June 27, 2020
Effect of COVID-19 on the Philippines’ Economy and Future Prospects
With a population of 185 million (2nd in ASEAN), the Philippines is the first ASEAN country to establish diplomatic relations with Korea (1949), but the current level of bilateral economic cooperation falls short of its potential. In 2019, the Philippines remained as Korea’s fifth-largest trading partner (8.4 billion USD in exports and 3.7 USD in imports), and seventh-largest investment destination (200 million USD) among the 10 ASEAN Member States.
However, with Duterte Administration’s ambitious ‘Build Build Build’ infrastructure program, bilateral cooperation is expected to expand in the years to come. The two countries are also expected to conclude negotiations for a bilateral Free Trade Agreement (FTA) within this year, as a follow-up to the “early achievement package” signed by the two Trade Ministers on the sidelines of the ASEAN-Korea Commemorative Summit in Busan last November.
Against this backdrop, this week’s ASEAN Issue will examine the recent impact of COVID-19 on the Philippines economy and its im plications.
■ COVID-19 Taps the Brake on the Philippines’ Rapid Economic Growth
The growth prospects of the Philippines economy, in the midst of the coronavirus, looks very bleak.
On 15 May, the government of the Philippines extended the lockdown, or Modified Enhanced Community Quarantine (MECQ), of Metro Manila, Laguna and Cebu until the end of May. In response, international economic experts are once again downgrading projections for this year’s economic growth of the country.
Capital Economics, a London-based research institute, foresaw a contraction of 6% of GDP in 2020--one of the worst among the 10 ASEAN countries along with Thailand--as the quarantine measures in major regions (Metro Manila, Laguna, and Cebu) which account for 45% of the Philippines' GDP, would delay economic recovery. The institute further forecast a -17% growth in the second quarter, the worst performance in years, based on its observations of the sharp reduction in the movement of people in the Philippines. According to Google’s regional travel data, there was 60% decrease in work attendance and 20% decrease in the use of navigation tools on Apple smartphones. Congestion in Metro Manila has also been significantly reduced.
The Dutch financial giant, ING, revised its projections from -2.2% to -2.9%, given that the Philippines had already entered into a technical recession following negative growth in the first quarter, and that the consumption-driven economy will likely take a bigger blow from the extension of lockdown in major cities. ING argued that the Philippines should expand government spending to propel economic recovery and suggested 1) additional cuts in the central bank’s interest rates, 2) expansion of social and income assistance programs, and 3) aggressive spending in infrastructure programs once the lockdown is over.
As if to support such bleak forecasts, the Philippines government, too, acknowledged the country’s dire economic situation. On 12 May, the Philippines Development Budget Coordination Committee (DBCC) revised the national GDP growth forecast further down to -2%~-3.4% from the previous -0.8%~-1%. The government estimated a potential loss of 2 trillion pesos (approximately 40 billion USD), equivalent to 9.4% of the national GDP as inevitable.
Meanwhile, ADB’s “Asia Development Outlook 2020”, released on 3 April, was a little more positive and forecast this year’s Philippines’ economic growth at 2%. IMF predicted Philippines’ growth at 0.6% in its “World Economic Outlook” dated 15 April. However, once the government’s downward revisions are taken into consideration, these international development banks are also likely to make negative estimates.
Fitch, an international credit rating agency, revised the country’s credit rating on 12 May based on its forecast of -1% growth?from 'BBB (positive/positive)' to 'BBB (stable/stable)'. The rating for the banking system was also revised from 'BB + (stable / stable)' to 'BBB- (stable / stable)'. However, since these projections were also announced before the extension of lockdown measures on 15 May, there may be further revisions downward.
■ Massive Contractions in investment, consumption, trade, and tourism
The Philippines’ economy recorded negative growth of -0.2% in the first quarter. This was largely due to the effects of the COVID19 and the Taal volcano which erupted on 15 January. This was the first economic contraction after years of positive growth since the Asian financial crisis in 1998.
