By Romy Bernardo, Independent Director, AEV
PART 1
Originally published in BusinessWorld on February 28, 2021
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 (globalsourcepartners.com) 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.
PART 2
Originally published in BusinessWorld on May 16, 2021
Allow me to start by sharing with readers excerpts from a note that Christine Tang and I wrote for subscribers of GlobalSource Partners (GSP, globalsourcepartners.com) on May 11 on the grim first quarter GDP performance.
(GSP is a New York-based network of independent analysts providing macro, financial and political outlook in emerging market economies.)
“The on-the-ground feedback we were getting of the economy’s performance leading up to today’s (May 11) GDP announcement had suggested a more buoyant economy than the reported 4.2% year-on-year (yoy) contraction. The headline number implies that GDP grew by only 0.3% quarter on quarter, or an annualized rate of just a little over 1%, at a time when lockdown restrictions had become much less stringent (for the first 10 of the 12-week quarter)…
“The re-imposition of strict lockdown measures from the last week of March to date, with any lifting of restrictions later this month likely to be done cautiously, implies we will likely suffer sequential quarter-on-quarter decline in 2Q output (although the YoY growth clip will be high due to base effects). Economic managers* are pinning [their] hopes of recovering lockdown losses and reaching government’s 6.5-7.5% growth target on: a.) major relaxation of quarantine policies through improving health resources and automating contact tracing, b.) fully implementing the available budgetary resources, and c.) accelerating the vaccination program.
“We think the first will be difficult following the detection locally of the more transmissible ‘double mutant’ COVID-19 variant first found in India and continuing weaknesses in contact tracing efforts. The second would definitely help but may require additional budgetary action by Congress under the Bayanihan III, especially in the form of direct cash transfers to the poor. The third, despite benefiting from the private sector’s technical assistance and mentoring at the local government levels, remains clouded by uncertainties surrounding vaccine deliveries and their efficacy against the new variants.
“We had previously capped this year’s GDP growth rate at a relatively pessimistic 5%, a number that looks rather high now given unknown course of wild card mutant varieties and possible future on and off lockdowns. In the event, we cannot rule out a flattish growth scenario.”
On May 12, a day later, I attended a public-private forum on the vaccination roll out with over 700 participants from business and civil society present. This was masterfully organized and moderated by Philippine Disaster Resiliency Foundation (PDRF) Chief Resiliency Officer Bill Luz. On the basis of the presentations and discussions, I now think we have a fighting chance of achieving some form of “herd immunity,” at least in the National Capital Region (NCR), by year end. This will make economic outcomes in 2022 much brighter.
My takeaways:
1. Per National Task Force Chief Implementor Charlie Galvez, there is now greater certainty over the arrivals of vaccines. Some 7.5 million doses have arrived, and ramping up very quickly as we get to the “-ber” months so that we expect to have enough to fully inoculate 70% of the NCR population towards yearend.
2. Planning and execution are being done down to city and barangay levels for the NCR, from master listing to deployment to vaccination with the technical assistance of the private sector experts in supply chain management, superbly led by Jollibee Foods Corp. Chief Corporate Sustainability and Public Affairs Officer José Miñana.
3.) As enough vaccines come to cover health workers and the vulnerable elderly, there will be an earlier start, likely this month, of vaccination of A4 frontliners and others down the 12-tier list. Some thinking is being given to a simplified more simultaneous rollout, similar to Israel’s three-tiered system.
4. As supplies build up and get used up, we need to overcome vaccine hesitation. Per the latest (February) Pulse Asia Survey, this is as high as 60% of the population. McDonald’s Managing Director and T3 Communications Lead Margot Torres is on top of a broad coalition which developed and are rolling out a compelling, even moving, Ingat Angat vaccination campaign some of us may have be seeing on media.
5. If all goes well in the execution, we should achieve some form of “herd immunity” and thus greater mobility in the NCR by end November. The NCR with its 17 LGUs is, of course, the locus of the plague, and accounts for a substantial part of our country’s GDP. From there, the next roll out will be in the +6 provinces (Cavite, Laguna, Batangas, Rizal, Bulacan, Pampanga) and Metro Cebu and Davao. The thinking is that if case numbers are lowered in NCR+8 as a result of vaccinations, there will be less contamination throughout the country since the spread starts from these areas.
Stressing the importance of close monitoring and good execution for all these to happen, ADB Executive Director Paul Dominguez said that:
• the plan appears doable but good execution and close monitoring is needed to address any problems or bottlenecks that emerge;
• the private sector should engage with the LGUs where they do business to offer assistance as well as help replicate the vaccination plan developed for the NCR in other major cities and provinces.
Flagship Secretary and NTF Deputy Chief Implementor Vince Dizon ended the forum on a hopeful note:
“It’s been more than a year since T3 was formed to bring together the private and public sector in an unprecedented way to battle this pandemic. Our work has shown that working together brings in the best of both the private and government sector. Today, we saw again that working together will lead to the results that we need and what we want. With the leadership of Secretary Galvez, we now have the vaccines coming. And this was followed by Pepot’s (Miñana) fantastic work in putting things in perspective with respect to deployment. Now is the time to execute and put this in action and we will heavily rely on the private sector. Finally, thank you to Margot (Torres), George (Royeca) and the team for communications because the challenge we face is demand generation. We have seen in other countries that demand generation is critical with the vaccination roll out, but with the beautiful and poignant ad that shows where we are and we are headed, we will get there and all enjoy a happier Christmas in 2021.”
I am writing this column, May 13, the day after the forum, as my family and our Muslim brothers and sisters are celebrating Eid Al Fitr, the end of Ramadan, a time of hope. I do so with the fervent wish that, Inshallah, we will have the “better Christmas” that Presidential Peace Adviser Charlie Galvez envisions for us all.
Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos Administrations. He is a Trustee/Director of the Foundation for Economic Freedom, Management Association of the Philippines and FINEX Foundation
