Regional macrosurveillance group, ASEAN+3 Macroeconomic Research Office (AMRO) has cut its 2021 Philippine GDP forecast to 6.4 percent from its previous 6.9 percent estimate back in March, citing concerns on the handling of COVID-19 cases in the country affecting the growth trajectory and contributing to downside risks.
AMRO chief economist Hoe Ee Khor said the balance of risks are listing to the downside because of the strong new wave of infections earlier this year and the slow roll out of vaccines. These factors has “weakened the recovery momentum” while increasing the downside risks.
For 2022, AMRO forecasts a GDP growth of 6.8 percent, also lower than its earlier projection of 7.8 percent.
“I think the Philippines has a lot of fiscal space and this fiscal space should strengthen the recovery because the recovery momentum has weakened ... it’s important to do that (fiscal space) to reduce the scarring of the economy (so it can) bounce back much faster at pre-COVID level,” said Khor in a virtual press briefing Tuesday after AMRO presented its annual report on the Philippines.
In its report, AMRO said the economy has two immediate short term risks, namely the prolonged wave of COVID-19 infections and “potential financial distress in the business sector.”
Khor said it is important that with the easing of lockdown or movement restriction measures, that the government will continue to extend and provide support such as in liquidity or funding, for businesses to ensure a quicker GDP recovery from its current recession. Such support will ensure there will be jobs and income for households.
AMRO has noted that economic activity has shown some signs of pick up in the second quarter and allowed some momentum but a “significant slack remains” such as a 7.1 percent high jobless rate in March.
“A speedy and robust economic recovery is essential to absorbing displaced workers, but the economy can only improve if the COVID-19 pandemic is well contained, such that the economy can reopen fully and business confidence is restored. The government should therefore continue providing strong policy support,” according to AMRO.
The report noted continued inflationary pressures with an above target inflation for the last four months, exceeding the two-four percent target band of the Bangko Sentral ng Pilipinas, mainly because of supply shocks that are temporary in nature.
“The surge in prices is likely to persist for some months, because the normalization of food supply will take time, while fuel prices will be boosted by the low base effect in early 2020,” it said.
For this year, it sees inflation rising to 4.3 percent but will decline to 3.2 percent in 2022, which is within the government target. “Timely implementation of effective measures to address the supply constraints could help ease price pressures,” it said.
As for monetary policy, AMRO said the BSP’s policy actions are appropriate to make sure there is sufficient liquidity in the financial system – “but more efforts should be placed on enhancing the effectiveness of monetary transmission and supporting credit expansion,” it said.
“The BSP should collaborate with other government agencies to provide banks with greater incentives to increase lending to the business sector, especially micro, small and medium enterprises,” said AMRO.
“The development of financial risks should be closely monitored, while the intervention and resolution framework should continue to be strengthened,” it emphasized.
AMRO also noted that the BSP’s “cautious attitude toward the withdrawal of regulatory forbearance is appropriate” but cautioned that with economy in a recovery phase, the “deterioration of asset quality is ongoing.”
“Efforts to resolve the issue of problem assets could stretch beyond the current policy cycle. To avoid a cliff effect, it is important for the BSP to coordinate closely with its stakeholders and other government agencies when deciding on the extension or withdrawal of relief measures,” said AMRO.