Slow crawl out of the trenches

Romeo L. Bernardo-125

Gross domestic product (GDP) contracted 9.5% last year, with the 15% fall in consumption and investments only partly offset by government spending and a significant narrowing of the trade deficit, itself a reflection of the demand collapse. Quarterly data show that as lockdown measures were gradually relaxed and mobility increased, there was a rebound in activity in Q3, in part reflecting pent-up demand, that softened in Q4. The gains notwithstanding, the level of Q4 2020 output was still 8% lower than Q4 2019. Expectations now of sustaining growth hinge on keeping infections down even as quarantine restrictions are progressively loosened.

Consensus forecast shows expectations of a sharp rebound in 2021 economic growth that is close to the upper end of the government’s 6.5-7.5% GDP growth target. Multilateral agencies on the other hand projects economic growth nearer the lower end of the range, with the World Bank forecasting it to fall slightly below 6%. Our outlook is still less upbeat, with GDP growing 5.5% this year. This is slightly up from the 5% projection in our report in early December, due mainly to expectations of stronger global economic recovery following the roll-out of several vaccines. This is positive news for the export sector, particularly with the forecast upturn in the electronics cycle, as well as for BPOs, a job creating sector.

Nevertheless, the overall outlook for domestic demand is still a grim one, reflecting both institutional/governance issues as well as the pandemic’s uneven impact on sectors and income groups that will weigh on recovery prospects. More specifically:

1. Government’s vaccine procurement program has encountered one problem after another such that following the current schedule that already reflects private sector assistance, major deliveries of vaccines (30-50 million doses) will only happen in Q3 and Q4. A serious vaccination effort could thus only start thereafter which will be a slow process considering logistical challenges in distribution and the high proportion of Filipinos who, surveys say, are not willing to get vaccinated. Even without considering the latter, experts tell us that herd immunity, i.e., 50 million adults getting the jab, will happen only by Q4 of 2022.


2. Given the above, capacity restrictions due to physical distancing requirements as well as mobility restrictions to protect the vulnerable will remain in place. Although economic managers appear to be doing their utmost to persuade decision makers to balance risks from COVID-19 (coronavirus disease 2019) against those from hunger, poverty, unemployment, and income losses, they not only face opposition from their counterparts in the health sector but also state security forces and, more so lately, risk-averse local government officials. Google mobility data so far this year are reflective of restrictions in place, with activities still well below pre-pandemic levels, especially for public transport that has a 50% capacity limit. The President’s reluctance to shift to a more relaxed quarantine level without a mass vaccination program in place necessarily caps near term growth potential, something that economic managers recognize as well.

3. Apart from general restrictions, a more specific problem has to do with the fragmented COVID-19 guidelines issued by local governments that makes inter-provincial/city travel difficult and costly. The problem affects both movement of workers and recovery of domestic tourism, seen as an important interim solution for closing some of the demand gap. The tourism industry not only has high linkages with the rest of the economy (the sector’s direct and indirect contribution to output is estimated at 12.7% of GDP in 2019) and employment potential (13.5% of total in 2019), but benefits significantly from domestic travelers (85% of total gross value added), a prospective growth area considering pent up demand from higher income groups for leisure activities. Aviation sector experts report that Philippine passenger volumes by late last year were only around 20% of pre-pandemic levels, lagging behind neighboring economies where the gaps have closed more significantly.

4. Aside from the above government-related constraints, the recovery will be marked by unevenness in spending where recoveries in discretionary spending of those who have managed to preserve jobs and incomes and accumulate savings under lockdown are dragged by expenditure cutbacks and scrimping on the part of those who have suffered job loss and wage cuts. Unfortunately, job and wage cuts are continuing per the labor department’s January report, even as survey data last quarter already showed worrying signs of discouraged job seekers and reduced work quality, i.e., more of the employed working less hours, and in less formal, lower skilled/wage occupations. Elevated food inflation lately is expected to lead to more scrimping.

5. At the firm level, recovery prospects are also highly uneven as may be seen in Q4 production accounts where outputs of 43 out of 60 non-agricultural sectors were still below pre-pandemic levels. With excess capacities running from industrial (manufacturing and construction) to services (real estate, close contact sectors) and firms grappling not just with profitability issues but with the timing of cash inflows to cover fixed overhead costs, including interest payments on debts, business expansions will be limited especially given the runup in the private sector’s capital expenditures pre-pandemic. These lagging sectors will drag expected expansions in sectors that went through the pandemic relatively unscathed, especially telecommunications where continuing large capital expenditures are required to meet rising demand. Although there would be similar motivations for investments in utilities, e.g., water, power, toll roads, we expect more restraint given the approaching elections and increased regulatory risks.

6. The damage to households’ and firms’ balance sheets will in turn hurt the financial sector’s asset quality and dampen their lending appetites, a drag to monetary policy effectiveness. The extent of the damage will only play out over time as moratoria imposed by law and regulatory forbearance measures are lifted. Current expectations are that non-performing loans (NPLs) of the big banks will double from the end-2020 ratio of 3.1% of total loans, with consumer loan portfolios expected to register larger credit losses. Small and mid-sized banks with larger credit exposure to households and small and medium enterprises can also expect more significant increases in their NPLs. Systemic risks are, however, low considering the dominance of well-capitalized universal and commercial banks (17% capital adequacy ratio as of Sept. 20).

7. Given expected weak demand, the main burden of jumpstarting economic growth still falls on the government. With the stimulative impact of low interest rates running into banks’ risk aversion and the need lately to anchor inflation expectations, fiscal policy will need to do the heavy lifting hereon. Despite relatively moderate new budget resources for 2021, the economy could still prospectively benefit from an additional 1% of GDP of spending authority carried over from last year’s regular and supplemental budgets. However, the worry is still execution risk and government again underspending at a time when it needs to spend as much as it has on hand. The hope now is that early implementation of infrastructure projects to take advantage of the dry season could help to crowd in earlier any associated private investments. Considering, too, political pressure as the election nears that may overcome fiscal authorities’ resistance, another fiscal stimulus package may be passed later in the year, a potential upside to our forecast.

Our 2022 GDP outlook, tentatively at 5%, is clouded by the uncertainties surrounding this year’s forecast, particularly progress in vaccination efforts and effectiveness in disease control that affect confidence all around. The outlook also depends on the electoral process and election outcomes, vaccine efficacy vs. virus mutations, and the impact on global economic recoveries, as well as timing of any withdrawal of accommodative macroeconomic policies globally and locally.

Excerpted from a 20-page report dated Feb. 25, of the same title written by Christine G. Tang and the columnist, Romeo L. Bernardo, for GlobalSource Partners ( where they are the Philippine Advisors/Partners. GlobalSource Partners is a New York-based network of independent analysts in emerging markets serving mostly fund managers and global banks.

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.


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