Some factors behind this sudden contraction include 1) significant drop in investment (-18.3%) due to supply chain disruptions and anxieties caused by the pandemic, 2) sharp decrease in imports and exports (-26.2% in imports, 24.9% in exports), 3) fall in private consumption (0.2%) and 4) disruptions in manufacturing and business operations due to lockdown measures placed since 15 March. Only government spending increased during this period (7.1%).
The tourism sector also took a blow. Only 1.4 million foreigners visited the Philippines in the first quarter which is a 35.6% drop from the previous year. Revenue from tourism also stopped at 85 billion USD, which is 36% less than the year before.
Remittances from Overseas Filipino Workers (OFW), which account for a large portion of the country’s income, are also adversely affected by the pandemic. On 15 May, the Philippines' central bank revised its growth forecasts for remittances from OFW from -2% to -3%. OFW remittances have grown significantly over the years?from 6 billion USD in 2001 to 30 billion USD in 2019?and account for roughly 8% of the national GDP. However, remittance transactions this February amounted to 2.6 billion USD, increasing only by 2.6%. This trend is expected to continue in the coming months.
■ Government Presents a Large-scale Stimulus Package
Bayanihan to Heal as one Act was enacted on 23 March through a special session of the Philippines Congress. The Act was signed three days later by both the Senate and the House of Representatives, as well as by the President. In accordance with this new law, President Duterte has been granted special powers for three months (unless the Congress agrees for an extension) to deal with the corona pandemic (reallocation of government funds, control over public and private hospitals, imposing isolation and quarantine measures etc).
In mid-May, the Duterte Administration prepared the following 4-pillar social-economic strategy worth 1.74 trillion pesos based on the Bayanihan to Heal as one Act.
① emergency support for the vulnerable population
-subsidies for low-income families (a monthly allowance of 5,000~8,000 pesos (about 120,000~190,000 Won) to 18 million low-income households for up to 2 months), credit guarantee to support affected SMEs (120 billion pesos), social welfare program (provision of basic food and necessities to 69,200 family households, unemployment compensation for up to 60,000 people out of work, online upskilling and reskilling programs for the unemployed), and wage subsidies for employees of SMEs (5,000~8,000 pesos to 3.4 million employees for up to 2 months).
②expansion of medical resources (58.6 billion pesos)
-health insurance coverage to corona patients, provision of special hazard pay and protective gear for healthcare workers, and increased procurement and production of test kits.
③implementation of fiscal and monetary policies
-expansion of liquidity (central bank’s repurchase agreement to fund 300 billion pesos, reduction of policy interest rates, and cutting of banks’ reserve requirement ratio), and obtaining of soft loans (436.9 billion pesos) from international development banks such as ADB and IMF.
④economic recovery plan
-establishment of “Bounce Back Plan” for economic recovery, and establishment of task force for social-infrastructure investment.
In order to support this stimulus package, the government drew up an emergency deficit budget of 1.56 trillion pesos (accounting for 8.1% of the GDP). In other words, fiscal revenue in 2020 now was expected to be about 2.61 trillion pesos, a 17.7% decrease from the previously estimated 3.17 trillion pesos, while expenditure would increase by 12 billion pesos to reach 4.18 trillion pesos.
Meanwhile, the Duterte Administration recently submitted three bills to the Congress to more effectively address the COVID-19 crisis. The first bill, Bayanihan 2, is a follow up to the Bayanihan to Heal as One Act, which expires on 26 June, and will support employment and income to those whose livelihoods have been severely affected by the pandemic.
This legislation claims the need for additional funds in between 130 billion to 160 billion pesos to provide tax benefits and access to bank loans to companies. In particular, the upgraded legislation will arrange 50 billion pesos , allocating 70% of this fund to the Land Bank of the Philippines, and 30% to the Philippines Guarantee Corporation to issue bonds, purchase preferred/common stock, and support cashflow to small and medium-sized companies.
