Key View
We at Fitch Solutions now forecast the Philippines economy to contract -2.0% in 2020, down from a previous forecast of 0.5% growth, reflecting the unparalleled shock to the economy the Covid-19 pandemic has proved.
Key to our revision is an expectation for household consumption to prove vulnerable through the year on the back of a worsening outlook for household incomes and lower confidence.
We do however expect greater support from policymakers, with a more significant fiscal response providing the most significant boost.
We at Fitch Solutions expect the Philippines economy to fall into recession in 2020, as the Covid-19 outbreak and resultant containment measures take their toll on economic activity. The real GDP release for Q120 showed the economy slipped into contraction, declining by 0.2% y-o-y, as containment measures took their toll. Despite lockdown measures being in place for only the last two weeks of the quarter, the economy – which had grown 6.7% y-o-y in Q419 – suffered from a sharp drop in external demand and then stifling of domestic activity as lockdown restrictions came into effect. The Q120 reading came in below our expectations, and as we flagged, we are become increasingly aware of how significant the impact of lockdown measures can be on growth readings. As such, with the Philippines in lockdown through April and into May, the drag on growth will pull the economy into recession. While we expect lockdown measures to be eased over Q220 and Q320, there will still be some drag initially from containment rules and external demand backdrop will remain subdued. As such, we at Fitch Solutions now forecast the Philippines economy to contract 2.0% in 2020, down from our previous forecast of 0.5% growth, reflecting the unparalleled shock to the economy the Covid-19 pandemic has proved. Worst Growth Since The Asian Financial Crisis Philippines - Real GDP Growth, %
f = Fitch Solutions forecast. Source: PSA, Fitch Solutions
The Q120 reading surprised to the downside, but also signals how deep growth is likely to contract in Q220. Indeed, activity in the industrial and agricultural sectors both contracted by 3.0% and 0.4% respectively. Services proved more resilient growing 1.4%. From an expenditure perspective, government consumption proved the most significant driver of growth, expanding 7.0%. However, gross capital formation collapsed 18.3% y-o-y and household consumption barely grew at 0.2%. Higher frequency data had held up in January and February despite a slump in Chinese demand, but began souring in March as the outbreak turned into a global pandemic and cases numbers began growing within the Philippines. The fact both services from a gross value add perspective and household consumption from an expenditure perspective both posted positive growth in Q1, suggests further room for growth to decline in Q2, as consumer spending collapses during the lockdown and all but essential services are restricted from operating.
Private Consumption To Drop Lower
Philippines - Real GDP By Expenditure Component, % chg y-o-y
Source: PSA, Fitch Solutions
As such, the key driver for our weaker outlook is the belief that the slowdown in domestic activity will be more significant than we had initially anticipated. Household consumption will prove vulnerable through the year on the back of a worsening outlook for household incomes and lower confidence. We have flagged how remittances will suffer as the global recession takes its toll on employment levels and earnings around the world. The US accounts for around 40% of remittances, but with unemployment in the US likely to prove its worst since the Great Depression, the outlook for remittance flows has deteriorated significantly. Factoring in the exposure of remittances to the cruise industry and service sectors in Asia, we expect a sharp decline over the coming months. This comes as unemployment rose in Q120 to 5.3%, from 4.5% in Q419, and real wages in the agricultural sector declined 2.7% y-o-y. Wage and labour market weakness will become more pronounced in Q220, as more businesses scale back output and struggle with lost income. Another indication of the declining consumer outlook was an uptick in savings in Q120 (see chart below); at 37.8% from 36.3% in Q419, the rise in households with savings indicates a scaling back of consumption. As confidence declines, we expect more households to turn to savings given the weaker outlook for incomes and fear of potential healthcare costs from the Covid-19 outbreak. Ultimately, the Philippines’ dependence on household consumption (at 74.6% of GDP in 2019) will prove a vulnerability during the lockdowns and as such, our outlook has been tempered.
Savings Rise As Households Prepare For Income Shock
Philippines - Share Of Households Saving, %
Source: PSA, Fitch Solutions
External demand will provide little support as the global economy falls into recession, and a positive contribution from net exports in 2020 would be more a signal of depressed domestic demand for imports than a recovery in the Philippines export sector. Indeed, exports and imports contracted 3.0% and 9.0% y-o-y respectively in Q120, and we believe exports will experience a deeper contraction over the coming months. In the April Manufacturing Purchasing Managers’ Index (PMI) report, new orders fell by the fastest pace seen in the series history, with exports constrained by weak demand and production stoppages due to the lockdown. Weak growth outlooks for the Philippines key export markets: the US, Japan and China – which together account for 45% of goods exports – are all experiencing sharp growth slowdowns (see chart below) and this too will weigh on the growth outlook.
Key Markets Facing Weak Growth
Philippines - Key Goods Export Markets
Source: PSA, Fitch Solutions To combat the slowdown we do anticipate further stimulus, but note that the lack of a significant fiscal stimulus package at the time of writing does signal some downside risks to our forecast. So far the government has committed to fiscal measures amounting to around 1.1% of GDP to support the economy during the outbreak. This comes alongside an already planned surge in budgeted expenditure, as unused funds from 2019 were rolled into the 2020 department budgets. Yet in comparison to measures announced in Thailand, which equate to 9% of GDP, and the loan guarantees of Malaysia, the Philippine government’s response looks relatively restrained. While government consumption was the fastest growth component in Q1, it benefitted from base effects and will need to increase further to offset lower private sector demand and investment. A large fiscal package could boost domestic confidence and we believe the government has scope, given improved reserve buffers (import cover stood at 7.9x in March) and public debt at 41.5% of GDP in 2019 (around 10 percentage points lower than in 2010). On the monetary side, easing inflationary pressures and the peso exchange rate’s stability offers further scope for easing, and we forecast a minimum of an additional 50bps of cuts to the key policy rate by year-end, which would take the key policy rate to 2.25%.
Source : Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company