Pandemic erodes Philippine economic gains

YEARENDER

MANILA, Philippines — Before the COVID-19 pandemic, the Philippine economy was already considered a rising star – one of the fastest-growing markets in Asia, with strong growth prospects, a vibrant consumption culture, and a young, skilled workforce.

Now, the health crisis threatens to undo years of gains in improving employment, reducing poverty and developing human capital as the country remains under the world’s longest continuing lockdown.

Almost a year into the pandemic, the nation is still reeling from a high level of unemployment and businesses are struggling to transition to the so-called new normal.

Economic managers are pinning their hopes on the traditional increased household consumption during the holiday season to help bring the economy back to a positive growth trajectory by the first quarter of next year.

Learning from the repercussions of the reimposition of a severe lockdown in August, the government has committed to continually reopen the economy and avoid a reversal to strict quarantine.

In an effort to salvage eroding productivity and development of the country’s future workforce, President Duterte also approved recently a pilot run of the resumption of face-to-face learning in areas with a low risk of viral transmission.

As the availability of a vaccine against COVID-19 for the majority of the population remains uncertain next year, Filipinos are bracing for another full year of restricted mobility, although a more lenient one, that will make recovery possible, but at great sacrifice.

Fortunately, the Philippines entered a turbulent year with a fundamentally sound economy as indicated by robust growth prospects, low unemployment and falling poverty incidence.

Likewise, a strong fiscal position, easing debt levels and respectable credit ratings gave the country enough borrowing power amid the crisis.

Economic growth averaged 6.6 percent from 2016 to 2019, positioning the country to graduate to an upper-middle income economy within the year.

However, it was not only the pandemic that contributed to the undoing of these gains on the economic front.

In January, the eruption of Taal Volcano in Batangas devastated industrial and tourism-oriented provinces south of Metro Manila.

Travel restrictions imposed worldwide to contain the new coronavirus outbreak dealt the domestic tourism sector a sharp blow when arrivals of foreign visitors contracted sharply.

And then, 75 percent of the economy was brought to a screeching halt when the country’s main island of Luzon was placed under a strict lockdown for three months beginning March 16.

The enforcement of the severe enhanced community quarantine (ECQ) in the country’s economic powerhouse during those three months left scars that will take years to erase.

In April, unemployment reached a record high of 17.7 percent following stringent lockdown measures, translating to around 7.3 million Filipinos suddenly left without work.

By the end of the second quarter, the Philippines suffered its first recession in 29 years when the economy shrank by a record 16.9 percent.

Even when quarantine restrictions were eased by June, around 40 percent of businesses remained closed, having little financial power to continue operations or adapt to the new normal of doing business.

In August, just as surviving businesses have reopened and complied with minimum public health standards, the stricter modified ECQ was re-imposed in Metro Manila, Bulacan, Cavite, Laguna and Rizal at the request of exhausted medical sector workers.

By the third quarter, the economy had contracted at a less severe but still dismal pace of 11.5 percent.

As a consequence, the country went into recession with three consecutive quarters of contraction, averaging 10 percent, prompting the government to recast in December its expectation of economic performance this year to a shrinkage of 8.5 to 9.5 percent.

In the early part of the lockdown, the government responded by providing subsidies to low-income households and wage subsidies to distressed firms.

As restrictions are eased, small firms were given access to credit and guarantees, while consumers were also given moratorium on payments for rent, utilities and consumer loans.

Awaiting passage is a law that will reduce corporate income tax and rationalize the provision of tax incentives for firms which is meant to encourage investment and job creation.

Other pending pieces of legislation intended to provide stimulus to the weary economy include those that will help banks dispose of bad loans and assets to free up money for lending, and provide equity support to strategic businesses facing insolvency.

Meager stimulus

The government’s economic stimulus program has been called rather “stingy” by several observers.

Several economists have commented that the country’s COVID-19 response spending at $21.65 billion as of November remains the lowest among five other economies in the region - Indonesia, Malaysia, Singapore, Thailand and Vietnam.

The country’s spending in response to the pandemic is equivalent to 5.88 percent of gross domestic product (GDP) at $202 per capita (around P9,700) for a population of just over 100 million. The Philippine economy is worth around P18 trillion.

And indeed, the government is relying on policy, structural reform, and infrastructure development instead of aggressive stimulus to usher in recovery.

One of the reasons put forward by economic managers for prudence is the need to conserve resources because of the uncertainties surrounding the pandemic, particularly its duration and possible setbacks in vaccine development and distribution.

Acting Socioeconomic Planning Secretary Karl Chua has, in fact, described the pandemic response as being akin to “marathon” rather than a race.

Another is that there is nothing fundamentally wrong with the economy and that “the economy is strong enough to recover if we enable it to do so.”

“All economic indicators reveal that with the safe relaxation of the economy, incomes and jobs come back, while with more restrictions, the reverse happens,” said Chua.

As if the pandemic was not enough….

Around six powerful typhoons pummeled the country in quick succession in November, displacing thousands and causing severe flooding in some provinces that led to several deaths.

