First green shoots of economic recovery in Philippines

By Richard Javad Heydarian

Despite the reimposition of strict Covid-19 lockdowns and a laggard vaccination rollout, the Philippines managed to post a better-than-expected growth rate in the third quarter.

On Tuesday last week, the Philippine Statistics Authority reported 7.1% gross domestic product (GDP) growth in the third quarter of the year, placing the country well on the path to meeting its target of 4-5% GDP growth this year.

Although lower than the 12% growth posted in the second quarter, the latest growth numbers were significantly higher than projections by industry analysts, who expected an under 4% growth rate due to a surge in Delta variant Covid-19 cases and the reimposition of Enhanced Community Quarantine (ECQ) in major economic hubs.

According to the National Economic and Development Authority (NEDA), two weeks of lockdowns could have cost the Philippine economy at least 210 billion pesos (US$4.2 billion). Add to that the tropical cyclones in September, which hammered agricultural production in major food-producing regions of the country.

Despite these signs of economic green shoots, the Philippines remains a regional laggard in terms of overall economic recovery, due in large part to a tepid fiscal response and deeply uneven vaccination rates across the country. Full recovery from the Covid-19 pandemic, which triggered five quarters of economic contraction since last year, may not come until the end of next year and under a new administration.

Among key growth drivers were the services and industry sectors, which posted 8.2% and 7.9% year-on-year growth rates respectively. Household consumption expenditure also showed signs of recovery, posting a healthy growth rate of 7.1%.

But the agriculture sector, suffering under extreme weather conditions in recent months and lack of government support over the years, posted a contraction of 1.7% year on year.

Economic Planning Secretary Karl Chua, a former economist at the World Bank, was quick to portray the encouraging numbers as an indication of “sustained recovery” and that the government’s “[pandemic] strategy is correct.”

“So long as there is no unexpected new risks like a stronger [coronavirus] variant or global surge, we are clearly on track to strong recovery,” the economy chief said.

Chua claimed that the country is all but assured of reaching the upper limit of its 4-5% GDP growth target this year following an almost 10% economic contraction in 2020.

Independent economists and industry experts who expected another economic battering amid the pandemic’s resurgence in the Philippines broadly echoed the government’s upbeat assessment.

“If the PHL economy can grow +7.1% with some months under ECQ, what more when it reopens continuously? This means, as we had shared in our commentaries, government’s 4% to 5% target looks attainable,” tweeted Jun Neri, chief economist at the Bank of the Philippines Islands.

Meanwhile, the Financial Executives Institute of the Philippines (FINEX), an independent forum, praised the country for a “feat” given “the reimposition of ECQ and the typhoons in several parts of the country.”

FINEX emphasized “increasing consumer confidence”, which is “critical in an economy [that] is over 70% driven by domestic consumption, and bodes well for recovery.”

“We look forward to a much better GDP performance in the fourth quarter with the easing of quarantine restrictions and the increased consumer spending this Christmas season,” the institute added optimistically about better growth prospects in the upcoming holiday season “as we go out to enjoy our newfound freedom of mobility.”

To boost economic recovery, the Philippine government eased pandemic restrictions in Metro-Manila to Alert Level 2 in early November. As a result, establishments such as restaurants can now accommodate up to 70% capacity, while minors have been allowed to enter shopping malls along with their parents.

From a high of 23,000 daily cases in mid-September, Covid-19 cases dropped precipitously to 1,400 cases on November 9, bringing total confirmed cases to 2.8 million out of a population of 109.6 million.

Praising the “[s]tronger-than-expected growth”, Justin Jimenez of Bloomberg Economics expressed optimism about a sustained recovery. The “easing of those restrictions and a receding virus wave should lift growth further in 4Q, especially given the high vaccination rate in the capital region,” he said.

Alex Holmes, Asia economist at Capital Economics Ltd, echoed similar sentiments in a recent report that argued “[o]utput is set to jump again in Q4 following a sharp drop in virus cases and the further easing of restrictions.”

He added that “even after rapid growth in the second half of this year, the recovery will still have a long way to go and the economy will still be in catch-up mode throughout 2022.”

To be sure, the government’s 4-5% growth target is a major downward revision from its earlier goal of posting 6.5-7.5% growth in 2021. Seasonally adjusted, the Philippines GDP growth rate from July to September was just around 3.8%, though that is way higher than a Bloomberg survey of 13 economists who expected a median growth of just 1.4%.

On a seasonally adjusted basis, only the services sector grew, expanding by 6.6%. Agriculture and industry sectors shrank by 0.7% and 0.3%, respectively, from the previous quarter.

In terms of the pandemic, there are also lingering questions about possible official underreporting of the actual number of Covid-19 cases as well as the perennial concern over inefficient contact tracing, especially in poorer and remote regions of the country.

“Based on data in the last 14 days, the seven non-reporting labs contribute, on average, 15.2% of samples tested and 5.1% of positive individuals,” the Philippine Department of Health (DOH) admitted recently amid the sharp downward trend in confirmed Covid-19 cases in recent weeks.

The other major concern is that the Philippines has the second to last vaccination rate in the Asia-Pacific region, with just over 20% of the population having been fully vaccinated, according to a new report released by Nikkei Asia.

In comparison, Southeast Asian neighbors Singapore and Malaysia are at close to 80%, while Thailand and Taiwan are at around 40%.

Although the Metro-Manila region is expected to achieve a 70% immunization rate before the end of the year, the picture is extremely different in other regions of the country.

Extreme inequality in vaccination rollout means that the second most-vaccinated region, Cordilleras, has a just over 30% immunization rate, while large parts of the country are not expected to reach “herd immunity” levels until well into 2022.

Perhaps the biggest source of concern is what economists refer to as “economic scarring”, namely the long-term dislocations in the labor market as well as a reduction in overall growth prospects.

Last year, the International Monetary Fund (IMF) reported that the Philippines is expected to suffer the largest growth potential decline in the world, growing at 13% less than its pre-pandemic potential in the next five years.

Even the broadly optimistic Philippine Socioeconomic Planning Secretary Chua earlier estimated that the long-term total cost of the Covid-19 pandemic over the next four decades could reach a staggering 41.4 trillion pesos ($800 billion).

Recognizing lingering vulnerabilities in the economy, former budget chief and current Philippine Central Bank Governor Benjamin Diokno announced that interest rates will be kept low for the foreseeable future to fuel growth.

Government technocrats are set to have another meeting on November 18 in order to discuss monetary measures to support economic recovery, which is still among the slowest in the region.

In terms of fiscal stimulus programs, the Philippines has been among the region’s laggards, spending far less on both a per capita and share of GDP basis than most of its regional peers.

“Fiscal normalization should be carefully calibrated and implemented in a phased manner,” Asian Development Bank president Masatsugu Asakawa warned earlier this year, while calling on regional governments to maintain robust pandemic recovery programs for the foreseeable future.

“While many of our DMCs (developing member countries) may be considering reducing fiscal stimulus this year, countries should bear in mind the lessons from premature fiscal consolidation right after the [2008] global financial crisis,” he added, warning against premature optimism and a reduction of fiscal stimulus and recovery initiatives in heavily-affected countries like the Philippines. (AsiaTimes)