How soon the economic recovery? (Part 1)

Published July 13, 2021, 7:00 AM

by Dr. Bernardo M. Villegas


No matter how I try to be the usual optimist I have always been about the Philippine economy, I cannot see the Philippine GDP recovering to its pre-pandemic level (2019) till the first semester of 2023.  Even worse, I do not see the poverty incidence falling again to the pre-pandemic 16.5 percent till 2025.  This uncharacteristic pessimism of mine is due to my assessment that we will continue to see more surges of  COVID-19 in even more deadly forms until we reach herd immunity in late 2022. By mid-year of 2021, the Philippines ranks worst in East Asia in the rate of vaccination at a very low 2.3 percent.  In East Asia, it has the second highest death rate per million (after Indonesia) of  total population.  Realistic forecast from health experts put herd immunity in the Philippines to be reached  only in late 2022.  The fact that countries like Taiwan and Indonesia that were able to manage the pandemic better than we did at the beginning are now seriously threatened with new surges of the virus makes me expect more lockdowns of important economic regions of the Philippines  before the end of 2021. Even as it seems that the rate of infection in the Metro Manila area is declining, we are seeing surges in other cities like Davao, Iloilo, Dumaguete, Bacolod, Baguio, Cagayan de Oro and other major economic centers.  The greatest threat comes from the Delta variant that originated from India. This is considered the most worrying because it is said to be 50% to 60% more infectious and may cause a more severe disease.  When the Indian variant first appeared in the UK at the start of April this year, it rapidly overcame the Alpha variant and now accounts for 90 per cent of new cases.  Because of the very slow process of vaccinating the population, either because of logistical problems, vaccine scare or mismanagement (there were some  P18.4 billion of unused allocations that are reverting back to treasury), it is highly probable that in the remaining months of 2021, we may still experience  more lockdowns in key regions of the Philippines which will definitely take a hit on incomes and employment. I also worry because our Filipino workers abroad, especially in the Middle East, have a lot of physical contact with their fellow overseas workers from India.  In my frequent trips in the past to places like Dubai and Qatar, I used to observe that in the Catholic churches, the most numerous church goers are Indians and Filipinos.  There is high probability that some returning OFWs can bring the Delta variant with them.

We cannot let our guard down even as countries like Singapore take the optimistic view that COVID-19 should be treated like a regular recurring epidemic such as the flu or chicken pox. This sanguine view could lead to the dismantling of such safety measures as social distancing, the wearing of face masks and frequent washings of hands.  The World Health Organization (WHO) reported in early July 2021 that our COVID-19 case total of over 1.4 million is the highest among all countries in the Western Pacific region.  The WHO tallied 1,408,058 infections in the Philippines, putting us at the top spot among 24 countries that reported COVID-19 infections in the Western Pacific.  The tally is nearly double the cases confirmed in Japan, which ranked second with over 798,000, a number that is putting the Olympics at risk  of cancellation in late July. Other countries with high rates of infection are Malaysia, South Korea and China.  It is understandable that Bloomberg reports that the Philippines is placed at the second to the lowest spot among 53 nations in economic recovery.    

Because of expected recurring lockdowns during the second half of 2021, the best we can do for this year is for our GDP to grow at 4 percent for the whole year. It is difficult to share the very understandable optimism of Socioeconomic Planning Secretary Karl Chua who expects   a big jump of GDP in the second quarter, albeit mostly from base effect since the second quarter of 2020 saw a 9.6 percent decline in GDP. I tend to agree with my colleagues at the University of Asia and the Pacific and the Fist Metro Investment Corporation (FMIC) that the weak labor print in April 2021 coupled with the extended restrictions in Metro Manila and nearby provinces most probably squeezed consumer sending during the second quarter.  Although data on exports, imports and production in the beginning of the second quarter prompted speculations about “green shoots” appearing, the reimposition of lockdowns has reversed the gains.  Negative signs were the unemployment rate at  7.7  percent with 3.37 million unemployed Filipinos and 12.3 percent or 5.49 million underemployed  in May 2021.  Because I expect more lockdowns in the third quarter as a result of the very slow rate of vaccination and the appearance of more infectious variants of COVID-19, one cannot expect too much growth in the third quarter.  Secretary Chua qualifies his optimism for the second half by stating that “prospects are good if we do three things:  manage risks and open the economy, implement the entire recovery program and vaccinate more and more”.  I am afraid it will be very difficult to do well on all three fronts, especially as the political circus begins in October with the declaration of the official candidates for the May 2022 national elections.

We can only expect most of the real growth (not base effect growth)  to come in the last quarter, thanks to the usual Christmas-related spending and the beginning of campaigns for the elections scheduled for May 2022. Because of the prevalence of social marketing tools in promoting the various candidates (especially trolling), however, the usual spending by the political candidates may not be as big as before.  The two sectors on which we can rely to equip the population with mass purchasing power are the remittances from the Overseas Filipinos and the BPO-IT industry.  The former has already shown an increase of 5 percent in the first six months of the year while the latter is rapidly recovering, as its main market, the U.S., is already experiencing strong growth.  Unfortunately, the impact of these dollar-earning sectors has been partly muted in the first half of 2021 because of the strong peso.  To the relatives of the OFWs and BPO-IT workers, a foreign exchange rate of P50 to $1 is obviously more desirable than P47 or P48 to $1. Thankfully, in early July 2021, the peso has devalued to P49 to $1 as hopes for a further reopening of the economy boosted demand for the U.S. dollar coupled with continuing worries about more surges of the virus.  It seems though that in the near term the peso will continue to be overvalued because of the minimal increase in imports and the weakening U.S. dollar.  The saving grace of a “strong” peso is that inflation may be contained at the level of 4.5 to 5.0 percent.  A strong peso (which makes imports cheaper) is a counterweight to the rapid increase in the price of oil that has already exceeded $70 per barrel and the increases in hog prices due to  the swine fever that has hit the industry.

Also contributing to the recovery in the fourth quarter of 2021 will be the 11 flagship projects of the Government that are being completed or will partially open in 2021. Another 29 flagship projects, amounting to P236 billion are projected to be spent in 2022. With the end of the rainy season in the fourth quarter, the Build, Build, Build initiative is getting back on track. The Government is expected to spend some P1.02 trillion by the end of 2021 and another P1.25 trillion in 2022. These  amount to more than 5 to 6 percent of GDP, a significant increase compared to the average of 2 to 3 percent in previous Administrations. The Government is disbursing P1.02 trillion for infrastructure in 2021. Among the large projects are those that are going to be funded by the private sector through Public Private Partnership (PPP).  The most notable among these is the P735.7 billion New Manila International Airport in Bulacan which will be rising in a 2,500 hectare property and will have enough capacity to serve some 100 million passengers annually, or three times the capacity of NAIA. Funded by San Miguel Corporation, groundbreaking is expected before the end of 2021. Other projects that can contribute to the recovery during the fourth quarter of this year are the North-South Commuter Railway Extension which aims to seamlessly integrate a three-way commuter rail system linking Metro Manila to the major provinces of Laguna, Pampanga and Bulacan; the P149.1 billion Philippine National Railway North 1, a 38-km line from Tutuban, Manila to Malolos, Bulacan which is part of the NCSR system; and the P11-billion New Cebu International Container Port (NCICP) which will be built on a 25-hectare reclaimed area in Barangay Tayud, Consolacion town in northern Cebu which is expected to have its groundbreaking in August 2021.  Funding of the NCICP will be through Korea’s Official Development Assistance (ODA).  (To be continued.)For comments. my email address is [email protected].