Coronavirus may delay PHL economic recovery

THE spread of the coronavirus disease 2019 (COVID-19) could delay the recovery of the country’s economic growth this year as it could impact drivers like remittances, consumption and tourism, according to ANZ Research.

Still, growth is expected to remain on track, with the government and the central bank expected to support the economy with fiscal and monetary stimulus.

In a report released on Thursday, the research arm of ANZ Bank said the COVID-19 outbreak is a “key downside risk” to the Philippine economy.

“A hit to Q1 GDP (gross domestic product) growth looks likely, but further out, the impact on full-year growth will depend on how quickly the virus spread can be contained and how quickly infrastructure spending can be pressed into action,” ANZ Research said, adding the impact on full-year GDP is “unclear for now.”

The economy grew by 6.4% in the fourth quarter, bringing the full-year 2019 figure to 5.9% in 2019, slower than 2018’s 6.2% and missing the downward-revised 6%-6.5% set by the government for that year.

The full-year reading was also the slowest in eight years, and also broke the economy’s seven-year streak of at least six percent growth.

ANZ Research said the outbreak could trim first-quarter growth by as much as 0.42 percentage point (ppt), which they forecast to be at 6.8%.

It, however, maintained its 2020 GDP growth forecast at 6.2% on the back of the assumption that COVID-19’s economic impact “should be relatively modest.”

The government is targeting 6.5% to 7.5% GDP growth this year.

“Recent high frequency indicators, such as credit and import growth, suggest that economic conditions are recovering, albeit at a modest pace,” ANZ Research said.

“In our base case scenario, we assumed that the bulk of the negative impact will occur in Q1 followed by a recovery in growth in H2, supported by both monetary and fiscal stimulus.”

UnionBank of the Philippines, Inc.’s Economic Research Unit (ERU), in a separate research note yesterday, for its part said annual GDP growth in 2020 could be stalled at 5.8% in the case the COVID-19 outbreak continue for about six months. ERU’s baseline 2020 growth forecast is at 6.6%.

CURRENT ACCOUNT
ANZ Research said slower economic activity in China and other affected countries will have spillover effects on the Philippines, particularly tourism, remittances and import demand, which could consequently affect the country’s current account.

ANZ said Mainland China accounted for just 0.1% of total remittances in the 11 months to November 2019, while remittances from Filipinos working in Hong Kong and Taiwan accounted for 2.6% and 2.0% respectively, bringing the cumulative number to 4.7%.

“It is also important to bear in mind that around a fifth of overseas Filipino workers are engaged in the shipping (passenger and cargo) industry, so any weakness in cruise travel or global trade…will have a negative impact.”

The report said a 50% drop in remittances from mainland China, Hong Kong and Taiwan for three straight months, coupled with a 20% decline in inflows from the rest of Asia, could shave 0.11 ppt off first-quarter GDP. Meanwhile, an extended decline in these inflows for a year could trim as much as 0.51 ppt from full-year GDP growth.

Meanwhile, slower Chinese economic activity due to business closures and internal travel restrictions will likely dampen Chinese demand for imports, it said.

“The Philippines’ exposure to goods exports…to China is estimated to be around 1.6% of GDP… Thus, a 20% drop in import demand from China for three months will translate to a 0.08 ppt hit to Philippines’ Q1 GDP through this channel,” it added.

With Chinese exports to the Philippines also likely to take a hit amid factory shutdowns, local industrial production may also be affected negatively.

Still, ANZ Research said the Philippines may be “relatively less exposed” than its neighbors to trade disruptions due to the outbreak.

As for tourism, ANZ Research expects tourist arrivals from other countries, not just China, to slow amid contagion fears, with the suspension of flights to some countries most affected by the virus also preventing some Philippine overseas workers from returning to work.

A reduction in Chinese visitors, which was the country’s second biggest tourism market last year, is expected to affect GDP by between 0.20-0.56 ppt, depending on the extent of the outbreak and the decline in tourist arrivals.

ANZ Research, however, said lower oil prices will give the current account some buffer versus the expected negative economic impact of COVID-19.

“Although lower remittances from Asia and weaker tourism receipts will exert downward pressure on the current account, this could be offset by a reduction in the fuel import bill…” ANZ Research said.

“Much will depend on the pace of recovery in capital imports going forward. At present, despite the risk from the virus outbreak, we expect any deterioration in the current account deficit in 2020 to remain manageable.”

POLICY SUPPORT
“Broadly, while the virus outbreak may delay the expected [economic] recovery, we still expect it to come through, given the monetary and fiscal stimulus involved,” ANZ Research said.

It said the timely passage of the 2020 budget will support the economy’s recovery after growth slowed in the first two quarters of 2019 due to the delay in the enactment of that year’s spending plan.

“We expect government spending in the year to expand at a sustained pace underscoring an improvement in public construction investment… Furthermore, legislation passed late last year, allows any unused funds from 2019 (both for capital outlays and operating expenses) to be allocated in the current year — a provision for an extra boost if needed,” it said.

ANZ Research also noted that the Bangko Sentral ng Pilipinas (BSP) earlier this month cut its policy rates by 25 basis points (bps) “to solidify the improving growth trajectory and guard against downside risks from the outbreak.”

The rates on the BSP’s reverse repurchase, overnight lending and deposit facilities now stand at 3.75%, 4.25%, and 3.25%, respectively.

Both ANZ Research and UnionBank’s ERU expect another 25-bp cut from the BSP this year. However, “a higher-than-expected impact from the coronavirus may extend the easing cycle further,” ANZ Research said.

“With the difficulty of assessing the economic impact of the COVID-19 health scare to China and to the region, UnionBank’s ERU thinks that another 25 bps cut may be pushed earlier than expected,” ERU said.

BSP Governor Benjamin E. Diokno has said the central bank is looking to cut rates by another 25 bps by midyear even as risks to the economic outlook persist. — LWTN