The Phl economy during the pandemic year

by Gerardo P. Sicat (The Philippine Star), 14 Jul 2021

This year is another difficult year for the Philippines. One year and a few months have now passed since the pandemic hit us. The consequences on the country have brought hardship on many.

Economic decline sucked out some of the dynamism that the economy had enjoyed in previous years. The country’s problems ahead have become more challenging as a result.

Economic decline – In 2020, the economy contracted by 9.5 per cent from the previous year. This happened as a result of the drastic quarantine measures that the government undertook.

The country’s main industrial and commercial centers located in Luzon’s greater Manila metropolis and surrounding provinces represented the largest concentration of population affected by the public health emergency.

In the first quarter of this year, the economy contracted by 4.2 percent year-on-year. In the same period, the country’s peers in the ASEAN also contracted, but not to the same extent. To wit: Thailand (-2.6 percent), Indonesia (-0.7 percent), and Malaysia (-0.5 percent). In contrast, Vietnam has continued to grow (4.5 percent). The data comes from the World Bank.

A weak part of the initial response was the failure to secure vaccines supplies. This is now likely to ease as deliveries are expected during the second half of the year and will help speed up vaccination. To date, the Philippine vaccination rate is up to 8.9 percent of the population, with 3.2 percent fully vaccinated. This lags behind country peers in ASEAN.

The lockdown measures designed to control the spread of infection has caused the contraction of labor mobility, leading to a drop in domestic production, a fall in gainful employment, and a curtailment of overall demand.

Domestic production and demand contraction were further afflicted by the drop in foreign trade in merchandise and in services. Tourism and BPO services suffered — two major sources of foreign exchange income. Recent rebounds have happened in exports, especially electronics exports. Workers’ remittances have rebounded too.

Despite a weakening of the overall foreign trade position, the country’s balance of payments has sustained a viable defensive position. The country’s foreign exchange reserves have continued to remain strong, maintained at around 12 months import capacity, and alternatively, 7.4 times capable of servicing the country’s short-term external debt.

The fiscal deficit – The government’s response to the decline in demand has been to pass a compensatory program of spending, including direct cash support to those badly affected by the loss of income opportunities as contained in the Bayanihan economic stimulus program.

The government’s expenditure program on construction of public infrastructure continued with vigor. Thus, government fiscal spending became the principal driver of economic activity.

The government programs under the Bayanihan and the infrastructure investment raised public spending to 23.4 percent of GDP by the first quarter of 2021 from 19 percent of GDP before the pandemic period..

On the fiscal revenue side, total revenues fell from 17.1 percent of GDP in 2020 to 16 percent of GDP in 2021. The drop in economic activity also led to a drop in government revenues.

The pandemic happened at a time when a major legislative reform in taxation and business incentives had been passed. This had the effect of reducing income taxes on corporations and redesigning the incentives system for investment promotion. These contributed to the fall in government revenues.

The increase of the fiscal deficit to 7.4 percent of GDP by the first quarter of 2021 was an inevitable result. The year before the pandemic, the fiscal deficit was two percent of GDP. In another meaningful framework, the Philippine situation puts the total public debt this year toward the 60 percent level of total GDP. Many countries have debt-to-GDP ratios beyond 100 percent and can still fiscally function.

This is a massive dose of fiscal deficit within a short period of time. A rule of thumb for frugal deficit spending for a responsibly growing emerging economy was before capped at three percent of GDP.

The pandemic has, however, relaxed the standard by which such measures are now seen. Under the emergencies that most nations face in the pandemic-driven world, fiscal standards have already been revised worldwide. The world’s fiscal watchers – the multilateral institutions led by the International Monetary Fund – understand that some degree of adjustments to the systemic decline of revenues of government need tolerance in hard times.

A day of reckoning in the future will have to factor in the economic measures that countries take to restore economic activity. This, of course, is a topic for future examination.