IMF sees stronger PH GDP recovery next year

Published October 13, 2020, 8:32 PM

by Lee C. Chipongian

The International Monetary Fund (IMF) forecasts a stronger GDP growth for the Philippines in 2021 at 7.4 percent higher than the previous estimate of 6.8 percent it announced last June, but also sees “significant scarring effects” to future growth because of the pandemic-induced recession this year.

Based on the latest IMF World Economic Outlook (WEO) report, the IMF is also looking at a negative 8.3 percent GDP performance for this year which is a larger contraction from its June projection of a negative 3.6 percent.

The IMF’s 2020 GDP estimates are not too far off from the government’s projected range of a negative seven percent to a negative nine percent. For 2021, the Duterte adminstration is hoping for a 6.5 to 7.5 percent growth, also near the IMF’s revised 7.4 percent projection for next year.

IMF Resident Representative for the Philippines, Yongzheng Yang, said the country will return to a strong growth with “pent-up” domestic demand and as more economic activity resumes post-pandemic, aided by the Bangko Sentral ng Pilipinas’ (BSP) accommodative policy actions this year.

“Real GDP is projected to expand by 7.4 percent in 2021 (up from a projected 6.8 percent in the June WEO). This upward revision of 2021 growth forecast (from a projected 6.8 percent in the June WEO to 7.4 percent in the October WEO) is on account of—in addition to the 2020 base effect—an expected rebound in pent-up demand from the relaxation of quarantine measures and continued effects of the policy easing in 2020,” said Yang in an email.

But, there are “significant scarring effects” that “are expected” such as hysteresis or bankruptcies, said Yang. “Over the medium term, the COVID‑19 crisis is expected to result in lower levels of potential output and higher structural unemployment, but real GDP growth is expected to converge back to potential, of 6.5 percent by 2025.” The term hysteresis, as explained by the IMF, usually “denotes the notion that recessions” which the Philippines is currently in now “have permanent negative effects on the supply-side of the economy.”

Yang said both the “BSP and the government responded timely to the impact of the pandemic.”

“The BSP has been forceful in cutting the policy rate, and providing liquidity support and regulatory relief. The government, through Bayanihan I and II, has provided substantial, well-targeted support to the health sector and the affected households and businesses. Nevertheless, owing to prudent debt management in the past, the Philippines has room to provide further fiscal support, if needed. In general, recovery phase policy measures in 2021 will need to be forceful and well calibrated to mitigate the significant scarring effects of the pandemic (hysteresis, bankruptcies),” said Yang.

After cutting the key rate by 175 basis points since February and possibly keeping the overnight policy rate at 2.25 percent for the rest of 2020, the Philippines have a low interest rate regime, manageable inflation, a strongly-performing peso and US dollar assets nearing $100 billion. There is also high liquidity in the financial system after the BSP injected P1.9 trillion — equivalent to 9.6 percent of GDP — to support a pandemic-hit economy.

Among emerging markets and developing economies, ASEAN 5 which includes the Philippines, Vietnam, Indonesia, Malaysia and Thailand, is projected to have a negative 3.4 percent for 2020 and 6.2 percent in 2021.

Of the ASEAN 5, the Philippines is projected to have it worse this year with a GDP contraction of 8.3 percent followed by Thailand with a negative 7.1 percent, Malaysia with a negative six percent, Vietnam with a negative 1.6 percent and Indonesia with a negative 1.5 percent.

For next year, Malaysia with a GDP growth of 7.8 percent leads the region, followed by the Philippines’ 7.4 percent projection. Vietnam and Indonesia  are expected to grow by 6.7 percent and 6.1 percent, respectively, while Thailand has the lowest growth estimate of four percent.

According to IMF for the “many emerging markets and developing economies excluding China, prospects continue to remain precarious.”

“This reflects a combination of factors: the continuing spread of the pandemic and overwhelmed health care systems; the greater importance of severely affected sectors, such as tourism; and the greater dependence on external finance, including remittances. All emerging market and developing economy regions are expected to contract this year, including notably emerging Asia, where large economies, such as India and Indonesia, continue to try to bring the pandemic under control,” said the IMF.

The IMF’s WEO report, released in April and October with an update provided in June, said recovery from the pandemic while COVID-19 infections are still spreading is “not assured.”

The IMF’s projected global growth outlook this year of negative 4.4 percent is less severe than what it said will happen last June because of the “better-than-anticipated second quarter GDP outturns” and on the expectation that a recovery will “take root” in the third quarter and will gradually gain strength over 2021. For next year, global growth will bounce back to 5.2 percent.

“While the global economy is coming back, the ascent will likely be long, uneven, and uncertain,” said the IMF, noting that “prospects have worsened significantly in some emerging market and developing economies where infections are rising rapidly.”

“Consequently, emerging market and developing economies, excluding China, are projected to incur a greater loss of output over 2020-2021 relative to the pre-pandemic projected path when compared to advanced economies. These uneven recoveries significantly worsen the prospects for global convergence in income levels,” said the IMF.

The IMF said most economies will have “lasting damage to supply potential, reflecting scars from the deep recession this year and the need for structural change.” This will affect living standards compared to pre-pandemic where “extreme poverty (will) rise for the first time in over two decades” while “inequality is set to increase because the crisis has disproportionately affected women, the informally employed, and those with relatively lower educational attainment.”