MANILA, Philippines—The Philippines is seen shedding 8.3 percent off its economy this year, considered as the biggest annual gross domestic product (GDP) drop in history, as the COVID-19 pandemic battered consumer confidence and private investments through prolonged community quarantine measures, according to the International Monetary Fund (IMF).
In its October 2020 World Economic Outlook (WEO) report released on Tuesday (Oct. 13), the Washington-based multilateral lender further downgraded its GDP forecast for the Philippines from its previous projection of a 3.6-percent contraction last June.
Amid the pandemic, the IMF expects unemployment rate in the Philippines to jump to 10.4 percent in 2020 from 5.1 percent in 2019.
In an e-mail, IMF resident representative in the Philippines Yongzheng Yang said the worse GDP expectation for 2020 “mostly reflects a larger-than-expected downturn in the second quarter and a more gradual resolution of the pandemic as witnessed over the past months, with prolonged social distancing.”
GDP fell by a record 16.5 percent year-on-year during the April to June period–at the height of the longest and most stringent COVID-19 lockdown in the region, shedding millions of jobs and threatening to reverse poverty reduction gains in recent years.
“Weak public confidence and low remittances as a result of the pandemic are expected to continue weighing on private investment and consumption,” Yang said.
“The negative impacts of COVID‑19 are expected to be only partially offset by policy support,” Yang added.
With millions of Filipinos working or living abroad amid a global recession, the IMF’s WEO report said “the risk of a decline in payments and transfers from migrant workers back to their home-countries is very significant.”
The sharp decline in remittances would be felt most in labor-exporting countries like Bangladesh, Egypt, Guatemala, Pakistan, the Philippines and those in sub-Saharan Africa.
“Significant weakening of remittance flows weighed on domestic spending in the Philippines,” the IMF said.
But as the Philippines gradually opened up its economy by easing quarantine restrictions while keeping health protocols in place, green shoots of economic recovery have been evident, Yang said. This, according to Yang, could propel a GDP rebound to 7.4 percent growth in 2021, a better forecast than the 6.8 percent earlier projected by the IMF.
The IMF also sees unemployment rate easing to 7.4 percent in 2021, although still higher than pre-pandemic level.
“We have seen some signs of recovery in high frequency data with the gradual reopening of the economy,” Yang said.
“Real GDP is projected to expand by 7.4 percent in 2021, helped by—in addition to the base effect—an expected rebound in pent-up demand from the relaxation of quarantine measures and continued effects of the policy easing in 2020,” Yang said.
The pandemic, however, had already wreaked havoc on the economy. Yang said “significant scarring effects (such as hysteresis and bankruptcies) are expected.”
Asked how the Philippines can bounce back from pandemic-induced recession, bring back jobs and reduce the number of people sliding into poverty, Yang replied: “It is important to maintain accommodative macroeconomic policies during the recovery phase and continue pursuing structural reforms to create more jobs, enabling a more conducive business environment, and providing a stronger social safety net for the poor and vulnerable.”
“Once a sustainable recovery is underway, fiscal policy priorities should shift from income support to aggregate demand support,” Yang said.
This should include “renewed infrastructure push in emerging growth areas such as digitalization, health care, and climate change,” according to Yang.
“Priority for investment in the short term should be given to projects that would generate more, immediate jobs. Furthermore, social protection programs should be strengthened as current temporary income support measures are phased out,” Yang said.
“Monetary policy should remain accommodative, given the below-potential weak economic activity and benign inflation prospects. The BSP has room for further rate cuts if needed,” Yang added, using the acronym for Bangko Sentral ng Pilipinas.
The IMF sees low and steady inflation in the next two years—2.4 percent in 2020 and 3 percent in 2021.
But Yang said “COVID-19 is expected to lead to a deterioration in banks’ asset quality, given the expected loss of income of borrowers.” Philippine monetary authorities, Yang said, should “closely monitor the underlying vulnerabilities and prepare contingency plans, supported by reforms of resolution mechanisms.”
Yang said reforms should be intensified since these “would strengthen the post-COVID-19 recovery and longer term growth and poverty reduction.”
Yang said these measures were needed to “complement ongoing social assistance programs”:
- Introduction of the national ID system
- Implementation of financial inclusion programs
- Relaxation of restrictions on foreign direct investments
- Streamlining of tax incentives
“In the medium term, more resources and incentives for climate change adaptation and mitigation will be needed to induce investment and changes in emission patterns, making growth more resilient,” Yang said.