MOODY’S Investors Service now expects the country’s gross domestic product (GDP) to contract by as much as 2% this year, as the coronavirus outbreak continues to wreak havoc on the economy.

“The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and financial market turmoil are creating a severe and extensive economic and financial shock,” Moody’s said in a credit opinion sent to reporters on May 12.

If realized, the -2% GDP would be the country’s first full-year economic contraction since 1998.

Moody’s had previously forecast 2.5% economic growth in April, much lower compared to the 6.2% baseline forecast it gave last year.

“As the ECQ (enhanced community quarantine) will encompass much of the second quarter, we expect high-frequency data to continue to deteriorate despite the implementation of countercyclical policy stimulus, including handouts to vulnerable, low-income households,” Moody’s said.

In an e-mail, Christian de Guzman, senior vice-president at the Sovereign Risk Group of Moody’s, said the forecast was downgraded mainly due to the severity of the impact of the ECQ and a change in the assumed strength of recovery as some precautionary measures may be maintained.

He noted that the expected 4% decline in its G20 global growth this year “led to a more pessimistic outlook for both remittances and exports.”

GDP contracted by 0.2% in the first quarter, its first contraction since the three percent decline in the fourth quarter of 1998 during the Asian financial crisis.

After a six percent growth in 2019, the government now expects -1% or flat GDP growth this year.

“Given that we now expect the ECQ to last through most, if not all, of the second quarter, we are looking at an even larger contraction through the middle of the year,” Mr. De Guzman said.

The Philippine government on Tuesday announced the extension of a lockdown of Metro Manila, Laguna province and Cebu City until end-May, although some restrictions will be eased.

“Some of the key risks include the containment of the coronavirus outbreak itself, not just in the Philippines but also globally; an inability to contain the outbreak could lead to an even more prolonged imposition of measures that will weigh on economic activity,” he said.

Despite the headwinds, Mr. De Guzman noted that the country has the fiscal space to cushion the blow of the economic fallout of the pandemic.

Meanwhile, Moody’s has upgraded its 2021 growth forecast for the Philippines to 6.4% from a previous forecast of six percent, under assumptions of normalization of economic conditions.

“The removal of restrictions on movement will benefit consumption, allow people to return to work and alleviate the disruptions to the government’s infrastructure program,” Mr. De Guzman said, noting that they also do not see industries such as travel and tourism to go back to their pre-outbreak levels of activity by 2021.

Meanwhile, Moody’s has maintained its “Baa2” rating for the country, which is a notch above minimum investment grade. It has likewise kept the country’s outlook at “stable.”

In its credit opinion, Moody’s said the country’s credit strengths lie in its sustained growth fueled by favorable demographics, moderate government debt levels, as well as its stable and resilient banking system.

“Moody’s expects the Philippines’ real GDP growth to remain robust relative to peers and that its fiscal metrics will continue to strengthen as the government continues to make progress on its socioeconomic reform agenda, particularly on tax reform,” it said.

“However, the global coronavirus outbreak threatens the Philippines through a number of channels, including trade, supply chain linkages, investment, remittances and tourism, while stringent containment measures will also sharply curtail domestic demand. In addition, the combination of lower revenue resulting from weaker economic growth and higher spending to mitigate its impact will lead to wider government deficits and higher debt.” — Luz Wendy T. Noble