After a strong finish to 2019, it’s certainly been a challenging first quarter for the Philippines, with the dual economic disruptions created by the Taal volcano eruption and the coronavirus (COVID-19) pandemic.
The National Economic Development Authority projects growth to range between -0.6% to 4.3% if the outbreak persists until June 2020, with the upper range to be achieved if the country stems the impact of COVID-19 and the enhanced community quarantine in Luzon.
To give the country the best chance of riding this storm, the national government and the monetary authorities unleashed heavy-duty fiscal and monetary measures. For example, Bangko Sentral ng Pilipinas (BSP) trimmed policy rates by another 50 basis points (bps) to 3.25%. It also cut reserve requirement ratio (RRR) by 200 bps and is signalling for another 200 bps RRR cut within the year, with around P100 billion ($2 billion) of added liquidity for every 100 bps RRR cut. BSP will also buy P300 billion worth of government securities in the market.
The peso remained relatively stable (as of March 13), and remittances from overseas workers also rose to $2.94 billion in January, growing 7.3% year-on-year from the $2.75 billion achieved in January 2019. Additionally, the nation retained its place in Asia’s top five for GDP in 2019, behind Indonesia, Thailand, Malaysia, and Singapore.
But there’s no denying the headwinds created by the global spread of COVID-19 have affected the short-term prospects for the Philippines, with any economic recovery now not expected until the second half of the year.
The financial markets have been more volatile. In March, the nation became the first in the world to call a temporary halt to stock, bond and currency trading. When the markets reopened two days later, the Philippines Stock Exchange index posted its biggest intra-day loss in 33 years. Risk-adverse foreign investors continued to leave the market, preferring to park their funds in US T-bonds. To date this year, overseas investors have sold local stocks of around $480 million.
First Metro Corporation (First Metro), the investment banking arm of Metrobank Group still expects a return to growth in the second half of 2020, supported by resurgent domestic demand, infrastructure and consumption, according to First Metro’s president Rabboni Arjonillo.
“COVID-19 and the Taal volcano eruption will negatively impact first quarter growth. But higher residential, and construction of various public-private infrastructure projects, along with the improvements in manufacturing activities, and strong national government spending, should provide the added impetus needed to drive the economy,” Arjonillo said.
Yield curving
According to Arjonillo, the negative impact of virus on the Philippines economy, plus the global economic slowdown, will combine to push interest rates south in the fixed-income market. Assuming the pandemic is over by the end of June, the BSP’s available liquidity measures, along with the slow revving up of the private sector will moderate any increase in rates for 2020.
“First Metro expects the yield curve to shift downwards with BSP additional policy rate cut on March 19. Adding to this is the cumulative effect of a trimmed RRR for banks in the last two months of 2019. Foreign interest rates are also showing a downward bias as US 10-year Treasury bond yields headed for multi-year lows,” he said.
First Metro factored in two BSP policy rate cuts for 2020, and although the February one was anticipated, the second was higher than economists expected.
The BSP Governor Benjamin Diokno described the move – a 50 bps cut – as ‘an assertive reduction’ needed to spur on the economy. The nation’s key interest rate now stands at 3.25%, with overnight deposits at 2.75% and lending rates at 3.75%.
The Philippine central bank also announced other relief measures including the temporary relaxing of its rules on reporting for banks, penalties on bank reserves, and borrowing limits for sole customers.
Unchecked spread
Much will certainly now depend on how fast COVID-19 can be contained both globally and locally.
“The unchecked spread of COVID-19 has dimmed the global growth outlook and investor sentiment once again, with equity investors scampering for safe assets and havens. We foresee that the outbreak will negatively impact the local equity market in the first half of 2020, but faster economic growth should return in the second half of the year,” Arjonillo said.
If, as First Metro anticipates, the economic fallout and the spread of the virus slows within months, as experienced during the SARs epidemic – as it has already shown signs of doing so in China, then the nation’s economic recovery could even begin as early as the third quarter of the year.
Analysts predict that ramping up national government infrastructure spending, an uptick in construction and manufacturing, plus a resurgence in domestic consumer confidence, could well result in a munch anticipated economic rally into the second half of the year. However, markets may take longer to recover.
Evidently, the start of rebuilding and the resumption of strong economic growth can only happen if and when COVID-19 finally comes to rest.
