Lockdowns, slow vaccine rollout seen delaying PH recovery to H2 ‘22

The Philippine economy may return to prepandemic productivity only by the second half of 2022, at the earliest, once herd immunity against COVID-19 is attained, an economist from JP Morgan said.

“Varying mobility restrictions across parts of the country have resulted in a fragile economic recovery, which has led us to pencil in a return to pre-COVID-19 activity levels only in second half of 2022,” said the research written on Aug.27 by economist Nur Raisah Rasid.

Despite a still sluggish domestic activity, however, research from JP Morgan sees a widening of the country’s current account deficit through next year, as the upturn in global commodity prices has jacked up foreign exchange demand.

The pick-up in pace of local COVID-19 vaccination is also seen to perk up economic activities, boosting import spending.

Accordingly, JP Morgan expects the Philippines to incur a current account deficit of $2.7 billion or 0.7 percent of gross domestic product (GDP) this year, which is seen to further widen to $5.9 billion or 1.4 percent of GDP in 2022.

The current account is one of the key components of balance of payments, a record of a country’s economic transactions with the rest of the world. The current account records the value of exports and imports of both goods and services and international transfers of capital.

The faster-than-expected widening of the trade deficit is partly due to a broad-based imports upturn coupled with the slump in exports, Rasid said.

But while import volumes have yet to recover to pre-COVID 19 levels, the economist noted that exports appeared to have stalled following a rebound in mid-2020.

“The comparatively weak exports recovery is striking, particularly juxtaposed with the performance of ASEAN (Association of Southeast Asian Nations) peers, which have collectively seen exports return to fourth quarter 2019 levels,” Rasid noted.

Exports of machinery and transport equipment accounted for the bulk of the slowdown, which Rasid said was notable given the resilience of tech demand in other emerging markets in Asia.

Meanwhile, given the broad upturn in global commodity prices, the cost of imported goods has gone up, raising the import bill. Against a backdrop of firm commodity prices and a pickup in the pace of vaccination, Rasid expects overall import spending to trend even higher in the coming quarter, raising US dollar demand.

“As the Philippines continue to grapple with high COVID-19 case numbers amid slow vaccine procurement, we expect herd immunity to be attained in mid-2022 at the earliest, implying a more sustained recovery may occur only then,” the economist said.

Further breaking down the components, Rasid noted that the widening of the trade deficit had been driven mainly by the recovery in imports of mineral fuels and manufactured goods.

“While mineral fuels and manufactured goods imports volumes have recovered only partially, the broad upturn in global commodity prices has added to the rise in the overall imports bill,” Rasid said.

The economist noted that manufactured goods imports reached an annualized level of $19.3 billion in June this year, up from $18.4 billion in fourth quarter of 2019, the bulk of which was driven by stronger industrial metals imports, particularly iron & steel, major inputs in infrastructure investment.

“While infrastructure activity, which currently stands at about 80 percent of its pre-pandemic level, is less import-intensive than durable equipment investment, as we expect global commodity prices to remain firm, these imports could widen the trade deficit materially ahead of the general election next year even before a broader and more sustained recovery takes hold,” Rasid said.