Stopped in mid flight

EcoEmerging// 2nd quarter 2020  
Stopped in mid flight  
The coronavirus crisis has hit a fast-growing economy, which expanded by more than 6% year-on-year in H2 2019 and looked set to  
continue at the same pace in 2020. The pandemic and the very strict lockdown imposed by the Duterte government will cause all the  
engines of growth to seize up: production will stop in the country’s economic centre, the fall in domestic demand will be  
exacerbated by reductions in remittances from workers abroad and losses in the informal economy, tourism will collapse and  
exports of goods and services will follow suit. This is a substantial shock, but the strong macroeconomic fundamentals and the  
modest level of government debt give the authorities scope to introduce support measures.  
The Philippines has enjoyed solid economic growth in recent years,  
- Forecasts  
driven by robust domestic demand and an expansion of the export  
base. Between 2012 and 2019, real GDP growth averaged 6.5% per  
year. It slowed to 5.5% year-on-year (y/y) in H1 2019 primarily due  
to a dip in investment, but then rebounded in H2 2019, reaching  
Real GDP growth (%)  
Inflation (CPI, year average, %)  
Government balance / GDP (%)  
Current account balance / GDP (%)  
6.2% y/y. This trend was set to continue into 2020 before it was  
brutally interrupted by the shock from the coronavirus epidemic.  
The government imposed very strict lockdown measures in mid-  
March. The whole of the island of Luzon and its capital Manila were  
placed into quarantine for at least a month. As a result, economic  
activity is at a standstill in this region, which is home to 56 million  
people (53% of the country’s population) and accounts for 73% of  
GDP (with Manila accounting for 36%). The health crisis will also  
have repercussions for sectors dependent on international demand,  
particularly tourism as well as remittances from workers abroad,  
which represent a significant source of support for domestic  
household consumption. As a result, all the private-sector engines  
of the Philippines growth will be significantly weakened from March  
onwards. The economy could go into recession in S1 2020, before  
recovering gradually once the epidemic has passed its peak. The  
stimulus measures introduced by the authorities will be key in  
determining the pace of this recovery. We project real GDP growth  
at only 2% in 2020, the slowest rate since the crisis of 2009.  
Economic growth is then expected to bounce back to 6% in 2021,  
slightly below the Philippines’ potential growth rate (Table 1).  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Contribution of the tourism sector to the economy  
du PIB  
Hong Kong SAR  
South Korea  
Source: WTTC, BNP Paribas  
The main engines of growth have seized up  
March and the early part of Q2 2020, private consumption growth is  
likely to recover only very gradually over the following quarters.  
Private consumption accounts for 68% of GDP and has been the  
main driver of economic growth in recent years. In 2019, it rose by  
Activity in the tourist industry is likely to be at a standstill for several  
months. This sector plays a crucial role in the economy, estimated  
at 12% of GDP, which is the largest economic contribution of any  
major Asian country (Figure 2). Tourist receipts in the current  
account balance account for 7% of total foreign currency receipts (or  
nearly 3% of GDP).  
5.8%, supported by the decline in inflation (from 5.9% y/y in  
Q4 2018 to 1.5% in Q4 2019), the strength of the labour market (the  
unemployment rate has continued to fall and reached 5.1%) and the  
strength of remittances from abroad (which reached USD 30 billion,  
or 8% of GDP). The lockdown in the country has produced a twin-  
pronged shock to consumption: firstly, households are limiting their  
purchases to essential goods, and secondly, they are suffering from  
lower incomes due to the interruption of production activity. In  
addition to the deterioration of the formal labour market, there will be  
losses in the informal sector and the probable reduction in  
remittances from workers abroad. The informal economy of the  
Philippines has shrunk over recent years but remains substantial: it  
still probably represents around two-thirds of employment and 30%  
of GDP. Household incomes are therefore likely to be lastingly  
weakened. As a result, after falling during the lockdown period in  
Investment growth slowed markedly in 2019 (to 1.5% from 12.9% in  
2018), as a result of delays in the implementation of the budget and  
interruptions to several public infrastructure projects, and also due  
to a tightening of credit conditions at the start of the year and  
weaker global demand prospects. Investment growth started to  
recover in H2 2019, particularly thanks to the resumption of  
construction projects, but this improvement has been stopped in its  
tracks by the outbreak of the virus. Despite a loosening of monetary  
policy, private investment is likely to remain depressed in the short  
EcoEmerging// 2nd quarter 2020  
term, due to the losses incurred by corporates during the health  
crisis and the deterioration of confidence. However, investment in  
public infrastructure projects is likely to recover more rapidly after  
the lockdown, driven by the government’s “Build, build, build”  
programme (which projects infrastructure development spending to  
reach 7% of GDP in 2022, up from 3% in 2015).  
