COVID-19 and the Philippine Economic Outlook: Recalibrating the 2020 Vision

This was adopted from an interview I participated in with Archers Network

It’s not an exaggeration to say that COVID-19 has dramatically affected our country. The effect of COVID19 is not just isolated to economics but across the board. In terms of the current position of the country, I am hopeful that we are already past the worst stages but this is subject to change depending on how we continue our containment of the virus and how the country will eventually recover and transit to a new normal. 

Given that there were a lot of restrictions on travel, trade was also subsequently affected both on the import and the export side. Banking was somewhat affected in that they may experience an increase in the number of non-performing loans and would potentially consider revisions or some considerations in the current portfolios or strategies. On the financial markets, the lockdown of course triggered initially a huge sell off in the equities or the stock market. Moreover, the bond market was also negatively affected with yields dropping quickly. The once vibrant entertainment industry halted with mass gatherings banned, most leisure attractions and activities closed, waiting for conditions to be better. Food supply and prices have been relatively stable for the most part. While there were some frictions in the beginning, we saw an immediate stabilization and adjustment as the supply of food was relatively unhampered despite the ECQ. Education will likely see fewer enrollments as some families and students may opt to wait it out until conditions clear or opt to participate in distance learning for the mean time. We see many universities adjust to this new normal, pioneering different blended learning strategies to reduce physical contact and continue education outside a physical classroom. I think there will be a surplus of masks, but that surplus will eventually get depleted and the overall production adjust entering the new normal. It is clear that there is a relatively permanent effect in the demand for masks moving forward due to the pandemic. While there was considerable scarcity during the start, supply has leveled off. We can also see some companies making slightly differentiated masks which may be a start of another small fashion segment. The same is true for alcohol. 

COVID-19 has been widespread at it has certainly affected a great majority of industries in the country. First, given that we had a massive nationwide lockdown affecting all industries, financial markets have fallen, unemployment is at a high (17.7 percent from 5.3 percent), and consumer spending and aggregate demand have taken a huge hit. Those that are biggest hit are likely the tourism and hospitality sector, the transportation sector, construction, leisure and trade. It just so happens that a great number of people around 30% of our labor force are employed in these sectors. If you look at the tourism and hospitality sector, they employ a lot of people and majority of these people live on daily wages. When the government implemented the lockdown to contain the virus, this of course severely affected tourism activities shutting down the industry almost overnight. Moreover, aviation and land travel also stopped therefore hitting the transportation sector quite heavily as well. 

COVID-19 presents a unique opportunity for many industries to re-align their priorities. It’s an understatement to say that majority of businesses were ill prepared for the pandemic. We were all caught off guard. However, the pandemic has also given many lessons by which industries can sort of learn from and potentially adopt. The first is the necessity to establish a digital presence and a digital infrastructure for the conduct of their business. This doesn’t mean abandoning old analog ways overnight, rather, it is about being flexible enough to go digital and embrace newer technologies. They can take advantage of digital tools and services from the sharing economy to be able to cope up with fast changes. Moreover, merchandisers and retailers may opt to adopt ecommerce more quickly given the unprecedented rise in the importance of logistics and deliveries in light of the pandemic. Government should provide support in all avenues that it can. One key consideration that we should have is being able to support MSMEs which not only comprise a great proportion of our overall output, but are responsible for the employment of many Filipinos. Government should prioritize measures on (1) containing the virus through the promotion of continuous testing, contact tracing, and a robust response framework, (2) enact measures speeding up the recovery plans we have put in place giving assistance to key industries and subsequently kickstarting select projects which could potentially bolster employment. As I’ve said, businesses would need to adjust to the new normal, and that means adjusting the way they conduct their business. This means adopting newer technologies, changing old habits, or restructuring their priorities especially if a more permanent effect to their business is seen. In terms of new businesses, the market will be tough. The economy would be reeling from the effects of the pandemic but that shouldn’t deter them from moving forward especially if they have a good action plan in place, a plan that potentially can drive growth in the short and medium term. 

