Worst is over for Philippine economy despite 7.3% contraction forecast for 2020: ADB

The Philippine economy’s decline is largely due to the COVID-19 pandemic, and the ensuing lockdowns that went with it. (AFP file photo)
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Updated 15 September 2020

Worst is over for Philippine economy despite 7.3% contraction forecast for 2020: ADB

  • ADB: We believe the worst is now over and that the contraction in GDP bottomed out in May or June this year
  • Philippine economy’s strengths could help it survive the doldrums

DUBAI: The worst is probably over for the Philippines despite a steeper GDP contraction projected for it this year, as the coronavirus pandemic hit not only the Southeast Asian country but the global economy as well.

The Philippine economy is forecast to contract by 7.3 percent in 2020 before growth returns to 6.5 percent next year, according to a new report from the Asian Development Bank (ADB).

“We believe the worst is now over and that the contraction in GDP bottomed out in May or June this year. The package of measures the government rolled out such as income support to families, relief for small businesses, and support to agriculture in the second quarter all helped the economy to bottom out,” Kelly Bird, Country Director for the Philippines at ADB, said.

“We expect the recovery to be slow and fragile for the rest of this year, and growth to accelerate in 2021 on the back of additional fiscal support and an accommodative monetary policy stance.”

The multilateral lending institution, in its Asian Development Outlook 2020 Update, projected a deeper shrinkage in the Philippine economy as private consumption and investments remain subdued amid the uncertainties. ADB forecast in June that the Philippines’ GDP would contract 3.8 percent.

Jonathan L. Ravelas, chief market strategist at BDO Unibank, meanwhile said while the Philippines had its first recession since 1998 and the deepest since 1985, the economy’s strengths could help it survive the doldrums.

“The low debt and deficit levels, adequate foreign exchange reserves, and a well-capitalized banking system could allow the government and central bank to employ additional support measures for the economy to rebound to a 3.3 percent growth in 2021,” Ravelas told Arab News.

“Our forecast for 2020 GDP growth is a decline of 8 percent, so the ADB downgrade is not surprising. We expect a below average economic growth at 5.5 percent in 2021, within striking distance of the ADB’s,” Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines’ corporate research unit, meanwhile said.

“Again, this growth recovery is not pre-COVID level and thus can be classified as partial recovery, as stated by the ADB. I think that everyone else’s analyses are converging.”

Government projections indicate a 5.5 percent GDP decline this year before recovering to around 6.5 percent next year and 7.5 percent in 2022.

The Philippine economy’s decline is largely due to the COVID-19 pandemic – and the ensuing lockdowns that went with it – which can be considered more of a health issue rather than economic or financial in nature, according to Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines’ corporate research unit.

“Philippine economic recovery could accelerate in the latter part of 2021 and in 2022, in preparation for the May 2022 presidential elections,” Asuncion told Arab News, as the government fast tracks infrastructure projects before an election ban on spending starts.

“But economic recovery remains relatively sluggish for now, with many businesses and industries still operating way below the usual capacity amid social distancing and other stringent health protocols to prevent COVID-19 from spreading further.”

Asuncion added that a further re-opening of the local and global economy from lockdowns, A reduction in new coronavirus cases plus the development of a vaccine against COVID-19 could help improve recovery prospects.

ADB’s Bird had similar assertions: the economy will rebound in 2021 as expected as the outbreak is contained, the economy is further opened, and more government stimulus measures are implemented.

There are however downside risks next year, Bird noted, which include a slower than expected global recovery – that could weigh heavily on trade, investment – and overseas Filipino worker remittances.

“The positive credit rating moves on the Philippines recently … fundamentally reflect the Philippines’ improved economic and credit fundamentals that may help attract more foreign investments into the country, and in turn, further help the recovery of manufacturing, imports, exports, employment, and overall GDP,” Asuncion said.

“To be able to steer the ship out of the storm and into port, the government needs to spend. It’s a balancing act,” BDO Unibank’s Ravelas said, stressing the need for more fiscal stimulus to further restart the economy.


Kuwait’s debt law gridlock poses first economic test

Updated 3 min 8 sec ago

Kuwait’s debt law gridlock poses first economic test

  • Oil exports accounted for 89 percent of revenues for Kuwait last fiscal year

DUBAI: Kuwait’s new Emir Sheikh Nawaf Al-Ahmad Al-Sabah faces the urgent task of overcoming legislative gridlock on debt legislation needed to tackle a liquidity crisis in the country.

Parliament has repeatedly blocked the bill, which would allow Kuwait to tap international debt markets, but the issue has gained urgency as low oil prices and COVID-19 strained state finances and led to the rapid depletion of available cash reserves.

“The country needs to quickly pass a new public debt law to ease liquidity shortages,” said Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes.

The new ruler, sworn in on Wednesday after the death of his brother Emir Sheikh Sabah Al-Ahmad Al-Sabah, takes the helm with the nearly $140 billion economy facing a yawning deficit of $46 billion this year.

Oil prices at about $40 a barrel are largely below what is needed to balance the OPEC member state’s budget, in which public sector salaries and subsidies accounted for 71 percent of spending for the 2020-2021 fiscal year.

“The deadlock on the funding situation directly threatens the government’s ability to function and pay salaries, which represents a significant escalation in the brinksmanship between the two branches of government,” said Moody’s.

The ratings agency, which downgraded Kuwait last week due to higher liquidity risks and concerns over its institutional strength, said it expected the proposed debt law to be passed by emiri decree between October and December.

Parliamentary elections are due to be held later this year, though authorities have not yet set a date.

Lawmakers opposed to the bill have called for clarity on government plans to reduce reliance on oil exports, which accounted for 89 percent of revenues last fiscal year. Analysts say parliament has hindered efforts to push through sensitive reforms such as introducing value-added tax in a country whose citizens are used to generous state subsidies.

Kuwait could see its economy shrink by 7.8 percent this year, Deutsche Bank has estimated, in what would be one of the worst economic crunches among Gulf oil exporters.

However, Sheikh Nawaf’s succession is not expected to significantly alter Kuwait’s economic outlook, at least in the short term.

“On the economic side, we think it’s more of the same,” said Mohammed Ali Yasin, chief strategy officer at Al Dhabi Capital.

But he added that resolving the debt saga would boost prospects for the country.