Painful recession looms for Philippine economy, Fitch says

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The Philippine economy's recovery is likely to be slower than initially hoped, as lockdown restrictions continue to hamper economic activity. -- Photo by Michael Varcas, The Philippine Star

The Philippine economy faces a “painful recession” this year, as the country struggles to curb the spread of the coronavirus disease 2019 (COVID-19) pandemic, according to Fitch Solutions Country Risk and Industry Research.

In a commentary released on Friday, Fitch Solutions slashed its outlook for Philippine gross domestic product (GDP) this year to -9.1% in a base case scenario, and -10.8% if stricter lockdown measures continue through December.

This is much worse than the -2% outlook it gave in May and a reversal from the 6.3% growth forecast it gave in January before the pandemic. It is also a wider contraction than the latest -5.5% GDP estimate released by the Development Budget Coordination Committee on Thursday.

“With another surge in COVID-19 cases in Q320, the recovery in economic activity we had expected in (the second half) now looks highly unlikely,” Fitch Solutions said.

The Health department on Friday reported 3,379 additional coronavirus cases, bringing the tally to 122,754. Reuters reported the Philippines now has the highest number of cases in Southeast Asia and other parts of eastern Asia including China.

Metro Manila and nearby provinces are once again under a lockdown until Aug.18, as the government hopes to temper the rise in coronavirus infections.

“However, with parts of the economy being put back into lockdown and fiscal expenditure expected to be directed to social welfare and loan guarantee programmes through (the second half), the economy will face a delayed recovery,” Fitch Solutions said.

The economy plunged into a recession as it shrank by 16.2% in the April to June period, following the 0.7% drop in the first quarter.

Fitch Solutions said the base case forecast assumes a fall in new infection cases that could lead to further easing of restriction measures by the fourth quarter, thereby leading to some improvement in domestic activity.

“We expect policymakers to maintain a dovish stance until the recovery is fully underway, with a focus on boosting capital investment,” it said.

However, Fitch Solutions also laid out a downside scenario of a much deeper 10.8% GDP contraction if tight restriction measures continue to be imposed from August to December.

In this case, the government will be burdened with the continued surge in infection which will take its toll on medium-term growth and result to less productive fiscal spending and higher levels of debt, it said.

“The impact on households would become more painful as unemployment rose further and poverty levels increased,” Fitch Solutions said, noting it would expect more stimulus measures, handouts, and subsidies to support households in this scenario.

This weaker environment will lead to a more subdued recovery by 2021 where Fitch Solutions sees a 6.2% growth, slightly revised from the previous 6.5% forecast.

Fitch Solutions said while retail and recreation activity will gradually pick up in the coming quarters once restriction measures are lifted, the economic shock from the pandemic will continue to hurt households through unemployment, weaker remittance and confidence shock.

Unemployment rate surged to a 15-year high of 17.7% in April from the 5.1% seen a year ago, according to data from the Philippine Statistics Authority. This translates to 7.25 million jobless Filipinos, three times more than the 2.27 million recorded in April 2019.

Cash remittances, which also fuels household consumption that makes up 70% of the economy, sank by 19% to $2.106 billion in May, according to data from the Bangko Sentral ng Pilipinas. This, as more than 115,000 Filipinos have been repatriated so far due to the on-going pandemic crisis. — Luz Wendy T. Noble