa said a meager fiscal response of 0.1 percent of GDP could result in a 0.1-percent GDP contraction.
For Ruben Carlo Asuncion, economist at Union Bank of the Philippines, large fiscal spending could jeopardize the country’s ambition to update its sovereign credit grade to A. Yet, “controlling the virus spread is top priority at this point or suffer a deeper economic damage,” he said in a separate research note.
Asuncion noted that even Singapore—which recently earmarked 48-billion Singapore dollars (equivalent to P1.7 trillion) in additional COVID-19 support—was willing to hike its budget deficit to over 7 percent of its GDP.“No one should think, right now, that the impact of this pandemic is miniscule or can be minimized. We must do everything we can, everything,” Asuncion said.
Compared to the fiscal stimuli adopted by the Philippines during the global financial crisis of 2007, Asuncion said the response to this pandemic should be stronger and the scope bigger. He noted trade was now a bigger part of the domestic economy and tourism has more than doubled in terms of output share since then, while consumption, supported by remittance flows, continued to be a major contributor.
From 2008 to 2009, the Philippine government embraced a P330-billion economic resiliency plan (4.1 percent of GDP), increased spending on community-level infrastructure and social protection by P160 billion and earmarked P100 billion to finance extra-budgetary infrastructure. It also set aside P30 billion for new and temporary additional benefits to Social Security System, Government Service Insurance System and Philhealth members, sanctioned P40 billion in tax cuts and created a P250-million “payback” package for overseas Filipino workers.
President Duterte has already called on various government agencies to build on the current P28-billion COVID-19 response bill.
“By mere optics, the current crop of policies may have to be augmented further and a more targeted policy support is very much needed,” Asuncion said.
Given that the mainstay household consumption component of the economy is also on quarantine and investment appetite is all but curtailed by the uncertainty and global trade halted by the virus, it’s only government spending that’s left to stimulate growth, according to Mapa.
“On top of size of the fiscal package, the scope of the recovery plan will be just as crucial,” Mapa said, adding that the government rescue package should at least cover three areas: income replacement, tax forbearance and loan/liquidity support.
So far, the President has pledged cash transfers of P5,000-P8,000 to lower-income families.
“Other countries have rolled out fiscal plans to give tax perks to firms most affected by the virus fallout while others plan to set up a loan facility for small- and medium-sized businesses granted that they retain all their employees. We hope that once the fiscal rescue bill is finally rolled out, it will have enough punch behind it and that it will be targeted to help address the most vulnerable sectors of society and business,” Mapa said.
“The Philippines is fighting a battle not seen perhaps in our lifetimes. The public health crisis that threatens our health and lives has real and painful consequences. On the economic front, with consumption, capital formation and trade on quarantine, it’s time for government to step in to fill that void. If we are able to weather this health crisis efficiently, we will then need to battle the ill effects on the economy,” he said. INQ