Economic crisis

"Recovery will take a long time coming."

The World Bank has forecast a decline in economic output by the Philippines of 3.6 percent for 2020. This is almost double the previous forecast of a 1.9-percent decline in GDP real growth for this year. The doubling of the drop in GDP, minus the effect of inflation, means the economic situation is worsening. Other economists forecast an ever deeper Philippine GDP decline this year — six percent.

The 3.6-percent economic slowdown is the worst in 36 years since 1984, when the economy contracted by a record 7.4 percent because of a political assassination. That political crisis caused a run on the country’s dollar reserves, froze credit, drained money supply, and raised interest rates to as high as 44 percent per year. The peso declined in value, from P18 per dollar to P55 per dollar, a devaluation of 211 percent.

This year, the Philippines’ dollar reserves hit a historic high of $93.29 billion in May, at the height of the pandemic, an increase of $2.35 billion from the April 2020 level of $90.94 billion. The peso has also become one of the strongest in the region, hitting P49.9495 per dollar yesterday. The currency seems to be seeking a P48 to $1 rate. That will be an appreciation of 8.2 percent from the January-April 2019 average of P52.296.

I have never seen an economic crisis where a country’s dollar supply rises rather than drops and the currency appreciates, rather than depreciates.

This year, there is no political crisis although the Duterte administration is preparing an Anti-Terror Law that rivals those of its ASEAN neighbors in the grant of awesome powers to the police and the military. If you are a terrorist, you might want to be in hiding. If you are a communist, you might want to be in hiding. And if you are a severe critic of government, you might want to study your hiding options.

This year’s crisis is economic, social, and structural. The lockdown that has lasted 102 days will cause loss in economic output of P4 trillion, with more than 80 percent of the country’s annual output of P20 trillion shut down for more than 100 days. I estimate more than 32 million workers have lost their jobs. A third of those jobs will never come back.

On June 9, the World Bank reported, quoting a government survey, 77 percent of micro and small firms and 62 percent of medium-sized firms had to close due to the enhanced community quarantines. Those that remained open suffered a 66.5 percent drop in sales.

The World Bank’s growth forecast for 2020 assumes that the containment measures will gradually ease in the second half of the year, and economic activities will return in some sectors of the economy. Given income losses and heightened uncertainty, household consumption and private investment are expected to remain weak, the bank said.

Over the long pull, the bank is optimistic. “Economic growth prospects and poverty figures are expected to improve in succeeding years driven by a rebound in consumption, a stronger push in public investment, supportive fiscal and monetary policies, and the recovery of global growth. Economic growth is projected to return to above 6 percent in 2021 and 7 percent in 2022. Increased economic activity surrounding national elections will also boost growth in 2022,” the World Bank’s Manila office said.

Says the World Bank: “The Philippines’ strong fundamentals, built over decades of structural reforms, has helped the economy to cope with the COVID-19 pandemic. The Philippines has abundant external reserves and the lowest public external debt in the East Asia and the Pacific Region. Also, the country has the highest reserve ratio in the region, indicating that monetary policy has plenty of room to inject liquidity into the economy and help boost growth.”

Don’t be complacent though. The International Monetary Fund, the central bank of central banks, reported on June 25, 2020 that this year’s crisis is a crisis like no other, with recovery uncertain.

IMF sees a decline in global growth of 4.9 percent, more than double its earlier forecast of just a 1.9- percent drop. In 2021, global growth recovers, to 5.4 percent.

Rich countries will show deeper declines in growth: United States (–8.0%); Japan (–5.8%); the United Kingdom (–10.2%); Germany (–7.8%); France (–12.5%); Italy and Spain (–12.8%). Together, the advanced economies will decline in growth by 8 percent and recover to 4.8 percent rate in 2021. China will grow by a measly one percent, from 6.1 percent in 2019 but recovers to 6.2 percent in 2021.

The ASEAN Five together will show economic decline of two percent for 2020 and growth of 6.2 percent in 2021.

Ninety percent of emerging and developing countries, which include the Philippines, will show negative growth in per capita income. The emerging economies will decline 3 percent this year but recover to 5.9 percent growth in 2021.

Global full-time job losses will swell from 130 million to 300 million by the second quarter of 2020.

The good news is that inflation in emerging economies this year moderates, to 4.4 percent, from 5.1 percent last year.

Oil spot prices per barrel are seen at $36.20 in 2020 and $37.50 in 2021, and $46 thereafter, still 25% below the 2019 average.

On balance, it is still bad news for the economy this year. And recovery will take a long time coming.

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