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Philippines forecast: Economy will grow but at a slower pace

Investors are on a rollercoaster ride as the spread of the COVID-19 widens globally. Looking to the future, the Philippines government is seeking to support and stimulate the nation’s economy.

The events of the past month have certainly affected the previously buoyant Philippines economy. But despite the cumulative effects of supply chain disruptions, the Luzon quarantine, a temporary suspension of commercial flights from Clark International Airport, and foreign investors flight to cash, the nation’s economy looks set to recover later this year, but at a slower rate than previously forecast.

Swift action by the Bangko Sentral ng Pilipinas (BSP) in recent months resulted in a third policy rate cut in April. The move should help offset lower GDP growth caused by COVID-19, which hit the nation in the first quarter of the year.

Although it’s still unclear as to how big an impact this will have on the nation’s economic forecast for 2020, the World Bank expects growth to decelerate to 3% from its earlier GDP prediction of 5.9%.

First Metro Corporation (First Metro), the investment banking arm of Metrobank Group still expects a return to growth in the second half of 2020, but admits that the nation’s GDP will take a hit in the first half of the year: “While we feel more optimis­tic for H2, this may vanish if the virus’s spread and death toll do not significantly ease,” it stated in its most recent report.

National government stimulus packages, including one for around 18 million of the nation’s poorest people, and a relatively resilient peso – supported by a narrower current account deficit and the possibility of further sizeable BSP rate cuts – could help to reboot the nation’s economic growth in the second half of the year.

A combination of lower crude oil and abundant rice supply eased inflation in March to 2.5%, a slight drop from February’s 2.6%.

First Metro expects inflation to stabilise in the 2-3% range as supply chain disruptions will keep food prices elevated.

Rising overseas remittances have, until now, boosted the nation’s domestic consumption. Hopes these will rise further in 2020 look shaky. The World Bank sees shockwaves from the pandemic posing ongoing problems for East Asia’s developing economies, which after facing trade wars, and COVID-19 may have to contend with a possible global recession and, in the case of Philippines, lower overseas remittances due to shrinking external demand.

Market contagion

March saw volatility in both equities and commodity markets with investors turning to local bonds for safety and better returns. Central bank responses in the form of a BSP rate cut and two US Federal Reserve rate cuts, plus oil and commodity prices are set to pull down the yield curve, a move that’s likely to continue until the pandemic abates.

Like global markets, the Philippines Stock Exchange Index (PSEi) was left in turmoil by COVID-19. At one point, the exchange suspended trading for a limited time (March 17-19), and year-to-date, the PSEi has fallen by 23.8% as of April 22.

First Metro analysts predict a sustained market recovery will hinge on the following: the P1.45 trillion economic stimulus package equal to 9% of GDP; an effective vaccine can be manufactured; flattening of the infection curve, improved capacity to test and trace potential COVID-19 sufferers; adequate quarantine facilities are provided; dedicated hospitals and ICU functions are available; and sufficient staff and PPE are on hand. Foreign selling continues to outweigh foreign buyers, with net outflows in February of P9.1billion ($178.7 million) and P8.3 billion in January 2020.

Going Forward

If the pandemic is contained quickly, the Philippines economy will resurge on the back of domestic demand but at a slower rate. Domestic consumption will also pick up but will take time to do so. At the same time, the peso remained relatively resilient, thanks to a narrower current account deficit.

With the government indicating that a further stimulus package is on the cards, and signals that leading Southeast Asian central banks are likely to coordinate efforts to boost their respective economies, the scene is set for the current economic headwinds to ease in the second half of the year.

¬ Haymarket Media Limited. All rights reserved.

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