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Economic rebound in 2nd half seen doubtful

Return to strict quarantine protocols to worsen job losses, weaken consumer spending
/ 04:10 AM August 11, 2020

With Metro Manila and surrounding provinces returning to tight lockdown protocols as the government struggles to curb the coronavirus (COVID-19) contagion, the Philippine domestic economy is seen unlikely to recover this second half as job losses mount and consumer spending further weakens.

The 16.5-percent gross domestic product (GDP) year-on-year contraction in the second quarter—the worst performance seen by the country in recent history—has also stoked fears that the government’s credit rating might eventually deteriorate despite its reluctance to support a bigger fiscal stimulus during this pandemic.

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British banking giant HSBC now expects Philippine GDP to contract by 9.6 percent this year, worse than the 3.9-percent drop previously projected. It forecasts GDP to recover by just 5.7 percent in 2021, downgrading its projection from the previous growth outlook of 7 percent.

“The Philippines now appears to be one of the worst-hit economies from COVID-19, prompting us to revisit our GDP assumptions. The continued rise in COVID-19 cases domestically remains a serious concern, and in our view, has dashed any hopes for a meaningful recovery in the second half of 2020. Moreover, the absence of a big-ticket stimulus is likely to put a damper on the recovery in the year ahead,” HSBC said in a research note issued on Monday.

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Following the worse-than-expected second quarter economic contraction, think tank Fitch Solutions sharply downgraded its full-year 2020 real GDP outlook for the Philippines to a contraction of 9.1 percent from a previous forecast of a milder decline of 2 percent.

In Fitch Solutions’ base case scenario, the domestic economy will gradually resume activity by yearend, although domestic activity will be considerably weaker than previously assumed. By 2021, it expects the economy to recover, with a government-led infrastructure drive, taking growth to 6.2 percent for the year, revised down slightly from the previous forecast of 6.5 percent.

GDP contracted by 16.5 percent year-on-year in the second quarter, officially bringing the economy to a technical recession following two consecutive quarters of economic decline.

“With the Filipino consumer knocked down by the lockdown, our solid macroeconomic fundamentals are likely out the door,” ING Philippines economist Nicholas Mapa said in a research note dated Aug. 7.

“With no consumption, government revenue streams dry up with the recent pandemic showcasing that point clearly. Strained revenue streams will eventually put pressure on the fiscal position and eat away at the buffers erected over the years of fiscal discipline,” Mapa said.

If the Philippine growth trajectory stalls to a lower path, Mapa said he would not be surprised if one of the big three global credit watchdogs would issue a negative sovereign outlook in the coming months.

Fitch Solutions’ projection of a 9.1-percent GDP decline assumed that the economy would gradually reopen by yearend, with the occasional tightening of confinement measures in specific regions or cities.

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“We expect growth in third quarter 2020 to show only a slight improvement on second quarter 2020, given a better external backdrop and a slow lifting of lockdown measures. The imposition of two-week stay-at-home orders in Manila and four surrounding provinces on the country’s main Luzon island as of Aug. 4 highlights how any recovery will at best be uneven,” Fitch Solutions said.

Assuming new case numbers fall on the back of the confinement measures, the think tank said lockdown measures could be lowered further through the fourth quarter, aiding some pick-up in domestic activity.

But if most areas would be subjected to similar confinement measures as seen in the second quarter, through August to December, Fitch Solutions sees the GDP contraction this year becoming steeper at 10.8 percent.

“The impact on households would become more painful as unemployment rose further and poverty levels increased,” it said. “We would expect the government to direct more of its stimulus measures toward households, providing handouts, wage subsidies and loans to support household incomes. This ultimately could mean higher indebtedness among lower income households and likely less productive forms of government spending.”

An inability to contain the virus could also dampen foreign direct investment and momentum around structural reforms to attract such investment over the longer term, Fitch Solutions said.

“With the economy down on the canvass and bloodied, perhaps it is time for the government to mount a second half rally, looking for a knockout punch of our own,” ING’s Mapa said, citing the need for a bigger fiscal stimulus.

“Coming out swinging to end the fight sooner may seem like a better strategy than simply covering up against the ropes as we desperately wait for the bell to sound one round closer to getting that vaccine,” he said. INQ

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