The ECQ was implemented on March 16, 2020 and we can clearly see that it has had a huge effect on the equities market. While the market was generally in decline as the pandemic escalated in late February when more cases were announced, the PSEi fell quite quickly from late February to Late March reaching the 4000 levels compared to the 7000 we were in during January. What’s surprising is that the recovery was quite quick after the initial crash going back comfortably to the 5000 levels around a week after the low. With restrictions slowing being lifted, we can see a rebound in the PSEi closing comfortably above 6000 recently. That trend in the recovery has been fairly consistent across all equities markets but we still need to be weary as further lockdowns, second waves, and more market disturbances could potentially affect this more in the future. Property values, based on some market estimates, are likely to decline considerably due to COVID but it’s unclear whether this decline would be widespread or more temporary as demand picks up later this year and early next year. The government will certainly deficit spend this year as it needs to implement measures to contain the virus while at the same time support the economy to keep it afloat. From our debt perspective, the Philippines is relatively well balanced in terms of its Debt to GDP ratio in that it is far lower than other countries. But that doesn’t mean we should just spend endlessly and forgo tax collection. The tax collection will come but government would obviously expect issuing some concessions especially for the hardest hit industries, but the tax collection cannot be zero or negligible. While we should continue to spend for the country, we must be weary of our levels of deficit being manageable. Band aid solutions and brash decisions on tax reliefs or subsidies may prove ineffective, especially if these policies are not inclusive, are inequitable, and are inefficient. 

The BSP has been quite proactive in responding to the crisis. For one, it acted quite quickly using its main tools such as lowering the its key policy rate and the reserve requirements on the onset of the ECQ. This has ensured adequate domestic liquidity for the most part. Moreover, it’s asset purchases from the Bureau of the Treasury would feed into the government funds to fight and contain the virus. For now, I think there is no further need to lower rates but this is an alternative which can be considered if containment isn’t achieved as expected or if more complications arise. Another thing that it did was it made all transactions on InstaPay and PesoNET virtually free under the PhilPASS system. Essentially, transferring to other banks was a breeze which made the adoption of mobile banking and digital banking quite fast during ECQ. This is important because we want less people venturing out on the streets to do transactions over the counter and it’s one further catalyst to try and bolster the digital banking environment of the country. 

OFWs were severely hit by the pandemic. You’ve seen in the news that a lot of our OFWs were retrenched, laid off, or furloughed by employers around the world. While we do expect some recovery in the new normal, chances are that there is some significant proportion of these OFWs that will remain unemployed and will have to look for new employment opportunities as companies recalibrate their systems under a new normal. The decrease in the remittances will certainly affect us but this is more a near term thing, with the possibility of extending to the medium term should conditions not be favorable. However, once these employees are reassigned or find newer more productive jobs, we could expect a pick-up shortly after that. 

The value of the Philippine peso actually is appreciating against the US dollar for the most part. While a slight depreciation was seen during the start of the ECQ, we saw a relatively quick rebound during the same period. However, note that the exchange rate is heavily influenced by capital flows globally. Since we are in a pandemic, returns a lot of capital assets have declined. As such, a more muted exchange rate environment should be seen until a pickup in the capital flows is seen. 

It is likely that consumer behavior would be changed for the time being and will likely fall back to its old level, albeit more restrained, after the pandemic is fully contained. In the new normal, we will see potentially less large-scale gatherings, more cautious measures to preserve public health, and the adoption of more resilient policy measures if things go sour. Regarding saving, spending, and investing, this is something a bit unclear to me personally. In my opinion, I think consumers would save and invest more in the short run and migrate to relatively safer securities and safer investments which aren’t hinged on the uncertainty that the pandemic causes. Of course, these lockdown measures indirectly made a huge dent on consumer spending and it’s likely that this will be the case for the remainder of the year. However, this spending should slowly and cautiously pick up as more recovery is felt and the pandemic is contained further. Overall, we can’t really change what the pandemic has done, we have to now take it as given. The challenge is rising up to establish new measures to prevent further outbreaks, strengthen our national health system, ensuring a cautious and smooth recovery, and ensuring a resilient economy in transitioning to a new normal which is inclusive bringing the benefits of economic policy closer to the nation.