Slower PHL growth seen amid prolonged pandemic

THE ASEAN+3 Macroeconomic Research Office (AMRO) tempered its economic growth forecast for the Philippines this year due to a resurgence in coronavirus disease 2019 (COVID-19) infections coupled with a sluggish vaccine rollout, highlighting the need for the government to boost fiscal support to minimize economic scarring.

The regional macroeconomic surveillance organization slashed its 2021 gross domestic product (GDP) forecast for the Philippines to 6.4% from the 6.9% estimate it gave in March, based on its latest Annual Consultation Report published on Tuesday.

This was still well within the government’s 6-7% growth target for the year and a turnaround from the record 9.6% GDP contraction in 2020.

AMRO economist Zhiwen Jiao said the further reopening of the economy, recovery in business and consumer confidence, and a faster vaccination program will support the baseline forecast for this year.

“This new wave of infections (in March) has significantly raised downside risk to both our output and baseline forecasts.

For the recovery to catch up, mass vaccination becomes more urgent. So far, the vaccination rollout in the Philippines has remained relatively slow,” Mr. Jiao said at a briefing on Tuesday.

On a worst-case scenario, AMRO Chief Economist Hoe Ee Khor said another wave of COVID-19 infections and the reimposition of stricter lockdowns could hamper recovery, and bring Philippine GDP growth to 5.5% or even 4.5% this year.

The Health department reported 4,479 COVID-19 infections on Tuesday, bringing active cases to 50,037. However, experts have warned of a potential surge in infections because of the more contagious Delta variant from India.

As of June 27, the government has given out more than 10 million doses, 7.5 million of which were first doses.

The Philippines aims to inoculate at least 500,000 people daily in Metro Manila, Rizal, Bulacan, Cavite, Laguna, Metro Cebu and Metro Davao to achieve herd immunity by Nov. 27.

'PERMANENT SCAR

For 2022, AMRO also lowered its growth forecast to 6.8%, from an earlier projection of 7.8%. This falls below the 7-9% GDP growth target of the government.

Output gap, or the difference between the actual GDP and its potential output, will likely remain negative at least until the end of 2022, AMRO said, citing expectations that a weak recovery and prolonged sluggish activity might leave a “permanent scar” on the economy.

Private consumption will likely pick up by 5.3% this year from last year’s 7.9% contraction, before rebounding again by 5.8% in 2022.

Government spending, however, is seen slowing down to 8.7% from the 10.5% spike last year, before rising by 12.5% next year.

AMRO warned that muted state spending amid the crisis could only further derail the economy’s recovery.

“While expansionary fiscal policy in 2021 will continue to support economic recovery, the recovery is still nascent, and further fiscal support would be critical if the growth momentum proves weaker-than-expected and the economy falters,” AMRO said.

Faced with the risk of economic scarring lowering potential growth, AMRO Senior Economist Byunghoon Nam said the Philippine government still has ample fiscal space to expand its support to the economy.

Mr. Nam said higher fiscal spending will raise the country’s debt level relative to GDP in the next two to three years, but the ratio will start to ease over the longer term when faster economic growth boosts government revenues and the capacity to pay off its debts.

“In the short term, more growth-friendly and supportive fiscal programs will promote stronger economic recovery. A more expansionary fiscal policy can recover the potential growth path, faster than the current fiscal policy,” he said.

“We recommend that the Philippine government should leverage on a sufficient fiscal policy space to achieve robust recovery and a more sustainable growth,” he added.

AMRO expects the budget deficit to widen to 9.5% of GDP by year’s end, slightly higher than the limit set by the government’s economic managers at 9.3% but wider than the 7.6% ratio seen last year.

Monetary policy will remain accommodative until next year amid the relatively benign inf l ation outlook. AMRO said the Bangko Sentral ng Pilipinas (BSP) deployed its monetary and regulatory policy responses swiftly and effectively to ensure ample liquidity in the market, but it has been “less successful in stimulating credit growth.”

“To better support the recovery, more efforts should be placed on enhancing the effectiveness of monetary transmission and supporting credit expansion,” it said.