The second bill, Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), aims to reduce the corporate income tax from the current 30% to 25% by July 2020, and then further lower the tax every year by 1%p down to 20% by 2027.
Furthermore, the law will also introduce tailor-made tax incentives for new investors which is an improvement from the previous Corporate Income Tax and Incentives Reform Act. The government has proposed a fund of 173 billion pesos to implement CREATE.
The third bill is a budget bill worth 4.64 trillion pesos for fiscal year 2021 which has been approved by the Development Budget Coordination Committee (DBCC).
■ House of Representatives Proposes a Different Relief Package
Tensions are getting high between the Administration and Congress in the Philippines regarding the response measures for the COVID-19 pandemic.
The Philippine Economic Stimulus Act (PESA), a separate economic recovery package worth 568 billion pesos initiated by House of Representatives, was approved by the Economic Stimulus Sub-committee on 18 May. PESA is designed to support mass coronavirus testing aimed at boosting the economy as well as to ensure a safe working environment (budget allocation of 10 billion pesos in 2020 and another 10 billion pesos in 2021). The package also includes allocating 1) 110 billion pesos to support wage subsidies (companies at risk, self-employed, freelancers, and overseas workers), 2) 30 billion pesos to relax regulations to allow temporary employment, exemption of fees, and extension of payment deadlines, 3) 40 billion pesos to support Philippine Guarantee Corporation’s guarantee of SME loans, and 4) 50 billion pesos to support expansion of Small Business Corporation’s loans for SMEs. It also includes measures to support individual industries by allocating 10 billion pesos to the Department of Trade and Industry, 58 billion pesos to the Department of Tourism, 44 billion pesos to the Board of Investments, 75 billion pesos to the Department of Transportation, and 6.6 billion pesos to the Department of Agriculture.
If, however, PESA is enacted, Philippines’ deficit will rise from 8.1% to 11.1% of its GDP. The Philippines is trying to maintain its debt-to-GDP ratio below 50%. Since 2004, when the ratio reached 71.6%, the country has continuously lowered this ratio by implementing austerity measures and succeeded in recording a debt-to-GDP of 39.6%, lowest in recent years, at the end of last year.
Consequently, Philippines’ Finance Secretary Carlos Dominguez III questioned the necessity and effectiveness of PESA as proposed by the House of Representatives. Rather, he urged legislators to promptly pass the three bills proposed by the Administration. A power struggle between the utive and legislative bodies of the Philippine government appears to be emerging over COVID-19 response measures.
■ Government Expected to Soon Restart Infrastructure Investment Plan
The Philippines’ government plans to restart its $160 billion infrastructure investment plan to revive the economy. According to Secretary Vince Dizon, advisor of President Duterte’s key infrastructure projects, the government is currently reviewing to restart infrastructure programs worth 4 trillion pesos. He added that priority will be given to infrastructure projects related to health care and digitalization having recognized their importance during the pandemic.
The revival of the infrastructure projects will require the government to secure 168 billion pesos--1.8 trillion pesos through the private sector, and another 2.3 trillion pesos from loans and foreign aid. There are voices of concern that loans from major lenders such as Japan and China may be difficult as these countries are also struggling to rescue their economies from freefall. However, Secretary Dizon, in his interview with Bloomberg, said that the international banks as well as China and Japan will continue their investments in the Philippines’ infrastructure projects brushing aside any signs of such concerns.
Also, it must be noted that in order to secure funds from the private sector, the government needs to give confidence to those companies involved in the infrastructure projects (San Miguel group’s Bulacan new airport project, Udenna Corp’s Cebu monorail project, and Naia consortium's Ninoy Aquino International Airport's upgrade project etc.) that the projects will, in fact, be resumed in the near future.
