CHANGING WORLD
Dr. Bernardo M. Villegas
(Part 1)
As an economist, part of my professional job is to fathom the future. I have been involved in economic forecasting ever since I joined the think tank called the Center for Research and Communication in 1967. Since then, year in and year out — with my colleagues at CRC and now the University of Asia and the Pacific — I have been issuing forecasts about aspects of the Philippine economy such as Gross Domestic Product, inflation, unemployment, underemployment, and poverty incidence which are “macro” data, as well as prospects for select industries such as mining, banking, insurance, consumer products, and real estate which constitute the “micro” data.
I cannot resist the temptation of prognosticating what the entire Philippine society, not only the economy , would look like after the COVID-19 pandemic. The year 2020 is a watershed in Philippine history as well as world history. I speculate that historians will talk about the pre-pandemic world and the post-pandemic world when things get back to normal, however you define what normal will be in the future. To generate discussion from my colleagues in the academe and the business world, I will dare to describe Philippine society after the pandemic. Much of what I will say will be from anecdotal observations and not from thorough data analysis. My objective is stimulate the building of hypotheses that can be subjected in the future to more thorough scientific research. I would appreciate a lot of feedback from my readers. So here goes.
Let me start with what is within my professional competence, the economy. How will the Philippine economy after the pandemic differ from what it was pre-2020? Let us start with the macroeconomic dimensions. GDP is expected to decline for the whole year of 2020 at a range of 8 to 12 percent. This could wipe out as much as two years of GDP growth in the past. Assuming that there will be second and third waves of the virus during the last quarter of 2020 and the first quarter of 2021 and that the vaccine will reach the Philippines only during the second semester of 2021, prospects for a strong recovery in 2021 are dim. I expect a GDP growth of 2 to 4 percent for the whole year of 2021 and a full recovery of the pre-pandemic 6 percent growth of GDP only in 2022, coinciding with the election year. Because of the low base from which GDP will grow in 2022, we may experience an 8 to 10 percent during that year.
I am aware that there is an alternative more optimistic forecast being issued by the government through the chief economic manager, Secretary of Finance Carlos Dominguez. In his most recent statement on November 17, 2020, Secretary Dominguez said he expects a “big bounce back” in GDP growth in 2021. His assumptions are that there will no more serious waves of the coronavirus in the coming months and that the vaccine will be available to the Philippines in the first half of 2021. I can only pray that he is right. This time, however, I am the pessimist about COVID-19 because of what I see happening in many European countries and in the US that are suffering from second and even third waves of the virus, some of them more serious than the first wave. For this reason, I foresee the “big bounce back” only in 2022.
For balance, let me also cite an even more bullish forecast of GDP growth for 2021 issued by global financial giant Morgan Stanley also on November 17, 2020. According to Morgan Stanley, GDP growth in 2021 can be as high at 13.5 percent, assuming “the COVID-19 situation improves and vaccine availability nears.” Basic assumptions are the Central Bank will continue to keep policy rate low and liquidity inflows help the Philippines to fund its fiscal deficit. The investment bank also expects the government will be able to ramp up its “Build, Build, Build” program to help spur recovery. The double-digit growth rate can be explained by the very low base 2020, especially considering the second and third quarters that were badly hit by the longest and most stringent COVID-19 lockdowns in the region. Morgan Stanley projected GDP to jump by 25.7 percent and 17 percent year-on-year respectively during the second and third quarters of 2021. Given such optimistic forecasts, I am willing to relinquish the title given to me by local pundits of “Prophet of Boom” to the economists of Morgan Stanley.
My more conservative stance is that the big comeback will come in 2022, which also happens to be an election year. Because of strong rebounds in remittances from OFWs and earnings of the BPO-IT sector — coupled with a recovery of the consumption sector as the main engine of growth — I expect GDP growth rates starting 2022 to be closer to 7 to 8 percent annually. Especially promising are the remittances from our more than ten million OFWS, who already in September, 2020, increased the money they send to their relatives by an impressive 9.1 percent. These remittances and the earnings of the more than 1.4 million BPO-IT workers will lead to a recovery of consumption as the primary engine of growth of the economy. The higher growth rate will also be facilitated by a more proactive role of the state in stimulating economic growth, a legacy of the pandemic period when it was only the State that was growing its spending. This assumes that the Duterte administration will be able to pass the CREATE bill before the end of its term, thus producing larger tax revenues on the consumption and the wealth of the rich. The external sector (exports minus imports) will continue to be the weakest contributor to GDP growth until and unless the country is able to significantly improve the productivity of the agribusiness sector that will enable it to export larger amounts of high-value food products, especially to the gigantic markets of China and the other rich Northeast Asian territories like Japan, South Korea, Hong Kong, and Taiwan.
Our positioning to be a major exporter of high-value agribusiness products has been given a big boost by the decision of five more countries to join the free trade agreement of the ASEAN Economic Community (AEC), made up of ten Southeast Asian countries to which we belong. Last November 14, 2020, the Regional Comprehensive Economic Partnership or RCEP was forged which brings in five of the six “dialogue partners” with which the AEC has already separate free trade agreements – Australia, China, Japan, New Zealand, and South Korea. The RCEP now constitutes the world’s largest trading bloc. It is larger than then the European Union (especially with the exit of the UK), and the North American Free Trade Agreement made up of the US, Canada, and Mexico. It must be pointed out that the Asia Pacific Economic Cooperation ( APEC)—which in includes the US, Canada and all the Latin American countries bordering the Pacific Ocean— is not a free trade community. The RCEP is.
If we play our cards right and really focus on improving our agricultural productivity, we can target not only China but also the other food-insecure Northeast Asian economies of Japan and South Korea for tariff-free exports of high-value food products.
To be continued.
For comments, my email address is [email protected]