Emerging

Constrained recovery

rd  
Eco Emerging // 3 quarter 2021  
economic-research.bnpparibas.com  
7
PHILIPPINES  
CONSTRAINED RECOVERY  
The health crisis is barely improving in the Philippines. After a particularly severe second wave, the number of new  
Covid-19 cases seems to have levelled off, albeit at a high level. Yet the full vaccination rate is very low, which means  
that the tight health restrictions which must be kept in place are weighing on domestic demand and the tourism  
sector. After contracting by more than 9% in 2020, GDP should rebound moderately in 2021. Even so, the country still  
has high growth potential thanks to the reforms undertaken over the past decade, which are paying off.  
A SEVERE RECESSION IN 2020  
FORECASTS  
The Philippines was one of the region’s economies that the Covid-19  
crisis hit hardest. The introduction of very strict health measures  
as of mid-March 2020 triggered an abrupt drop-off in business that  
heavily constrained domestic demand. Investment contracted by 27%  
and private consumption fell by 8% in 2020. At the same time, tourism  
revenues (which accounted for nearly 13% of GDP in 2019) plunged by  
about 80%.  
2019  
2020  
2021e  
2022e  
Real GDP growth (%)  
5.9  
-9.3  
2.6  
5.1  
6.8  
Inflation (CPI, year average, %)  
Government balance / GDP (%)  
National government debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
2.5  
3.8  
2.5  
-3.5  
39.5  
-0.8  
87.8  
87.8  
6.9  
-7.5  
54.5  
3.6  
-6.0  
55.1  
1.9  
-4.5  
55.0  
1.0  
All in all, despite the authorities’ massive support (the central bank and  
the government implemented measures accounting for more than 14%  
of GDP), real GDP contracted by 9.3%. In comparison, GDP contracted  
by 3.4% on average in the ASEAN-5 countries.  
109.8  
110.1  
10.1  
104.4  
112.1  
11.1  
103.5  
114.1  
9.8  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
e: ESTIMATES & FORECASTS  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
TABLE 1  
THE HEALTH SITUATION IS PROVING HARD TO STABILISE  
Growth is expected to rebound in 2021-2022, lifted primarily by the  
upturn in global demand, ongoing public policy support, and a huge  
base effect, although downside risks are still very strong.  
FULL VACCINATION RATES IN THE ASEAN COUNTRIES  
A sharp rise in the number of Covid-19 cases since mid-March has cut  
short the economic recovery observed since the end of Q3 2020. After  
levelling off at 1,500 cases in mid-November, the number of new daily  
cases rose very rapidly, to nearly 10,000 new cases in early April 2021,  
which is significantly higher than the 4,500 new cases reported during  
the first peak in August 2020. After being gradually lifted, health res-  
trictions had to be imposed again nationwide in mid-March. Measures  
were especially strict in the Manila metropolitan area, home of the  
nation’s capital, which accounts for more than 70% of GDP. Moreover,  
the country’s hospitals and intensive care units have extremely limited  
capacity.  
GDP contracted again in Q1, down 12% quarter-on-quarter (q/q), after  
Q4 growth of 16% q/q, the only quarter of positive growth in 2020.  
The rebound in exports of goods and robust public demand (additional  
measures were announced in March 2021) failed to offset another  
decline in domestic demand.  
Vaccination rate (% of total population)  
9
8
7
6
5
4
3
2
1
Indonesia  
Philippines  
Malaysia  
Thailand  
0
01/2021  
02/2021  
03/2021  
04/2021  
05/2021  
06/2021  
07/2021  
CHART 1  
SOURCE: OUR WORLD IN DATA  
The outlook for the rest of 2021 is mixed. On the one hand, the  
number of new daily cases has declined since mid-June, but remains  
relatively high (less than 5,500 new cases in early July). On the other,  
SOLID MACROECONOMIC FUNDAMENTALS  
the vaccination rate is still low (only 2.6% of the population had Even so, despite the size of the shock and the prospects of a timid  
received two doses of the vaccine at 5 July) because the government recovery in the short term, the country still has solid macroeconomic  
has encountered numerous supply problems. That said, the vaccination fundamentals.  
campaign should accelerate during H2 thanks to a large number of  
doses received via Covax. The government is aiming to vaccinate 65%  
of the population by 31 December 2021.  