- The central bank will cut interest rates further  
CPI (Y/Y)  
Policy rate  
Growth in exports of goods and services also started to slow in 2019  
to 3.2% in real terms, from 13.4% in 2018). Import growth fell even  
more sharply, and the contribution of net exports to real GDP growth  
was slightly positive, after four years in negative territory. In 2020,  
both exports and imports of goods and services are likely to contract,  
given the slowdown in domestic demand, the fall in world industrial  
production (on which sales of electronic goods and IT services from  
the Philippines depend), international trade and tourism.  
The central bank has room to act  
Source : Central Bank, CEIC  
The reduction in inflationary pressures has given the central bank  
Bangko Sentral ng Pilipinas, or BSP) the room to ease its policy  
depreciated since the beginning of the health crisis in spite capital  
outflows. In contrast, and in line with world market trends, the  
Philippines’ stock market suffered a very sharp correction in March  
(falling by 22%).  
stance. Monetary policy is based on inflation-targeting, with a  
targeted range from 2% to 4%. Inflation has been below the 3%  
mark since June 2019. After a temporary uptick in December-  
January, it is likely to continue to weaken in the short term, due to  
low oil prices and weaker consumption. The BSP began to relax its  
monetary policy in Q2 2019, cutting its policy rate by 50 basis points  
Fiscal slippage under control  
The government’s initial stimulus package was small (PHP 27 billion,  
or 0.15% of GDP), coming on top of the public investment plan  
introduced in 2016. However, in response to the worsening health  
crisis and the growing shock to economic activity and household  
income, the government declared a state of emergency at the end  
of March and stepped up its support measures. It aims to support  
the healthcare sector, the most vulnerable workers and households,  
SMEs as well as the tourism and agriculture sectors. The budget  
deficit is expected to exceed 4% of GDP in 2020 (up from an initial  
target of 3.2%). Public finances are sufficiently solid to absorb the  
shock: government debt is low, it declined from 45% of GDP in 2015  
to 42% in 2019, and two-thirds of it is in securities issued on the  
domestic market. The BSP has already announced that it will  
purchase government bonds for PHP 300 billion (1.6% of GDP).  
Therefore, the government should be in a position to cover its  
financing requirements in the short term, despite the correction in  
international bond markets (the EMBI spread on the Philippines’  
sovereign bonds widened from 67 bp to 280 bp in Q1 2020).  
bp) between May 2019 and January 2020. Since the onset of the  
pandemic, it has quickened the pace of rate cuts. The policy rate  
was cut by 25 bp on 6 February and then a further 50bp on  
9 March, taking it to 3.25% (Figure 3). Further cuts are likely in  
Q2 2020.  
The central bank has also introduced measures to support liquidity  
in the banking sector and stimulate credit. Reserve requirement  
ratios have been lowered by 200 bp (to 12% for big banks) and  
prudential rules have been relaxed (such as reporting and  
provisioning rules). Banks have been encouraged to support their  
customers (reducing fees, extending repayment delays, etc.). The  
authorities enjoy some room to manoeuvre on the credit front as  
corporate debt levels are moderate (credit to the private sector  
represents less than 50% of GDP) and the banking sector is solid.  
In fact, banks have levels of liquidity and equity that are sufficiently  
comfortable to absorb an increase in non-performing loans  
estimated at 2% of total loans in 2019). Yet, the banks will probably  
face episodes of stress and record a deterioration of profits in the  
short term. Their main sources of vulnerability come from the  
concentration of their portfolios on a few large local conglomerates  
as well as their exposure to the real estate market (which accounts  
for nearly 20% of total loans). Their exposure to currency risk is  
limited, as banks on the whole do not post currency mismatches in  
their balance sheets, and foreign-currency loans only account for  
about 10% of total loans.  
Currency risk itself is limited, with the peso (PHP) supported by the  
spread between domestic and global interest rates, the Philippines’  
good macroeconomic fundamentals and the recent improvement in  
the current account deficit (only 0.1% of GDP in 2019). The peso  
appreciated slightly against the USD in 2019, and then has barely  
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.
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