With COVID-19 still uncontained in the Philippines, the World Bank sees gross domestic product (GDP) shrinking by 6.9 percent this year — the worst drop in 35 years, even as the country’s chief economist expects slower third-quarter contraction than the record fall at the height of the lockdown.
The Washington-based multilateral lender’s updated GDP forecast for the Philippines, contained in its October 2020 East Asia and Pacific Economic Update report released on Tuesday, was a steeper fall than the 1.9-percent decline projected in June.
The forecasts of the World Bank as well as most other banks and financial institutions were beyond the government’s projection of 4.5-6.6 percent full-year contraction. Acting Socioeconomic Planning Secretary Karl Kendrick T. Chua told the Inquirer Tuesday that the economic team was “constantly reviewing” their own forecast as new data came in.
But Chua, who heads the state planning agency National Economic and Development Authority (Neda), believes that the worst was over for the Philippine economy.
Citing the latest monthly manufacturing, external trade, and labor data, Chua said these “suggest improvement” from the second-quarter GDP, which fell by a record 16.5 percent as 75 percent of the economy was put to a halt by the most stringent COVID-19 quarantine in the region from mid-March to May.
Manufacturing and trade data remained negative to date, however, such that Neda Undersecretary Rosemarie G. Edillon told a press conference Tuesday that the third-quarter performance will likely remain negative year-on-year.
The World Bank’s full-year GDP forecast, if realized, will match the 6.9-percent economic contraction in 1985, at the height of a debt crisis during the waning years of the Marcos dictatorship.
World Bank senior economist for the Philippines Rong Qian told a virtual press briefing Tuesday that GDP will revert to pre-pandemic levels by end-2021, a slower pace compared to neighboring countries such as Indonesia, where COVID-19 cases also remained elevated.
Qian said it did not help that the Philippine economy was “much more connected to the world” than domestic-driven Indonesia, especially in terms of tourism, services and trade exports, as well as remittances.
On top of the bigger exposure to global demand, the Philippines also had a longer and stricter COVID-19 lockdown, Qian added.
Qian agreed that the third quarter will be better than the second-quarter economic outturn, citing improving revenue collections as the economy gradually opened up.
However, Qian said recovery would further slow if COVID-19 cases in the Philippines spike and the country reverts to a lockdown, or if the global economy slides into a deeper recession.
Based on the World Bank’s poverty threshold for lower middle-income countries of $3.2 per day per capita in 2011 purchasing power parity (PPP), the lender estimated the Philippines’ poverty rate to rise to 22.4 percent this year from 20.5 percent last year, “despite the government’s efforts to mitigate the negative effects of the pandemic on poor and vulnerable households.”
Qian said this would translate into about two million more Filipinos becoming poor in 2020.
“If wage and nonfarm employment increase with GDP growth and inflation is stable, the poverty rate will likely decline back to its 2018 level by 2021 and maintain a downward trend through 2022,” the World Bank said.
As the economy recovers in the next two years, the poverty rate will gradually decline to 21.4 percent next year and 20.4 percent in 2022, World Bank estimates showed.
The World Bank projected GDP growth of 5.3 percent in 2021 and 5.6 percent in 2022 — both below the government’s target range of 6.5-7.5 percent yearly expansion in the next two years.
The Philippine government’s official national poverty incidence rate stood at a low of 16.7 percent in 2018, although Chua had flagged a temporary increase in urban poverty amid the pandemic.
In a statement, World Bank country director for Brunei, Malaysia, the Philippines and Thailand Ndiamé Diop urged “effective public health management and social protection measures in the immediate and resuming the government’s strong emphasis on human capital investments and infrastructure that characterized the Philippines’ successful growth story pre-COVID-19” so that the economy would bounce back from the pandemic-induced recession.
“In the short term, every peso put directly in the hands of poor and vulnerable families through social assistance translates into demand for basic goods and services in local communities, which in turn supports micro and small enterprises and the government’s recovery efforts. At the same time, one cannot overemphasize the importance of improvements in public health management including testing, tracing, isolating, and treatment to effectively control the spread of COVID-19 and secure a definitive recovery,” Diop said.
While the Philippines may have a relatively smaller financial war chest to fight COVID-19 compared with its neighbors, Qian said: “I think we also need to balance the short-term benefit versus the long-term impact — having a large package now means that we’ll be having a higher debt in the coming years, which will mean that more resources will be used to repay the debt. But also, at the same time we need to ensure that the poor and the vulnerable are protected through cash transfers or cash-for-work, because some of those human capital we need to protect because they have a long-term impact in the future growth potential.”
“So carefully considering the pros and cons of designing the support package — not only the size, but also the content — is important for the government,” Qian said.