UK think tank: Next president needs to lift PH from ‘most lackluster’ COVID recovery
MANILA, Philippines—The next President will have to deal with rising inflation, record debt and the risks of policy direction changes, the main challenges to economic recovery according to economists watching the Philippines.
The Duterte administration targets 7 to 9 percent gross domestic product (GDP) expansion in 2022, but majority of economists polled by the Inquirer last week believe the goal cannot be attained.
Geopolitical tensions abroad such as the Ukraine-Russia war, surging inflation globally, and aggressive policy tightening by the US Federal Reserve are spilling over to the Philippines and posing risks to economic recovery.
Add to that the lingering uncertainty about this year’s presidential elections, with a new President assuming the position on July 1.
While many economists sought by the Inquirer last week — including former socioeconomic planning secretary Ernesto Pernia, who had said a win by the son of dictator Ferdinand Marcos may “wreak havoc” on the Philippine economy still reeling from the prolonged COVID-19 pandemic — preferred also an economist like Vice President Leni Robredo, the UK-based think tank Pantheon Macroeconomics on Monday said that “the likely election of Ferdinand Marcos Jr. as the Philippine president shouldn’t spook markets.”
“A smooth transition matters most—gridlock due to a contested result is the worst-case scenario. Any future administration will have to shelve reform, as repairing the COVID-19 damage is far from over,” Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco said in a report.
Chanco said while Marcos led the surveys leading to the elections, he had “a lot of political baggage, which risks distracting — or, at worst, destabilizing — a probable Marcos administration.”
“His family is still facing lawsuits for ill-gotten wealth obtained during the dictatorship of his late father, and Mr. Marcos is personally facing allegations of tax evasion,” Chanco noted.
On the flip side, Robredo — “the market’s preferred candidate,” as had been shown by a recent Bloomberg poll among analysts and investors — “boasts a concrete set of specific policy proposals, whereas Mr. Marcos is running more on his prior record in the offices he has held, most recently as a senator from 2010 to 2016,” Chanco said. However, as surveys had shown, Chanco said that “the huge crowds that have turned up at Mrs. Robredo’s rallies have had little impact on sentiment.”
For Chanco, “a Marcos victory is unlikely to translate directly to a bad day for markets.”
“What arguably matters more is that election day proceeds smoothly and that the transition in government takes place without a hitch. This can’t be taken for granted in the Philippines’ still-young, sometimes-fragile and often volatile politics,” Chanco said.
“A ‘bad’ market outcome is an election that doesn’t produce a clear winner, with the presumptive victor then likely to face allegations of electoral misconduct. Remember that no president in modern Philippine history has secured a majority of the electorate’s support,” Chanco added, citing Pulse Asia’s last pre-election survey showing Marcos likely cornering 56 percent of the votes for president.
“We don’t have to look too far in the past to see what can happen if the election turns out to be a much closer contest than the opinion polls have been suggesting,” Chanco said.
“The 2016 vice presidential race was a nail-biter between Mrs. Robredo and Mr. Marcos, with the former edging past the latter by just 0.3 percentage points of the vote. The extremely tight margin compelled Mr. Marcos to challenge Mrs. Robredo’s victory, a legal process that lasted years, until the Supreme Court dismissed the case in 2021,” Chanco noted.
“To be sure, the opinion polls leading up to that race for the second-highest office in the land were much tighter. Nonetheless, a shock result this time can’t be ruled out, especially when considering the relatively small sample size of electoral surveys in the country, which typically poll just a few thousand people,” Chanco said.
“For perspective, 45 million votes were cast in 2016. All told, the potential worst-case scenario is political and government gridlock, if the runner-up ends up challenging the legitimacy of the next president,” Chanco added.
Chanco said that “in the event that Mr. Marcos comes out on top without much drama, his — mostly vague — aspirations for the economy are unlikely to matter much in his first few years in office.”