■ Prospects and Implications
The Economist, in its article “Which emerging markets are in most financial peril”, published on 2 May, assessed 66 emerging economies’ financial strengths using four indicators?public debt, foreign debt, cost of borrowing, and reserve cover. Philippines, despite the many difficulties mentioned above, received a high score, and came out 6th among the 66 countries. On 20 May, the central bank of the Philippines (BSP), stated in its press release that it “sees no apparent and immediate need to avail of IMF’s short-term liquidity line (SLL)”. The bank said that the country’s net inflow recorded $7.84 billion in 2019, highest in the past 7 years, and expected this year’s net inflow to reach $3.7 billion dollars. Also, the bank emphasized that the country had sufficient foreign reserves--$89 billion dollars as of March 2020 which is 5.3 times the country’s short-term foreign debt based on original maturity. The bank further explained that the debt-to-GDP ratio at the end of 2019 was relatively stable at 40%, and the peso was also stabilized.
In other words, while the extension of lockdown measures will adversely affect the Philippines’ economy, in view of the above-average growth prior to the pandemic, a successful rebound of Philippine’s economy looks hopeful once the lockdown measures are lifted and the big-ticket infrastructure projects are revived.
Visitor Arrivals FY2019, Department of Tourism(December, 2019)
Asian Development Outlook 2020, ADB(2020.4.3)
World Economic Outlook, IMF(2020.4.15)
The Duterte administration's Philippine Program for Recovery with Equity and Solidarity (PH-PROGRESO), Department of Finance(2020.4.21)
More than 155,000 tourism sector workers receive first tranche of DOF wage subsidy program, Department of Tourism(2020.5.5)
Highlights of the Philippine Export and Import Statistics March 2020 (Preliminary), Philippines Statistics Authority(2020.5.6)
PH Trade drops in March 2020 due to Covid19 Restrictions, National Economic and Development Authority(2020.5.6)
GDP declines by 0.2 percent in the first quarter of 2020; the first contraction since fourth quarter of 1998, Philippines Statistics Authority(2020.5.7)
DBCC Revisits Medium-term Macroeconomic assumption and fiscal program amid the Covid19 Pandemic, National Economic and Development Authority(2020.5.13.)
OFW remittances in January to February climb to US$5.6 billion, up by 5%, Bangko Sentral NG Pilipinas(2020.5.15.)
Addressing the Social and Economic Impact of the COVID-19 Pandemic, National Economic and Development Authority(2020.5.19)
Coronavirus and Philippine tourism, Inquirer(2020.2.8)
The Tourism Industry Is in Trouble. These Countries Will Suffer the Most. Foreign Policy(2020.4.1)
The Philippines Was an Economic Star. Until Covid-19, Bloomberg(2020.4.2)
Simplifying the Bayanihan to Heal as One Act, Businessworld(2020.4.3)
IMF says the world will ‘very likely ‘experience worst recession since the 1930s, CNBC(2020.4.14)
Which emerging markets are in most financial peril?, Economist(2020.5.2)
Philippines commits support to ASEAN tourism recovery, Philstar(2020.5.4)
Coronavirus snaps Philippines’21-year growth steak, Nikkei Asian Review(2020.5.7)
Philippines: 1Q GDP contracts - steep drop ahead, ING(2020.5.7)
Philippine economy shrinks for first time in 22 years, Rappler(2020.5.7)
Philippines GDP Falls for First Time Since 1998 on Shutdowns, Bloomberg(2020.5.7)
Fitch Downgrades Philippine National Bank to 'BB' on Coronavirus Risks; Outlook Stable, Fitch Ratings(2020.5.12)
Corporate income tax cut to 25% by July pushed, Inquirer(2020.5.15)
Coronavirus threatens Philippines’ ‘economic lifeline’ of OFW remittances, South China Morning Post(2020.5.17)
Govt to lose P667B from CIT rate cut, Business Mirror(2020.5.18)
House committee approves P568-billion PESA bill, Businessworld(2020.5.18)
PHL economy may lose up to P1.2T, Businessworld(2020.5.18)
Lockdown extension to delay recovery, Inquirer(2020.5.19)
BSP sees no need for IMF emergency loan, Inquirer(2020.5.20)