Economic problems in the Philippines 2021 and their solutions

ArticleThe Philippines' Economy To Be Lifted By Normalising ActivityFitch Solutions / Country Risk / Philippines / Tue 09 Nov, 2021Key ViewWe at Fitch Solutions now forecast the Ph

Economic problems in the Philippines 2021 and their solutions


The Philippines' Economy To Be Lifted By Normalising Activity

Fitch Solutions / Country Risk / Philippines / Tue 09 Nov, 2021

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Key View

  • We at Fitch Solutions now forecast the Philippine economy to grow by 4.5% in 2021 and 6.5% in 2022, revised from 4.2% and 6.8% respectively.
  • As domestic restrictions eased, real GDP rebounded from a contraction of 1.4% q-o-q in Q221 to growth of 3.8% in Q321.
  • Recovering domestic activity will be the key driver of the economy moving forward; however, low vaccination rates and less supportive external conditions keep risks to growth tilted to the downside.

We at Fitch Solutions now forecast the Philippine economy to grow by 4.5% in 2021 and 6.5% in 2022, revised from 4.2% and 6.8% respectively. In Q321, the Philippine economy posted strong q-o-q growth of 3.8%, following a contraction of 1.4% in Q221 because of lockdown measures. A gradual relaxing of domestic mobility restrictions and continued support measures from policymakers helped propel activity, bringing the economy closer to its pre-pandemic output levels. There are signs of a continued recovery in Q421, with mobility data signalling an increase in domestic activity and vaccination rates rising in the key economic hub of Manila. Nevertheless, the Philippines still remains vulnerable to Covid-19 outbreaks given disparities between regional vaccination rollouts and the lower efficacy rates of the vaccines administered. As of October 21, only 22.6% of the population had been fully vaccinated and the lower efficacy of the vaccines being used could mean that there is a greater need for booster shots. Thus, in the near term, further disruptions could weigh on the pace of the economic recovery, and the prospects of a revival in the countrys tourism sector remain dim. While we expect economic growth to increase further in 2022, remaining challenges will stop the Philippine economy returning to its pre-pandemic growth trajectory.

Economy To Recover To Pre-Pandemic Output By End-2022

Philippines  Real GDP Growth, % chg & Expenditure Components, pp contributions

f = Fitch Solutions forecast. Source: PSA, Fitch Solutions

In Q321, the Philippine economy beat Bloomberg consensus expectations, posting growth of 7.1% y-o-y against an expected 4.8%. Base effects played a significant role, with growth strong across all expenditure components. Private consumption growth eased slightly from 7.3% y-o-y in Q221 to 7.1% in Q321, while gross fixed capital formation (GFCF) growth also eased from 80.3% y-o-y in Q221 to 22.0% in Q321. The strong domestic activity was partially a reflection of rebounding confidence and some relaxing of domestic restrictions, relative to the same period a year prior. Government consumption also proved supportive, bouncing back from a contraction of 4.2% y-o-y in Q221 to 13.6% in Q321. On the external side, base effects eased off, with exports growth slowing from 27.8% y-o-y to 9.0% and imports growth slowing from 39.8% to 13.2%.

Recovery To Remain Buoyant Through Q421

Philippines  Real GDP Growth, % chg

Source: Bloomberg, Fitch Solutions

Domestic Activity To Be Stronger In 2022

We forecast private consumption to grow by 3.7% in 2021 (revised up from 3.5%), before rebounding to 5.0% growth in 2022. A recovery in private consumption is key to the Philippines' real GDP growth, given the fact that private consumption accounts for around 74% of output. The easing of domestic restrictions in Q421, particularly around metro Manila, will help bolster private consumption. Google mobility data are already reflecting a strong rebound in domestic activity, with data for retail & recreation, and grocery and pharmacy mobility signalling the highest level of activity since the onset of the pandemic in Q220 (see chart below). This tallies with the recovery in the retail index, which in October rose to its highest level since July.

Domestic Consumption Activity Rebounding Strongly

Philippines  Google Mobility Tracker (% chg from baseline activity)

Note: Q421 data up to November 9. Source: Google, Fitch Solutions

In 2022, we expect the gradual easing of domestic restrictions to provide some tailwinds to consumption but we note weakened labour-market dynamics as potentially curbing the extent to which consumption rebounds. On the one hand, rebounding remittances have helped boost household incomes, with personal remittances up 4.8% y-o-y in August. On the other hand, labour-market weakness and elevated inflation has helped erode real wages. Unemployment rates rose in 2020, from an average of 5.1% in 2019 to 10.3% in 2020, and they remained elevated at 8.0% in Q221, while labour force participation rates are also lower. Real wages are around 4.0% lower than pre-pandemic levels and with headline inflation likely to remain elevated on higher energy and food prices, households are likely to see incomes eroded further, capping consumption growth.

Confidence Rebounding In October

Philippines  Sentiment Indices

Source: BSP, Fitch Solutions

We forecast growth of 11.0% and 15.0% in 2021 and 2022 respectively (revised from 9.0% and 18.0% previously), following the 27.5% slump in 2020. GFCF growth will continue be supported by favourable base effects, though with diminishing effects in 2022. Spare capacity still remains elevated; as of Q321, output was 5.5% below where it was in Q419 and capacity utilisation is substantially lower, at 66.1% in August (it was averaging around 83% before the pandemic). As such, we expect GFCF growth to ease from an average of 12.6% y-o-y from Q121 to Q321, such that growth is 12.0% for the full year. Looking to 2022, the continued spare capacity in the economy will act as a cap investment appetite and we highlight declines in house prices through the pandemic as potentially dampening real estate construction activity (the house price index declined by 9.4% y-o-y in Q221). That said, rebounding business optimism and manufacturing activity will support capital goods investment. Moreover, we believe logistical constraints  such as travel restrictions between regions and disruptions at ports  will aid the resumption of delayed projects, with building permits up by 114.1% y-o-y and 4.8% q-o-q in Q221.

We forecast government consumption to grow by 8.5% in 2021 and 4.5% in 2022, revised up from 5.0% and 2.0% previously. The Philippines' public debt has surged during the pandemic, from 39.6% of GDP in 2019 to 63.1% in Q321. We expect policymakers to begin to focus on consolidating debt levels over the coming quarters, which could lead to greater scrutiny of fiscal expenditure plans. Indeed, while the proposed 2022 budget plans an 11.5% increase in expenditure, we do expect revenue boosting measures to also be undertaken to narrow the budget deficit. An increasing share of government expenditure will go towards GFCF in 2022, as the need for pandemic-related expenditure begins to abate, which should prove supportive of longer-term growth as well, given the Philippines high need for infrastructure investment.

Net Exports To Prove A Drag

On the external side, we forecast net exports to subtract 2.1 percentage points (pp) and 1.1pp in 2021 and 2022 respectively. Continued elevated shipping costs and global supply-chain constraints will pose headwinds to Philippines trade activity through Q421 and Q122. As border restrictions ease and global supply chains gradually normalise, we expect slowing growth in China to prove the biggest drag on regional trade and external demand for Philippine goods. Moreover, while tourism activity will begin to resume in 2022, the Philippines relatively low vaccination rate may deter tourists or result in continued travel restrictions to the country, capping the extent to which the tourism sector can recover. Meanwhile, the rebound in domestic demand will see increased appetite for imports and elevated commodity prices will add to the imports bill over the coming quarters.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.Country RiskAsiaPhilippinesCoronavirus

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