THE ECONOMY could contract by 9.8% this year, weighed down further damage to the economy from calamities, according to Nomura Global Markets Research, adding that the absence of an “additional, sizeable” fiscal package to match those rolled out by governments in the region could also lead to another round of easing from the central bank before the year ends.
Issued following the weaker-than-expected third quarter gross domestic product (GDP) data, the latest estimate represents a downgrade from Nomura Global’s previous projection of minus 6.6% GDP growth. The official government forecast for 2020 GDP performance is between minus 4.5% and minus 6.6% estimated by the government.
“This partly reflects the impact of recent typhoons, which led to substantial damage to the agriculture sector but also, importantly, our expectation that fiscal spending growth will continue to be a significant drag on the economic recovery at a time when private sector confidence remains fairly weak,” it said in a note.
The economy contracted by 11.5% in the three months to September following the record 16.9% contraction in the second quarter.
In the fourth quarter, Nomura Global expects GDP to continue contracting, though it will moderate to minus 9.8%. If realized, this would mark the fourth consecutive quarter to post declines.
“As was evident in the Q3 GDP details, a lack of fiscal support will still likely weigh on private sector spending with sentiment remaining weak and business uncertainty still high,” it said.
Capital formation slumped 41.6% in the third quarter, following the 53.7% decline in the three months to June. Meanwhile, government spending growth slowed to 5.8% from 21.8% in the second quarter.
“We believe the passage of the fiscal measures called Bayanihan II (Republic Act No. 11494) is unlikely to raise meaningfully fiscal expenditures, particularly on capital outlays because its total size was just 0.9% of GDP,” it said, noting this is also unlikely to support a rebound in public construction activity.
Bayanihan II, passed in September, allocated P165.5 billion in additional pandemic responses. It is the follow-up to RA 11469, which provided P275 billion to address the crisis.
Nomura Global said it does not expect the government to consider further rounds of fiscal packages to revive the economy from the coronavirus disease 2019 (COVID-19) pandemic as it focuses its efforts on passing the P4.5-trillion 2021 budget and the CREATE (Corporate Recovery and Tax Incentives for Enterprises Act) bill which will lower corporate income taxes.
“We have argued before CREATE is unlikely to be effective if the goal is to provide emergency support to vulnerable sectors as well as to stimulate demand in the short run,” it said.
Given a likely slow recovery awaiting the economy as well as the relatively small fiscal measures, Nomura is pricing in a 50 basis point rate cut from the Bangko Sentral ng Pilipinas (BSP) in the fourth quarter.
“A benign inflation outlook allows BSP to focus on measures to support growth, and we believe the Q3 GDP outturn disappointed official forecasts, and hence supports our call of a rate cut in the near term,” it said.
October inflation was 2.5%, picking up from 2.3% in the prior month. Year-to-date inflation averaged 2.5%, above the BSP’s 2.3% forecast for the year but still well within the 2-4% target range.
The central bank has slashed rates by a total of 175 basis points this year, bringing down the overnight reverse repurchase, lending, and deposit facilities to 2.25%, 2.75%, and 1.75%, respectively. The Monetary Board will hold two more policy-meetings this year on Nov. 19 and Dec. 17. — Luz Wendy T. Noble