Moody’s: PH economy to shrink 2% in 2020

Moody’s Investors Service sees the Philippine economy shrinking by 2 percent this year, but the credit watcher’s decision to maintain the country’s debt rating and outlook is a positive development given the economic malaise that is spreading around the world due to the coronavirus pandemic, the head of the central bank said on Tuesday.

In a statement to reporters, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the country was standing on solid fiscal and monetary ground as it prepares to weather the expected economic contraction this year.

“Given the unprecedented collapse of the global economy, the recent Moody’s credit opinion of the Philippines—maintaining it Baa2 stable outlook—is actually a vote of confidence on the country’s strong macroeconomic fundamentals and the way the Philippine government is managing the coronavirus pandemic,” he said.

In addition to maintaining its rating and outlook for the Philippines, which is effectively two notches below the coveted investment grade of ‘A’, Moody’s predicted that the local economy may contract by as much as 2 percent this year. The central bank chief expects a contraction of only 1 percent.

“As I said before, the once-in-a-lifetime COVID-19 crisis hit the Philippines from a position of strength,” Diokno assured. “It has ample fiscal and monetary space.”

To date, the central bank bank has reduced its key interest rate by 125 basis points and curbed bank reserves by 200 bps, with another reduction of the same magnitude primed to go—all with the goal of flushing the financial system with growth-inducing cash.

Diokno also proposed that the government reallocate some P400 billion of fiscal output into “quick disbursing” programs, like a nationwide work scheme that will be distributed among the residents of more than 42,000 barangays across the country.

“While the economy is likely to contract this year, the contraction would be less severe compared to most economies in the world,” the central bank chief assured. “In fact, barring a second wave of infections, I expect the Philippine economy to have a strong rebound, estimated at 7.8 percent in 2021.”

In its report on Tuesday, Moody’s kept the Philippines’ ‘Baa2’ credit rating and ‘stable’ outlook untouched given “strong economic performance, a strengthening fiscal position and limited vulnerability to external shocks, although the global coronavirus outbreak presents near-term challenges to these trends.”

“In particular, stringent containment measures have curtailed domestic activity, while the global downturn weighs on the outlook for remittance inflows and goods exports. Structural credit challenges include low per capita income and modest debt affordability,” Moody’s said.

The debt watcher further downgraded its GDP forecast from the previous projection of 2.5-percent growth last April.

According to Moody’s, the potential full-year GDP contraction—the first since 1998—was due to “the rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and financial market turmoil” which were “creating a severe and extensive economic and financial shock.”

“Real GDP growth has already declined 0.2-percent year-on-year through the first three months, even as the stringent containment measures under the ECQ only became effective over the last few weeks of the quarter. As the ECQ will encompass much of the second quarter, we expect high-frequency data to continue to deteriorate despite the implementation of countercyclical policy stimulus, including handouts to vulnerable, low-income households,” Moody’s said, referring to the enhanced community quarantine imposed in Luzon and other parts of the country since mid-March to contain the spread of COVID-19.

“Growth will also be pressured by weakening external demand. Following a recovery in late 2019—goods exports expanded 6.2 percent year-on-year in the fourth quarter of last year, the fastest rate of growth since 2017—outbound shipments declined 5.2 percent in the first quarter and will continue to slump, reflecting the widening global outbreak through the second quarter,” Moody’s said. INQ