“It doesn’t really matter who takes the helm at Malacañang Palace, as any future administration will be preoccupied with repairing the economic damage caused by the pandemic since 2020, with economic reforms likely to take a back seat,” Chanco said.
Chanco described the Philippines’ economic recovery from its worst post-war recession wrought by the most stringent restrictions in 2020 to be “the most lackluster in emerging Asia.”
“Based on our current forecasts, real GDP will remain some 15-percent below the pre-COVID-19 trend by the end of this year. The rest of the region is likely to show more impressive rates of recovery, at around 90-95 percent of its pre-pandemic rates,” Chanco said.
“The labor market also remains fundamentally weak, despite the latest data last week showing that the unemployment rate in March fell below 6 percent for the first time since the pandemic hit,” Chanco said.
“Crucially, the headline jobless rate is being flattered substantially by the highest labor force participation rates in years,” he added.
“Demand for workers still is very subdued, with job openings at the end of last year treading water at 45-percent below the end-2019 level. Consumption, the economy’s mainstay, is likely to stay under pressure, with the sluggish job market, the rebuilding of savings lost since 2020 and, more recently, fast-rising inflation, weighing heavily on spending decisions,” Chanco said.
In April, headline inflation or the rate of increase in prices of basic commodities surged to a 40-month high of 4.9 percent year-on-year — above the Bangko Sentral ng Pilipinas’ (BSP) 2 to 4 percent target range of manageable price hikes — due to expensive food and fuel.
Pernia told the Inquirer last Sunday that while he hesitated to venture into forecasting economic numbers, having been part of the Duterte administration before he resigned in April 2020, he was “not as upbeat — with rising inflation,” about growth prospects for this year.
In an economic bulletin on Monday, the Department of Finance’s (DOF) chief economist and retired undersecretary Gil Beltran warned that “the economy continues to face inflationary pressures from both food and non-food items.”
“The lingering effects of the African swine fever (ASF) continues to threaten food security and is further complicated by the ongoing geopolitical tension that has implications on both food and energy security,” Beltran said.
“Moreover, avian flu outbreaks in parts of the country pose threats to the poultry sector. The country needs to repopulate decimated hog populations, momentarily supplement any shortfall with meat imports, and effectively contain the avian flu outbreak,” Beltran added.
“In the short-term, non-food price inflation will continue to be driven by developments in the global energy market. Dubai crude oil continues to hover high, averaging $102.68 per barrel in April, up by 64.6 percent from the same month last year but declining by 9.2 percent, month-on-month,” said the DOF chief economist.
But for Beltran, “it would be a policy mistake to suspend fuel taxes since it will be the top 10 percent of the population that will gain the most as they account for nearly half the fuel consumption in the country.”
“The appropriate policy instrument to address elevated energy prices is targeted transfers to vulnerable groups rather than blanket non-taxation to all,” Beltran said. To mitigate the impact of expensive fuel, the government will give away a total of P47.5 billion in financial assistance to the bottom 50-percent income households, public utility vehicle (PUV) drivers, as well as fishermen and fisherfolk.
In an email to the Inquirer last week, Sun Life Investment Management and Trust Corp. economist Patrick Ella said that the change in administration was “not a risk just as previous changes weren’t,” although he said the next President’s biggest challenge will be to “manage the debt-to-GDP ratio back to 2019 levels,” when it fell to a historic-low of 39.6 percent before COVID-19 struck.
The national government’s outstanding debt hit a new record-high of P12.68 trillion last March, and would further climb to P13.42 trillion this year’s end.
The Philippines’ debt-to-GDP ratio — said to be the better gauge of an economy’s capacity to repay its debts — had been projected to inch up to 60.9 percent of GDP, from the 16-year-high of 60.5 percent last year. For emerging market-economies like the Philippines, debt watchers pegged manageable public debt at the 60-percent-of-GDP level.
