PH economic recovery may take up to 3 more years, says MUFG

It will likely take the Philippines two to three years to return to prepandemic productivity, but the country is unlikely to succumb to “stagflation” or a prolonged economic downturn that comes with persistently high inflation and unemployment rates.

This is according to Japanese banking giant MUFG, which downgraded its Philippine gross domestic product (GDP) forecast for this year to 4.9 percent from 6.2 percent due to the reimposition early this year of tough lockdown protocols due to the resurgence in COVID-19 case.

But the local economy isn’t weak enough to be at risk of stagflation, MUFG Bank global markets for Asia analyst Sophia Ng said, noting that real GDP could grow faster next year due to low base effects and a gradual recovery in private consumption and investments.

In a press briefing on Wednesday, Ng said the country’s GDP growth might grow at a faster pace of 6.8 percent in 2022, compared to the bank’s previous forecast of 6.1 percent.

In 2020, due to shockwaves caused by the COVID-19 pandemic, the country saw its worst recession in history as the economy contracted by 9.6 percent. Prior to the pandemic, GDP has been growing by 6-7 percent a year and delivering about P19 trillion worth of economic output annually.

High oil prices add pressures

With soaring energy prices, MUFG expects local inflation rate to average 4.5 percent this year or the highest since 2018. However, base effects are seen to lead to a moderation in inflation rate to close to 3 percent—or the midpoint of the Bangko Sentral ng Pilipinas’ (BSP) target range—next year.

“Even with inflationary pressures within the coming months, we think the BSP is unlikely to tighten monetary policy prematurely. Doing so would derail the pace of economic activity and will be ineffective in containing inflationary pressures that are mostly driven by supply-side constraints rather than strong demand,” Ng said.

MUFG expects the BSP to maintain its overnight borrowing rate at a record-low level of 2 percent at least for the next six months and instead resort to other monetary policy tools to support growth.

Asked when the BSP is likely to switch to a monetary tightening cycle, Ng said it would all depend on the pace of economic recovery. Even assuming a gradual recovery next year, she said any interest rate hike would still be unlikely.

“Of course, there are some risks. We’ve got some Asian central banks that are already tightening monetary policy,” she said, citing Bank of Korea and the Monetary Authority of Singapore which had started raising rates to curb inflationary pressures. If the BSP would be forced to hike rates due to high inflation, Ng said the first increase in interest rates would probably come by the third quarter of next year.

A bullish global energy cycle is also seen to add pressure on oil-importing countries like the Philippines. This is seen to result in a current account deficit equivalent to 1-2 percent of GDP this year from last year’s surplus of 3 percent, in turn weighing down the peso against the US dollar.

“Usually, rising crude oil prices tend to coincide with global inflation and optimism over growth, but definitely, this time it is not the case,” said Lin Li, Asia head of Global Markets Research.

MUFG is projecting global oil prices to average at $82.8 per barrel in the fourth quarter and $71.6 per barrel this full year and $73.7per barrel next year.

While there’s some improvement in global demand, Li said the natural gas crunch in United Kingdom and the rest of Europe had been putting pressure on oil prices.

COVID risks

Aside from risks caused by lofty fuel prices, pandemic risks remained even as the third wave of COVID-19 infection was now over. The decision of local authorities to adopt a “living with COVID-19 strategy” has its pros and cons, Ng said.

For one, she said mobility restrictions would be more targeted than widespread, which could help revive economic activity to a certain extent. She likewise cited attempts to revive the tourism sector by doing away with the quarantine requirement for fully vaccinated tourists from dozens of countries. “But of course, this has its own risks … especially since the laws imposed by other countries could be different,” Ng said.

“We still think that some risks remain. This is particularly so with the slow pace of vaccination and the difficulty in the procurement and distribution of vaccines in the Philippines. This could actually then result in another wave of COVID-19 [cases], not to mention the new COVID variants that could be more resilient to vaccines…,” Ng said. She said mobility restrictions might not be eased significantly in the Philippines and if there would be a new wave of COVID-19 cases, these could tighten again and affect the pace of economic recovery.

As the pace of vaccination in the country is the slowest in the Asean, Ng said it would “take a longer period of time for the Philippines’ negative output gap to actually close.”

A negative output gap means that there is spare capacity, or slack, in the economy due to weak demand.