Philippines unlikely to mount convincing rebound this year

MANILA, Philippines — A convincing recovery is unlikely for the Philippines this year and any rebound would be “fragile” and vulnerable to quarantine swings that have usurped business and consumer confidence coming into 2021.

This was the forecast of Manila-based Asian Development Bank (ADB), which now projects a below-trend growth of 4.5% year-on-year for gross domestic product this year. The latest number was a substantial downgrade from 6.5% seen in December.

GDP contracted a record 9.6% last year and in normal cycles, a bust is typically followed by a massive boom by capitalizing on the benefits of a low base. At 4.5% forecast however, the Philippines is unlikely to experience that much-needed bounce where lost ground last year is significantly recovered. 

Uncertainty still fills the air at ADB’s host country that for the first time, the multilateral lender put up a caveat on its own forecast. While ADB is 90% confident that growth would hit its baseline projection, it does not rule out the economy outperforming to as much as 6.5% if and when a sustainable supply of vaccines begin to arrive by June.

Apart from that, all other drivers seen in previous forecast reviews have appeared to be steady. “The outlook assumes a modest fiscal expansion, especially through infrastructure spending and social assistance, COVID-19 vaccination advancing in the second half, and a global economic recovery,” Kelly Bird, country director, said in a briefing.  

At 4.5% GDP growth, the Duterte administration is set to miss its own 6.5-7.5% growth targets which have become more ambitious with sluggish inoculations and a return to tighter lockdowns in Metro Manila and key urban areas that corner over half of annual GDP.

The good news is Bird said the Philippines has also the ingredients to move past that slow growth by 2023 and return to the stronger trend of 6% every year before the pandemic messed with its economic laurels. That means even election spending, long believed to boost economic activity, cannot be relied upon in 2022 when a new administration would take over.

More specifically, ADB forecasts growth to only accelerate up to 5.5% next year, well below the government aspiration of an 8-10% uptick. 

Apart from slower growth however, ADB said the Philippines would have to watch inflation this year, seen rising to 4.1% by yearend which will be a tad higher than the 2-4% central bank target. That said, consistent with the assessment of the Bangko Sentral ng Pilipinas, inflation is projected to eventually slow to 3.5% on-year by 2022.

Scarring

But the combo of fast inflation and slow growth this year, while the pandemic is well within our midst, is not without consequences. As well as in most other countries fighting new coronavirus variants, the Philippines may see normal employment levels fall below their pre-pandemic trend— that means that if for instance, full employment before meant the jobless rate hovering around 4-5%, post-crisis, it can be higher than that, signaling more people unemployed.

The looming phenomenon also indicates that people formerly in secured employment may fall back to the informal sector for quick relief, but over the long-term risks losing their social protections, and security of tenure.

Bird said priority should be on preventing these “scarring effects” from materializing by supporting business recovery through hiring and wage subsidies, as well as other aid.

“The recovery in the Philippines is expected to be fragile,” ADB said in its report. “The slow recovery risks delayed effects in the labor market in which the unemployment rate continues to rise even after the economy has started to grow again.”

Across Southeast Asia, Vietnam would stay as best performer this year, with output likely growing 6.7% annually, followed by Singapore and Malaysia that are both forecast to grow 6%. Still grappling with a violent military coup amid the pandemic, Myanmar is seen contracting 9.8%, the only country to buck the recovery trend.