Phl not out of woods yet despite Q2 growth

by Lawrence Agcaoili (The Philippine Star), 2 Aug 2021

MANILA, Philippines — Global financial institutions were not impressed by the strong rebound in the country’s economic output in the second quarter, noting that downside risks persist that could hinder a further recovery.

American banking giant Citi and Fitch Solutions Country Risk & Industry Research said in separate reports that the Philippines is not out of the woods yet despite booking a strong 11.8 percent gross domestic product (GDP) growth in the second quarter – the fastest in 32 years and snapping five consecutive quarters of contraction.

Nalin Chutchotitham, economist for the Philippines at Citi, said the two-week hard lockdown in the National Capital Region (NCR) and nearby provinces from Aug. 6 to 20 to slow the spread of the more contagious COVID-19 variant provides downside risks to growth.

“Despite better-than-expected second quarter GDP performance, there remains downside risks for the third quarter and fourth quarter due to renewed lockdown,” Chutchotitham said.

Malacañang placed the NCR under enhanced community quarantine for 14 days amid a COVID surge driven by the more contagious Delta variant.

Chutchotitham said Citi is retaining its GDP growth forecasts at 4.9 percent for 2021 and 6.8 percent for 2022, but is closely watching downside risks from a potential prolonged lockdown.

The bank said the stricter lockdown measures in the second quarter translated to a 1.3 percent GDP contraction in the second quarter after growing by 0.7 percent in the first quarter.

Chutchotitham said the Bangko Sentral ng Pilipinas (BSP) is likely to keep interest rates at record lows in its meeting today and to maintain the bank reserve requirement ratio (RRR) due to tepid demand for loans.

“We still expect the BSP to keep policy rate unchanged at two percent through at least mid-2022, given expectation of manageable inflation in the second half. We also do not think RRR cut is likely in the second semester while credit growth remains weak,” Chutchotitham said.

On the other hand, Fitch Solutions further slashed its 2021 GDP growth forecasts to 4.2 percent and 6.8 percent for next year amid the continued disruptions to output as the country struggles to contain COVID.

Fitch Solutions said underlying weaknesses were evident as mobility restrictions caused the output to contract by 1.3 percent quarter-on-quarter despite emerging from recession in the second quarter.

“The economy will face continued disruptions from the COVID-19 pandemic given its slow pace of vaccination and difficulties containing outbreaks. With only 9.9 percent of the population fully vaccinated as of Aug. 5, the country remains a long way off from reaching herd immunity,” it said.

The research arm of the Fitch Group added it lowered its expectations for domestic activity through the second half amid the hard lockdown in Metro Manila in August and the heightened threat posed by the more infectious Delta variant.

It also slashed its gross fixed capital formation growth outlook to nine percent from 10 percent, given spare capacity and continued disruptions to investment.

According to Fitch Solutions, manufacturers reported spare capacity and declining backlogs in the July Purchasing Managers’ Index report, indicating limited need for investment.

Likewise, the Fitch unit also lowered its government consumption growth projection to five percent instead of seven percent this year as lockdown measures would continue to hurt revenue collections and delay expenditure plans.