While this will not make a substantial dent on the economy, the effect manifested in rising food prices that erode the purchasing power of the poorest households.

The destruction to lives and property brought about by these floods prompted the government to consider moving more flood control projects forward as it recalibrates the list of flagship infrastructure projects.

With less than two years left for the Duterte administration’s push for its ambitious Build Build Build program, only 26 projects among the 104 in the Infrastructure Flagship Project (IFP) list are now under various preparation processes.

In July, eight slow-moving projects have already been shelved and replaced with 13 projects for connectivity, transportation, health, and those that address flooding.

The 2021 proposed national budget of P4.506 trillion— around 21.4 percent of GDP— includes P1.121 trillion for infrastructure spending. This level of spending on infrastructure will continue to raise spending in infrastructure to 5.4 percent of GDP which, Chua said, “is sufficient to make sure that the economy will rebound strongly.”

Increased spending for the government’s infrastructure build up program is seen to restore the net job loss of 1.2 million since the start of the lockdown through the creation of 1.7 million direct and indirect jobs.

Road to recovery

Realizing that repeated returns to strict lockdowns significantly prevent the economy from moving forward, the government resolved to continually reopen the economy under a risk management strategy as opposed to a risk aversion strategy implemented in the early part of the pandemic.

This means that the reimposition of hard lockdowns will only be used as a last resort. In the event of spikes in the number of confirmed COVID-19 cases in a certain area, a localized lockdown will be enforced and health standards will be raised.

Alongside this, the capacity of the health system will be continually strengthened to restore confidence.

By next year, it is expected that the whole country will be under the modified general community quarantine (MGCQ), the most lenient among quarantine classifications.

In January, the resumption of face-to-face classes in areas with low-risk of viral transmission will be piloted with the goal of gradually restoring physical classes when restrictions are lowered.

Prolonging the use of distant learning methods such as the use of self-learning modules is seen to affect national productivity in the short and long-term as some parents stay out of the job market longer to help their children go through schooling and students themselves do not learn at the optimum level.

Also now tabled for discussion is the eventual relaxation of the age group that can be allowed to go out to help revive consumption, which was found out to be largely family-driven.

As the economy opens more and people get used to adherence to strict minimum public health standards, it is assumed that there will also be an eventual improvement in the country’s labor market and poverty incidence.

Despite the still dismal unemployment level and expected spike in poverty this year, the government maintains that the target of reducing the incidence to a level of only 14 percent of the population will still be possible by 2022.

This year, poverty incidence is expected to have risen by as much as 17.5 percent. This will be confirmed when the next Family Income and Expenditure Survey (FIES) is conducted in 2021.

Results of the last FIES in 2018 showed that poverty incidence fell to 16.6 percent in 2018 from the revised 23.3 percent in 2015. This meant some six million Filipinos were lifted out of poverty during this time.

This pertains to the proportion of Filipinos whose per capita income is not enough to meet basic food and non-food needs.

In turn, this translates to 17.6 million Filipinos living below the poverty threshold of P10,727 monthly for a family of five in 2018, the minimum income needed to satisfy basic food and non-food needs.

“The target to lift six million Filipinos out of poverty by 2022 was attained in 2018 so we had a good headstart. So we will still achieve our original target of 14 percent by 2022,” said Chua.

Unemployment, meanwhile, eased to 8.7 percent in October from 10 percent in July. This was equivalent to 3.8 million Filipinos without jobs nor livelihood in October, 800,000 fewer compared with 4.6 million in July when the country was just emerging from strict lockdowns.

Poverty can be expected to rise faster in cities but the increase is expected to be tempered in the rural areas where mobility restrictions are less severe.

Falling unemployment and poverty incidence matter to businesses because this is seen as an indicator of the strength of consumption which comprises around 70 percent of the economic output.

Lessons from the crisis

The pandemic has forced the fast-tracking of aggressive reforms that would have otherwise been relegated to the back burner has the crisis not happened.

The public and private sector, for instance, recognize the importance of digital transformation and have been moving to integrate it into business processes.

In the area of social assistance, the implementation of the National ID System, a foundational identification system, is now underway with around nine million Filipinos belonging to low-income households pre-registered into the system.

Having a national ID addresses one of the major barriers to financial inclusion among poor households and aids in the distribution of government assistance to target households.

It also now being discussed now it can be used in the efficient targeting and distribution of vaccines.

The pandemic also exposed the weakness of the country’s health system and amplified the weakness of the transport system.

Severe lockdowns had to be prolonged and repeatedly enforced to prevent the healthcare system from collapsing.

Economic recovery in major cities, meanwhile, have been slow because of lack of sufficient public transportation.

Several projects long supported by multilateral institutions can be expected to be rolled out in the next few years to address these concerns.

With still elevated levels of infection, the Philippines is now among the countries that are highly dependent on vaccines to return to normal in contrast to others that have managed to contain the transmission and managed to return to a growth path this year.

“This Christmas season, the government has been proactive in advising people to be more careful so that we do not reverse the gains we painstakingly worked for this year,” said Chua.