Forecasting in a time of radical uncertainty

On Thursday night, President Rodrigo Duterte, upon the recommendation of health officials, announced that for 30 days starting March 15, Metro Manila will be put under “community quarantine,” a term that he said means a lockdown. The measure was in response to the rapidly rising number of COVID-19 infections in the last 10 days, increasing from only three (with one dead) to 140 (with 12 deceased) per the latest count (as of March 15).

The quarantine of Metro Manila is accompanied by guidelines that may lead to a widening of quarantines to other local government units and/or their smaller political subdivisions depending on the spread of COVID-19 cases. Other “stringent social distancing measures” have also been imposed including the suspension of classes and mass gatherings and most work in the executive branch of government. Nevertheless, it will not be a total lockdown as certain retail outlets will remain open and public transportation systems will continue to operate. Also reported excluded are deliveries in and out of Metro Manila, and workers who live outside Metro Manila will be allowed entry/exit.

The measures at first glance are quite drastic considering the relatively low number of COVID-19 infections but on further thought appear necessary given the high likelihood that many more cases remain undetected and the fact that the health department has only a limited supply of test kits. Panic buying in supermarkets also became the norm before the lockdown.

Clearly, our last brief downgrading our 2020 economic growth forecast had not anticipated a lockdown situation and of Metro Manila no less, which accounts for close to 40% of Philippine GDP. Moreover, with the global transmission of the virus worsening, now recognized as a pandemic by the World Health Organization, the impact of the coronavirus on domestic activity will surely be higher than the 0.5ppt cut to GDP growth we considered early this month.

At this time though, we have more questions than answers on how exactly government will carry out the quarantine and are awaiting more detailed guidelines, currently being drafted. Given plunging stock prices, which government is trying to prop up by ordering state pension institutions to double their daily stock purchases, we think that aside from the direct impact on worker and business incomes from the lockdown, the thing to watch out for is how the developments will affect consumer and business sentiments.

We will be looking more closely at the numbers and what the likely impact on growth will be. While we agree with former Governor of the Bank of England Mervyn King that in this time of “radical uncertainty,” it would be quite impossible to attach probabilities to the range of possible outcomes, we will still try to hazard a guestimate, although our main objective would be to get a more solid grasp of the risks and channels of transmission and their importance to the domestic economy. For now, we note the following likely changes to our forecast numbers.

1. The impact on consumption will be much higher. First, the spread of the virus and the lockdown will mean that relying on local tourism to make up for the foreign travel bans is no longer viable, which means that tourism-related sectors (transport, retail, hospitality) will be hit harder. Reduced demand will have knock-on effects on firm profitability, especially for small businesses, that can be expected to lead to job losses or pay cuts for workers. Add to this are fears of infection as well as self and community quarantines that will keep more people home. Another consideration is that although wage and salaried workers may be able to rely on some safety nets (e.g., paid leaves or publicly provided but limited unemployment benefits), the self-employed, who make up close to 30% of employment, will be at greater risk, and fear of income losses may worsen infection rates if those with minor symptoms (or the asymptomatic) opt to continue working.

2. Private investments are unlikely to recover under this environment as businesses try to cope with the many new challenges. Some firms, in order to minimize the risk of infection and manage restrictions during the lockdown, have opted to temporarily downsize operations.

3. With the global growth outlook turning bleaker, the export sector is facing even more headwinds quite apart from supply chain disruptions. Remittances may also be affected more than expected by a synchronized global slowdown, especially if employers themselves are crippled by the expected downturn in international tourism.

4. Although economic managers have acknowledged that the budget deficit will be higher this year (3.6% of GDP estimate) and additional funding for the COVID-19 outbreak is expected to come through off-budget support, we also worry that the spread of the virus will affect the pace of government’s Build, Build, Build infrastructure program.

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com