ILLSUTRATION BR RACHEL REVILLA
Despite lingering risks from incessant COVID-19 infections, the prolonged Russian invasion of Ukraine, spillover global price shocks as well as pandemic-induced supply-chain disruptions, consensus estimates have placed the Philippines’ potential economic growth this year among Southeast Asia’s best.
But moving forward, economists tell the Inquirer that economic expansion could slow next year, especially if external challenges linger, and despite President Marcos’ administration targeting a “more ambitious” pace of yearly “broad-based, inclusive” growth until 2028 to outgrow ballooning public debts.
Based on median forecast of more than 20 private and multilateral institutions collated by Inquirer, the country’s gross domestic product (GDP) is expected to grow by 6.8 percent this year and 6 percent next year.
On the part of the government, Mr. Marcos’ economic team downscaled the GDP growth target for 2022 to 6.5 to 7.5 percent from 7 to 8 percent. At the start of this year, then President Duterte’s team was more optimistic with a wider growth goal range of 7 to 9 percent.
But Socioeconomic Planning Secretary Arsenio Balisacan explains that their tempered expectations only reflect external challenges, especially the Russia-Ukraine conflict. “We really do not know how long it could be, and the extent of the supply disruptions globally,” he says.
As the country’s chief economist, Balisacan is nonetheless confident that just like how the Philippines had rebounded from past crises, like the Asian financial crisis of 1997-1998 and the global financial crisis of 2008, solid macro fundamentals will allow the economy to recover as fast. The National Economic Development Authority (Neda) chief says that if they could get the local economy “firing,” there is no need to worry about external developments.
“We were, in fact, quite lucky; if it were the 1980s and this kind of shock appeared, we could have been dead by now. The sharp impact on the local economy would have been great, but that’s not the case now. Our fundamentals are much better than they used to be,” says Balisacan. He is referring to the debt crisis during the waning years of the dictator Ferdinand Marcos Sr., which eventually led to his ouster through the peaceful Edsa Revolution.
In 2020, the Philippines had also fallen to its worst postwar annual recession (-9.6 percent GDP) at the height of the most stringent COVID-19 lockdowns, but the economy has rebounded since last year (+5.7 percent) as more business activities reopened alongside the mass vaccination program. In the first quarter of this year, GDP grew by 8.3 percent, beating market expectations.
The inflation drag
“We expect the economy to expand 7.3 percent this year and 5.2 percent in 2023. Despite a modest rise in COVID-19 cases, we think restrictions will continue to be eased as long as the hospitalization rate remains low, which will be supportive of domestic demand. The end of the lockdowns in China will support exports in the second half of 2022, and policy easing will shore up growth. But supply side issues remain due to the ongoing war in Ukraine, and global trade is set to moderate as higher commodity prices continue to squeeze real incomes,” says Makoto Tsuchiya, assistant economist at UK-based think tank Oxford Economics.
In a forum organized by the Foundation for Economic Freedom, former Finance Undersecretary Romeo Bernardo says think tank GlobalSource Partners, where he serves as country analyst, projects a 6.8-percent GDP growth for this year as the 2022 presidential elections boosted spending.
Philippine National Bank economist Alvin Joseph Arogo says the economy will still benefit from the further relaxation of mobility restrictions this year, such that economic reopening will largely outweigh the burden of higher inflation on consumer spending. During the first half, headline inflation averaged 4.4 percent, above the Bangko Sentral ng Pilipinas’ (BSP) 2 to 4 percent target band of manageable price hikes conducive to economic growth. The Cabinet-level Development Budget Coordination Committee (DBCC) already concedes that inflation will average 4.5 to 5.5 percent in 2022.
While Arogo projects a 6.8-percent GDP growth for this year, he estimates a slowdown to 5.7 percent in 2023 “mainly because the negative impact of elevated consumer prices to the demand would largely be felt next year as the savings made by the fortunate households during the pandemic will largely be used up by then.”
China Bank chief economist Domini Velasquez agrees that 2023 “will be a more difficult year.”
“First, we would not have the same traction from the opening up of the economy. Moreover, higher prices from the previous year are expected to take a toll on households’ savings. The BSP’s monetary tightening will already affect businesses. And a slower global growth, possibly recession in some advanced economies, will dampen our exports outlook,” Velasquez explains. The BSP is widely expected to aggressively hike interest rates in the near-term to rein in elevated inflation.Security Bank chief economist Robert Dan Roces also says “inflation is the main headwind for this year and the next as this has the potential to slow private consumption, which is around 75 percent of GDP.”
Other headwinds
Bank of the Philippine Islands (BPI) lead economist Emilio Neri Jr. says that on top of imminent rate hikes by major central banks worldwide, the new administration should brace for other headwinds like China’s economic slowdown, as well as food security concerns.
For ING senior Philippine economist Nicholas Antonio Mapa, “the triple threat of accelerating inflation, higher interest rates, and sizable debt are all challenges that will likely cap the growth momentum.” Mapa and Neri have among the lowest GDP growth projections for 2023, at 4.5 percent and 4.8 percent, respectively.
Bernardo says GlobalSource’s GDP growth forecast for 2023 is just 5.5 percent as “the lack of fiscal space of the government is also going to be an important constraint in depending on public investments to drive growth.”
According to Bernardo, the Philippine economy could grow as fast as pre-pandemic levels if the current administration would stimulate more investments. “Our growth has been driven by consumption, and consumption cannot be relied upon in a situation where people have lost their jobs, inflation is high, and we have a global recession,” Bernardo says.
For many economists, “balance” is what President Marcos Jr. and his economic managers must pursue to reap the benefits of a resilient economy while addressing the socioeconomic scarring wrought by the prolonged COVID-19 pandemic.
“In general, we expect policy continuation from the Marcos Jr. administration, particularly in areas such as infrastructure. However, after two years of expansionary fiscal policy, fiscal space is very limited and the new administration is facing a tricky balancing act between shoring up growth and maintaining prudent fiscal policy,” Oxford Economics’ Tsuchiya says.
“Besides keeping inflation under control, the Marcos Jr. administration will have to balance economic growth and the fiscal debt threshold if the government were to step up infrastructure investment as promised during the election campaign,” Moody’s Analytics associate economist Sonia Zhu says.
For Singapore-based United Overseas Bank (UOB), the new administration has some strengths which it can leverage on to not only sustain recovery but also pursue its economic agenda.
“Marcos Jr. has a ‘super majority’ in Congress that will also allow him to push through legislation, chiefly the passage of the national budget and tax measures, to boost economic growth and attract foreign investments in the short to medium term,” UOB says in a report.
Miguel Chanco, chief emerging Asia economist at UK-based think tank Pantheon Macroeconomics, is the least optimistic among economists watching the Philippines, with growth projections of 5.6 percent for 2022, and 4.8 percent for 2023.
For Chanco, “the growth targets outlined by the new administration will be difficult to achieve, in large part because macro policy settings are being tightened on both fronts — with the government dead-set on fiscal consolidation (and rightly so) and the BSP starting to normalize monetary policy (also, rightly so).”
“The main challenge for the Marcos Jr. administration will be spurring private consumption and investment under these conditions, which will be made more difficult by the deep economic scarring caused by the pandemic years of 2020 to 2021,” Chanco says.