PH: Battling COVID-19, reviving economy

The disruptions brought about by the COVID-19 pandemic have plunged the Philippine economy into the deepest recession in more than two decades.

The authorities’ unprecedented policy responses have provided indispensable support to households, businesses and financial institutions. However, further policy support and a faster rollout of vaccines are essential for the economy to secure a more solid recovery.

This is according to the preliminary assessment by the ASEAN+3 Macroeconomic Research Office (Amro) after its virtual annual consultation with Philippine authorities from Jan. 11 to Jan. 26.

The mission—composed of Amro lead economist Siu Fung Yiu, director Toshinori Doi and chief economist Hoe Ee Khor—participated in policy meetings with key Philippine government officials. The consultation focused in the development of the COVID-19 pandemic and its adverse impact on the economy, key risks and challenges, and policy responses to revive and transition the economy to the postpandemic “new normal.”

Developments, outlook

“The Philippine economy contracted by 9.5 percent in 2020 as a result of the disruptive impact of the COVID-19 pandemic,” said Yiu. “As the recovery remains fragile and is at its early stage, the government should maintain sufficient policy support to ensure a robust economic recovery while safeguarding against potential macroeconomic and financial risks. We expect the economy to grow by 7.4 percent in 2021, accelerating to 7.8 percent next year,” said Yiu.

The collapse of domestic demand was broad-based and particularly acute in sectors that need physical contact and close engagement. The unemployment rate remained elevated at 8.8 percent in October, albeit much lower than in April when containment measures were first introduced.

Despite some supply disruptions from the pandemic and a series of strong typhoons, inflation has remained low and stable.

The current account shifted to a large surplus of $8.7 billion in the first three quarters of 2020, or 3.4 percent of the gross domestic product (GDP). Moreover, capital flows became more balanced following a large outflow in the first quarter, partially supported by the government’s large external borrowings. As a result, the overall balance of payments improved substantially and international reserves rose to a record high of $109.8 billion in December 2020, which is more than sufficient to meet the country’s short-term external funding needs. Looking ahead, the Philippine economy is expected to continue to recover, as more restrictive policies are lifted, and confidence is restored by mass vaccination and continued policy support.

Risks, vulnerabilities

The Philippine economy continues to face multiple downside risks and challenges in its recovery path, including a prolonged wave of the pandemic and a slower-than-expected global recovery.

Businesses face potential financial distress with implications for lower potential growth due to the scarring effects of a prolonged downturn.

Dominated by the service-oriented sectors and micro, small and medium enterprises (MSMEs), the economy is vulnerable to the COVID-19 shocks. Effective policy transmission faces several practical challenges that may be improved with greater financial inclusion. As such, the Philippines is likely to experience some reversal of social economic gains.

Policy responses

The Philippine government has deployed a wide array of measures to contain the pandemic, including the most stringent and longest lockdowns.

The government’s four-pillar strategy is critical in containing the pandemic, mitigating the adverse impact and reviving the economy. The fiscal deficit is expected to widen to 7.6 percent of GDP in 2020 but the fiscal stimulus is relatively modest. The fiscal policy in 2021 is moderately expansionary and supportive of the recovery.

However, considering that the recovery is still nascent, further fiscal support would be critical if the growth momentum is weaker than expected and the economy were to falter.

Monetary and regulatory policy responses have been swift and effective in easing monetary conditions and ensuring ample liquidity in the financial system. More efforts should be placed on enhancing the effectiveness of monetary transmission and supporting credit expansion. The Bangko Sentral ng Pilipinas (BSP) should collaborate with other government agencies to offer banks greater incentives to increase lending to the business sector, especially MSMEs.

The development of financial risks should be closely monitored, while the intervention and resolution framework should continue to be strengthened. Likewise, the withdrawal of regulatory forbearance needs to be cautious.

Although the economy has entered the recovery phase, the deterioration of asset quality is still ongoing. The typical inverted U-shaped trajectory of nonperforming loans indicates that the efforts of resolving the problem assets can stretch beyond the current policy cycle.

It is important for the BSP to coordinate closely with its stakeholders and other government agencies when deciding on the extension or withdrawal of relief measures to avoid a cliff effect.

Structural policies and reforms are needed to enhance the resilience of the economy to shocks and facilitate the transition to the postpandemic new normal. The government’s efforts to promote digitalization, invest in infrastructure, and improve the “doing business” environment, will facilitate the process.

Statement of regional surveillance organization Asean+3 Macroeconomic and Research Office (Amro) following a virtual yearly consultation with Philippine economic officials

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