Economic contraction seen slowing to 6%

The gradual easing of COVID-19 quarantine measures likely narrowed gross domestic product (GDP) contraction in the fourth quarter of last year to single-digit, but this would not stop the Philippine economy from sliding to its worst post-war recession in 2020, according to global economic research firms. In a Jan. 20 report, Morgan Stanley Research projected a 6-percent year-on-year decline in fourth-quarter GDP, a slower drop than the average of 10 percent recorded in the first nine months of last year.

Morgan Stanley’s forecast would bring end-2020 GDP contraction to a record 8.8 percent.

The government will report on the fourth-quarter and full-year GDP performance on Jan. 28.

“Private consumption likely recovered further, as consumer sentiment edged up slightly and passenger vehicle sales saw a milder decline. Meanwhile, fixed capital expenditure momentum likely registered a modest second-order derivative improvement, with capital goods imports and commercial vehicle sales faring better. On the external front, goods exports likely rebounded to positive year-on-year territory,” Morgan Stanley said.

In a separate report, United Overseas Bank (UOB) Global Economics and Market Research projected fourth-quarter GDP to have shrunk by 8.2 percent year-on-year, bringing the full-year drop to 9.5 percent or at the worse end of the government’s estimates of 8.5-9.5 percent decline.

UOB expects the pandemic-induced recession to spill over to the first quarter of this year before the economy eventually reverts to growth following mass vaccination.

“The Philippines’ economic recovery is seen losing momentum and is fragile, exacerbated by the resurgence of the COVID-19 pandemic worldwide, natural calamities at home, as well as softening household and business sentiment. High frequency data (motor vehicle sales, overseas remittances and loan growth) suggest shallow activity in the fourth quarter of 2020 amid ongoing general community quarantine in the country,” UOB said in its quarterly global outlook report for the first quarter of 2021.

Morgan Stanley was more bullish as it projected “above-trend” GDP growth of 13.5 percent this year, well-above the government’s conservative target of 6.5-7.5 percent expansion in 2021.

On top of “low-base effects and sequential momentum,” Morgan Stanley said that “with the vaccine rollout targeted to begin soon, it should help improve sentiment and reduce risk aversion in the private sector.”

Also, Morgan Stanley said the Duterte administration’s “Build, Build, Build” infrastructure program would be “a key driver to boost the recovery.”

“Policy makers have pledged to prioritize and fast-track several big-ticket infrastructure projects with higher multiplier effect, given the unintended delays in construction activity in 2020 due to the COVID-19 lockdown and weather disruptions. With the 2021 budget being President Duterte’s penultimate budget before the next presidential election (May 2022), there is likely added impetus to accelerate infrastructure spending,” Morgan Stanley said.

As for UOB, it expects GDP growth hitting 7 percent in 2021, even as prospects “continue to hinge on when the pandemic can be resolved including the successful development and widespread distribution of COVID-19 vaccines and enhancement of the public health system, as well as how households adjust in a post-pandemic environment.”

But UOB said “a positive strong growth rebound is expected to come in only from the second quarter of 2021 onwards, with the assumptions of a successful vaccine in place, favorable year-ago low-base effects, and external sectors improving along with global economic conditions.”

With inoculation underway, the pandemic-battered economy was also seen getting a boost from the record P4.5-trillion 2021 national budget, which UOB said would “underpin the commencement of mega projects, increase in investment, and help communities to slowly recover from the health crisis.“

UOB said it helped that the Bangko Sentral ng Pilipinas was committed to “defending growth at all cost,” even as the BSP would likely keep the policy rate steady at a record-low of 2 percent throughout 2021 amid expectations of benign and within-target inflation as well as improving economic prospects.

The peso, meanwhile, would “maintain its short-term resiliency as broad dollar weakness is expected to continue into 2021,” such that UOB projected the domestic currency to further gradually strengthen to 47.50:$1 by midyear and appreciate to 47 against the greenback by yearend.

For Morgan Stanley, the monetary policy stance “should stay accommodative as manageable inflation and the Fed’s average inflation targeting framework enable the BSP to keep policy rate low and liquidity inflows help the Philippines to fund its fiscal deficit.”