Part 1
As we approach the end of 2021, let me review my forecasting record for the Philippine economy throughout the whole year since January 2021. As I saw the Philippine GDP declining at -0.7 %, -17.0%. -11.6%, and -8.3% in the first, second, third and fourth quarters respectively of 2020, I realized how badly the Philippine Government was managing the approach to the COVID-19 pandemic, in comparison with our East Asian neighbors. We introduced the longest lockdowns and had one of the slowest rollouts of the vaccines. By the first quarter of 2021, I was no longer the usual optimist (aka “prophet of boom”) on whom local business people could count for some good news. I had the lowest GDP forecast at the beginning of the year, compared to both government and private economists who were still banking on a 5 to 7% GDP growth for the whole of 2021. I said ominously that it would be difficult for the Philippine GDP to grow by more than 4 % for the whole of 2021. Another decline of -3.9 % in GDP during the first quarter of 2021 confirmed me in my pessimism.
Even the 12.0% GDP growth in the second quarter did not make me change my 4% forecast for the year. The Government continued its very strict lockdown policies in the third quarter. The Philippines was the last country in the world to allow face to face classes in the schools. The rate of vaccination continued to be among the slowest in East Asia. By the second quarter of 2021, the majority of forecasters started to sing the same tune that GDP growth would not go beyond 4 %. The IMF had the lowest forecast of 3.1 %, also based on the perception of the poor response to the pandemic. I stuck to my 4 % maximum growth.
Then in the first week of November, the GDP numbers for the third quarter were announced. The PSA estimated that the GDP grew at 7.1 percent during the third quarter, despite the many lockdowns not only in the National Capital Region but in other key cities like Cebu, Davao, Iloilo, Bacolod and others. This figure was a pleasant surprise for all. Especially heartening was the fact that private consumption, which accounts for more than 70 % of GDP grew at 7.1%. giving the major boost to income growth. Also encouraging were the 13.6% growth in government consumption expenditures, the 22.0% growth in Gross Capital formation and 9.0 % growth in exports. Seeing how the Government has been learning from its mistakes in the past and introducing less draconian lockdown measures (the Metro Manila area reached Level 2 and the prospects of Level 1 are bright), I am now forecasting an 8 to 10% GDP growth for the fourth quarter, fueled by Christmas-related and election-motivated spending as well as a more aggressive implementation of the Build, Build, Build program to coincide with the election campaign period.
Given all these positive developments, I am now forecasting a 5 to 6% GDP growth rate for 2021 and a 7 to 8 % growth for the whole of 2022. The Philippine economy will be back at the 2019 level by the second semester of next year. If the new Administration that will be in place by the second semester of 2022 can implement some of the suggested programs below, it is very possible that GDP growth rates from 2023 and beyond can be at the range of 8 to 10%. Such higher growth rates will result from continuing robust private consumption expenditures fueled from the remittances of Filipino Overseas Workers which I foresee to grow at 5 to 6% annually; and the increasing incomes of those who work in the BPO-IT sector that will bounce back strongly as the developed countries, especially the U.S., recover their 3 -4% GDP growth. Also expected to strongly recover is domestic tourism with some 60 to 70 million Filipinos traveling to the numerous destinations that will no longer be subject to stringent lockdowns. It will take longer (probably 2024) for foreign tourists to be back in the Philippine in big numbers, especially considering the appearance of the new variant Omicron and who knows what else in the future. Already nations are scrambling to close down their doors to foreign travelers.**
Interest rates will be kept low by the Central Bank for at least the whole of 2022. I expect inflation rate to be at the range of 3.5 to 4.0% for 2022, closer to the official government target. The foreign exchange rate will hover between P51 – 52 to a US dollar as imports rise with the higher level of GDP. International reserves will be at a comfortable $112 billion. The weaker peso should be a bonanza to the relatives of the OFWs as well as the workers in the BPO-IT sector. At such a moderate rate of peso depreciation, I do not think that there is a danger of fueling inflation.
I am aware of the risks still faced by the Philippine economy that may render these forecasts unrealistic. There may be an upsurge of the COVID virus in the first quarter of 2020 as a result of the “revenge shopping” and reveling occasioned by the Christmas holidays. There may still occur some deadly typhoons which are still probable during the last quarter of 2021. As regardsa third or fourth round of the pandemic, as is occurring in European countries and some East Asian countries, I was glad to listen to Dr. Guido David of OCTA, with whom I recently coincided in a panel discussion, that he is of the opinion that the Philippines can avoid these future waves because Filipinos seem to be more disciplined than the Europeans in continuing with the safety protocols of wearing masks, washing hands and keeping social distance. I can identify with this view because I have been consistently scandalized by the behavior of the football fans in Europe. I like to watch football games, especially of the Spanish League and the Premier League of the U.K. In a recent football match between Real Madrid and FC Barcelona in Camp Nou., there were close to 90,000 maskless fans shouting and cheering and obviously not keeping social distance from one another.
I am not alone in my bullish forecast for 2022. Investment banking giant Goldman Sachs came out with a forecast that the Philippine GDP will be growing at 7.3% for the whole 9f 2022, the fastest in the ASEAN. This is within the Government’s 7 to 9 percent target. We will exceed Malaysia’s 6.6 %, Indonesia’s 5.1%, Singapore’s 4.3% and Thailand’s 3.6%. Goldman Sachs also sees the easing of inflation, forecasted to return within the government’s 2 to 4 target as food supply issues ease and international oil prices moderate. It expects the BSP to begin withdrawing liquidity using its term deposit facility and BSP security auctions during the second semester of 2022, with one 25-basis point policy rate hike in the fourth quarter of next year.
Also giving a more positive outlook about the prospects for the coming quarters was former Secretary of Socio-economic Planning and NEDA Director General, Cielito Habito, who in his regular column in The Inquirer identified the key drivers of the quarter-on**--quarter growth of the third quarter of this year. He noted that the PSA cited wholesale and retail trade, transport and storage, and professional and business services as the key drivers. Wholesale and retail trade, manufacturing and construction drove the year-on-year growth. Being an agricultural economist himself, he was able to give a more optimistic view of the agricultural sector when he made the observation that the reason why agriculture fell by 1.0 % in the first three quarters of 2020 is that the African swine fever made livestock production fall by a deep 19.7%. Without livestock, agriculture actually grew at 2.2 %. This information reflects well on the current leadership of the Department of Agriculture.
Also recently turned bullish about the economic recovery expected in 2022 is the present Socio-Economic Planning Secretary, Karl Kendrick Chua. In a speech to foreign chambers of commerce, he forecasted that GDP would match pre-pandemic levels by the first months of 2022. He cited such encouraging signs as airlines’ capacity climbing to 40% of pre-pandemic capacity in November 2021 compared to 16% in September last year. Visits to shopping malls increased to 63% of pre-pandemic levels in November 2021 from 35% in October and 24% last September 2020. These figures indicate the resilience of Filipino consumers who are already leading a strong rebound of domestic tourism. This augurs well for an increase in employment because the hospitality industry is one of the most labor-intensive of the service sector. Already even before the peak of the Christmas season, he reported that major malls are reporting significant increases, at 50% during weekdays and a high 81% during weekends. This trend is largely a result of families bringing their children with them once again to these public places. (To be continued).