External vulnerability remained very low in 2020 and could diminish  
even further: the peso has strengthened against the dollar, foreign re-  
serves are rising, the current account balance has been positive (3.6%  
Consequently, it could take a long time to absorb the imbalance between of GDP) for the first time since 2015. The downturn in imports and  
the number of new cases and the vaccination rate, which means that relatively resilient remittances from migrant workers have largely off-  
health restrictions may have to be extended. This would have a lasting set the decline in exports. The current account surplus is expected to  
negative impact on domestic demand and the tourism sector.  
shrink in the quarters ahead as imports pick up, in keeping with the  
The bank  
for a changing  
world  
3rd quarter 2021  
economic-research.bnpparibas.com  
8
rebound in economic growth. Ultimately, however, the economy’s com-  
petitiveness should further strengthen exports (notably in the services  
sector).  
FOREIGN DIRECT INVESTMENT INFLOWS  
1
200  
After declining in 2019-2020, foreign direct investment (FDI) should  
rise again, bolstered by new government measures. According to the  
OECD, despite regular reforms since 2016, the Philippines still had one  
of the most restrictive frameworks for FDI of the ASEAN countries in  
FDI inflows (USD bn, mm12)  
1000  
800  
2
019 (concerning the authorised thresholds for foreign stakes, filtering/  
authorisation mechanisms, restrictions on hiring non-residents for key  
positions, and other operating restrictions). This observation applies  
to virtually all sectors, including infrastructure projects that are  
being promoted by the government (such as maritime transport, road  
transport, and landline/mobile telecommunications).  
6
4
2
00  
00  
00  
0
The Corporate Recovery and Tax Incentives for Enterprises (CREATE)  
bill, passed in March 2021, should help improve the business climate  
and facilitate private investment projects with both resident and non-  
resident investors. Among its incentives, the bill proposes to reduce the  
corporate tax rate, which is currently one of the highest in the ASEAN  
countries, from 30% to 25%, and to make the tax cut retroactive to July  
2
014  
2015  
2016  
2017  
2018  
2019  
2020  
2021  
CHART 2  
SOURCE: CENTRAL BANK  
2
020. Foreign companies would then benefit from a 1-point tax cut  
annually until the rate comes to 20% in 2027. Meanwhile, local small  
and mid-sized enterprises (SME) would benefit immediately from a  
tax rate of only 20%. Several other draft bills are also being discussed.  
Similarly, the corporate tax reforms launched over the past decade  
have paid off. In early 2020, the government had sufficient fiscal ma-  
noeuvring room to provide massive support to the economy and the  
health system.  
The public deficit rose significantly in 2020, to 7.5% of GDP from 3.5%  
in 2019, and will remain high in 2021-2022. Nonetheless, it should  
narrow gradually with the halting of support measures and the  
rebound in the economy. New measures to improve tax collection  
were also set up in 2020. They aim to offset the short-term increase in  
spending due to the Covid-19 crisis, and the medium-term shortfall in  
fiscal revenues due to the corporate tax cuts introduced by the CREATE  
bill. Fiscal consolidation could take time, however, and the presidential  
election scheduled for 2022 introduces some uncertainty concerning  
the economic policy that will be pursued by the next government.  
The public debt rose to nearly 55% of GDP in 2020, from less than  
4
0% in 2019, and it is expected to swell further in 2021-2022. The  
year 2020 “erased” more than 10 years of fiscal consolidation (public  
debt was 52% of GDP in 2009), but the debt profile is much more  
favourable today (longer maturities, a large share of the debt issued in  
the local market, and a sharp decline in the share of foreign currency  
debt). To help the government cover its financing needs, the central  
bank also announced that it would maintain the securities purchasing  
programme introduced in early 2020 at least through the end of 2021.  
Lastly, the country still has very high growth potential, estimated at  
6
.5% a year, and this potential has not eroded despite the amplitude of  
the shock. With a diversified economy, a young population and ongoing  
reform efforts in 2020, productivity will get a boost in the medium to  
long term. Moreover, the unemployment rate has declined continuously  
from 2005 to year-end 2019, signalling a stronger labour market, even  
though the working age population is still growing.  
Completed on 5 July 2021  
Hélène DROUOT  
helene.drouot@bnpparibas.com  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
Le site contient 1589 articles et 282 vidéos