The full economic impact of the virus

The full economic impact of the Wuhan pandemic is still unravelling. As we go from month to month, we are discovering that the ramifications are worse than we thought.

The Asset Management Group of BDO recently presented its prognosis before the members of the Financial Executives Institute of the Philippines. It was not a pretty picture — in fact, it was rather bleak.

Although the statistics for the second quarter have not yet been published by the National Economic and Development Authority (NEDA), the country’s biggest bank has determined that the economy contracted by as much as 15.4% during that period. And since the quarantine has spilled-over through the third quarter in NCR, Calabarzon and the Central Visayas (which comprises two-thirds of gross domestic product), the third quarter is seen to post another contraction of 6.7%. Negative growth will ease to 1% in the fourth quarter, but this is on the assumption that quarantine is relaxed. All these will result in a whole year contraction of 5.9% for 2020.

The four successive quarters of negative growth have officially put the country in a state of recession. The last time we experienced such deep economic reversals was in 1984 and 1985 when the economy withered in size by 7.3% for two consecutive years. While it took the country 25 years to recover from the economic havoc of the 1980s, economists believe that we can regain our strong pre-COVID fundamentals in less than five years. This is on the proviso that a vaccine is discovered next year and that the government rolls-out its P1.7-trillion stimulus package as planned. Household consumption, government consumption, and public and private construction will fuel the recovery.

As of today, however, BDO sees a long and slow U-shaped recovery. It predicts growth in 2021 will be only 3.3% and 4.5% in 2022 (the latter is the estimate of the Ateneo Business school). The slow recovery is due to delays in government spending, sustained unemployment, and an anticipated second-wave lockdown.

The painful reality is that despite having appropriated P1.7 trillion to stimulate the economy and provide immediate relief to sectors in distress, the government has failed to cascade the lion’s share of the funds for their intended purpose. This is due to the lack of absorptive capacities of government institutions, inefficiency in operations, and, to a lesser extent, corruption. For instance, the majority of small and medium sized enterprises (SME) have yet to obtain access to credit and emergency loans. The majority of the 400,000 returning OFWs have yet to receive their cash assistance. Funds appropriated for training and livelihood of SMEs is hardly felt. Even infrastructure spending, the sector counted on by the government to stimulate the economy, is lagging behind. Again, I emphasize, government spending is key to a quick recovery.

The pandemic has so far driven 7.911 million Filipinos into unemployment. Add to this 400,000 OFWs who have returned and another 300,000 who are expected to be repatriated. By the end of the third quarter, unemployment will likely hit 9 million.

Meanwhile, the Department of Trade and Industry (DTI) said that more than 2,000 firms have already declared bankruptcy and have closed permanently (this number is massively understated). With so many companies going belly up due to the lack of government subsidies, who, then, will absorb the 9 million unemployed when conditions improve? This is the conundrum we face.

Exacerbating matters further is that surviving companies have implemented cash saving measures to arm themselves against the uncertainties of the pandemic. Capital expenditures (business expansion) have been slashed if not put on hold. There are no new jobs. On the contrary, we can expect more retrenchments.

This is why experts believe our recovery will be long and slow.

We are a consumer-driven economy with 72% of economic output attributed to private consumption. Consumption plunged by 15.1% in the second quarter and is seen to stay in negative territory in the 3^rd and 4^th quarters at a rate of 8.2% and 3.2%, respectively.

Manufacturing output dropped by 44% (PMI from 140 to 78) from February to March. It improved minutely in May. Manufacturing companies are operating at an average of 30% capacity today.

Fixed capital dropped by 55.2% in the second quarter due to the stoppage of work. A cause for worry is that Build, Build, Build is not yet in full swing in the 3^rd quarter. This is why BDO anticipates a further shrinkage in fixed capital by 14.7% and 6.4% in the 3^rd and 4^th quarters, respectively.

Hardest hits are retail, wholesale, recreation (arts and sports), and tourism activities, which dropped by 84% in the early days of the quarantine. Even the DTI admits that establishments that are operating today only realize an average of 10% of their pre-COVID sales. Without government support or subsidies, thousands of retailers, wholesalers, restaurateurs, hotels and entertainment enterprises will either close their doors permanently or downsize massively.

Government borrowings to combat the pandemic have reached P386 billion ($7.73 billion) as of this writing. The aggressive borrowing will cause our fiscal deficit to deteriorate from 8.4% to 10%, worst case.

As far as the stock market is concerned, the collective value of stocks dropped by 19.8% during the early days of the quarantine. Listed companies were trading at an average of 9.3 times their price-earnings. Values have since recovered. BDO sees the PSE Index ending at 6,600 this year.

On the positive side, Inflation is seen to be benign at 2.3% this year due to low oil prices and low interest rates. BDO sees the peso emerging as the strongest currency in the region. It has already appreciated by 2.4% in the first seven months of the year due to the low demand for dollars. The peso’s value against the US dollar should be in the region of P49.70 by year end. Gross International Reserves are healthy at $93 billion, sufficient for 8.5 months of imports. This is because the Banco Sentral has stepped up its borrowings to beef up its war chest versus the pandemic.

Government holds the key to our recovery. It will be long and slow if nothing changes. It can be quick if it does four things: 1.) save our entrepreneurs from bankruptcies; 2.) cascade the stimulus package as planned; 3.) go full blast with Build, Build, Build; and, 4.) restore consumer confidence by isolating the quarantine to barangay level, not whole cities. Let’s hope the government ticks all the boxes.

Andrew J. Masigan is an economist