Downgrades issued by HSBC Research, Nomura after dismal GDP data

TWO major institutions downgraded their full-year growth forecasts for the Philippines in 2020 in the wake of the 16.5% contraction in second-quarter gross domestic product (GDP), with HSBC Research pricing in what would be a record contraction for the year of 9.6%.

In a report issued Monday, HSBC Economist Noelan Arbis said the institution slashed its GDP forecast for the Philippines from -3.9% previously, projecting that the “recovery ahead will be shallow” with COVID-19 (coronavirus disease 2019) cases still rising and new lockdowns ordered.

“The continued rise in COVID-19 cases domestically remains a serious concern, and in our view, has dashed any hopes for a meaningful recovery in the second half of 2020. Moreover, the absence of a big-ticket stimulus is likely to put a damper on the recovery in the year ahead,” Mr. Arbis said.

He said private consumption, a growth driver for the domestic economy, is unlikely to “bounce back meaningfully” in the third quarter since economic centers, including Metro Manila, have reverted to stricter forms of lockdown.

“Another factor weighing on our outlook is a potential decline in the government’s ability to spend on infrastructure in the quarters ahead… As COVID-19 lingers, the government’s fiscal ammunition is likely to be diverted toward more needed expenditures (i.e. health and social safety nets) and away from infrastructure,” he added.

Nomura Global Markets Research on Monday also trimmed its 2020 GDP forecast to -6.6% from -4.8% as the escalating COVID-19 outbreak points to “a shaky economic recovery.”

“The surge in unemployment and falling remittances will continue to likely weigh heavily on consumption. With still rising COVID-19 cases, the outbreak is still posing a threat to the recovery,” Nomura Global said.

The economy declined by 16.5% in the second quarter following the revised 0.7% contraction in the first quarter. The two consecutive contractions puts the Philippines in a recession, the first since 1991.

Mr. Arbis also lowered his 2021 GDP forecast to 5.7% from 7% previously, while Nomura Global expects 8.1% growth next year.

HSBC Research and Nomura Global both flagged the size of the stimulus package currently pending in Congress.

“The absence of a big-ticket stimulus program from the government has also reduced our expectations for a meaningful recovery in the near-term,” HSBC Research’s Mr. Arbis said, noting that the modest size of the package could weigh on growth prospects both this year and next year.

Nomura Global also warned of a “fiscal cliff” threatening further the economy for the rest of the year, as the government prioritizes longer-term reforms and sets limits to additional spending. It estimated fiscal expenditure growth slowing to 0.2%-5.4% year on year in the second half, against the 26.6% growth in the first half.

“Without a new program that either expands the 2020 budget or supplements it to allow new spending, we expect fiscal spending growth to slow materially in H2 vs H1 at a time when fiscal support measures are critically needed in the war against COVID-19,” it said.

It said the proposed corporate income tax cut to 25% this year from 30% under Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill “is unlikely to be an effective stimulus measure” since the benefit of a lower tax rate will remain “minimal” and may not spur spending as the profitability of businesses will be hit hard this year.

“In contrast, we think ARISE would be more appropriate if the goal is to support a more sustainable recovery and prevent the damage due to the pandemic from becoming permanent,” it added.

Several rescue bills are currently being discussed by Congress, ranging from P140 billion under the Bayanihan to Recover as One Act (Bayanihan II), which has been endorsed by the economic team; to the P1.3-trillion Accelerated Recovery and Investments Stimulus for the Economy (ARISE) bill, which economic managers said is “unfundable.”

“We think such conservatism runs the risk of undermining the economic recovery, given that the Philippines continues to see a worsening of the local outbreak despite the lockdown in mid-March,” Nomura Global said.

Economic managers expect the economy to contract 4.5%-6.6% this year, with the midpoint of the range at about -5.5%, before bouncing back to 6.5%-7.5% growth next year. — Beatrice M. Laforga