“Elevated levels of debt that will be turned over to the new administration will handicap the next President’s ability to ‘hit the ground running,’” said ING senior Philippine economist Nicholas Antonio Mapa in an e-mail.
“In 2016, the debt-to-GDP ratio was at 40 percent. Nowadays it’s at 60.6 percent. Inflation as mentioned earlier is now at 4.9 percent [in April] while in 2016 inflation was subdued and even below 2 percent. Borrowing costs are surging, making the investment climate not as favorable while the trade balance has ballooned to record levels,” Mapa said.
“Surging inflation is just one of the many risks that this economy faces at a crucial time of leadership change. The new President inherits an economy that is very different from the one turned over in 2016,” Mapa said.
“Thus, the choice of the next President could not be more crucial as he or she will need to navigate the pitfalls of the economic landscape they will inherit. A misstep in the first 100 days could spell the difference between credit downgrade or a stay, a return to the 6-percent [pre-pandemic] growth path or the return to the pre-2010 growth trajectory of roughly 3.5 percent,” Mapa added.
Union Bank of the Philippines chief economist Ruben Carlo Asuncion also cautioned that “at this point, any change in leadership is always a threat to continuity and balance.”
“We know that the markets have their own preference and we do have candidates leading in surveys that may not be what the market wants or prefers,” Asuncion said.
“As we approach the elections, the uncertainties will definitely rise, but as the smoke clears, everyone has to work together to move forward. And whoever wins, even if we would have preferred otherwise, the wise thing to do is to make it work for the best of all,” according to Asuncion.
Asuncion said the top challenge for President Rodrigo Duterte’s successor will be “to address the pandemic effects effectively with little impact on the fiscal side.”
“Also, addressing the fiscal challenges would be paramount. Getting our act together would also be a priority, I believe, especially with so many uncertainties, particularly the external environment,” Asuncion added.
Duterte’s economic team will turn over a comprehensive fiscal consolidation and resource mobilization plan to the next administration to pay for the ballooning debt and narrow the yawning budget deficits wrought by COVID-19.
“Fiscally, the Philippines is also more constrained than its counterparts. The country suffered one of the biggest budget blowouts at the height of the COVID-19 crisis, and progress in closing the budget gap has essentially stalled, remaining just a touch under 9 percent of GDP through most of 2021,” Chanco said.
Different economic officials had said the fiscal consolidation proposal may include new or higher taxes, spending cuts on non-priority sectors, as well as drivers to robust GDP growth that could outgrow debt.
Another risk flagged by Philippine National Bank (PNB) economist Alvin Joseph Arogo, meanwhile, was that “government spending will likely be slower for the rest of the year as disbursements planned by the previous administration are typically scrutinized by the team of the newly elected President.”
“Too much scrutiny might result in a bigger than expected deceleration in government spending growth,” Arogo warned.
Ateneo Center for Economic Research and Development (ACERD) associate director Ser Percival Peña-Reyes agreed: “There is a huge debt overhang because the government had to protect human resources and small businesses at the height of COVID-19. More promises of spending are simply difficult because of the lack of resources and limited revenue generation.”
For Arogo, the next President’s biggest challenges included reducing the debt-to-GDP ratio, managing public-private partnership (PPP) project amid the new Build-Operate-Transfer (BOT) Law’s implementing rules and regulations (IRR), ensuring electricity and water security, as well as improving agricultural self-sufficiency.
Arogo was referring to jitters wrought to the private sector by the revised BOT Law IRR approved by the Duterte administration’s economic managers, which not only shielded the government from arbitration, but also provided “anti-market” definitions of contingent liabilities arising from PPP projects.
Rizal Commercial Banking Corp. (RCBC) chief economist Michael Ricafort listed down what he deemed as key success factors for the new Philippine President that, for him, would help sustain the country’s economic recovery and development as well as attract more investments into the country:
- Credible and competent economic team (as has been seen over the past 10-20 years)
- Policies that promote ESG (environment, society and governance) to help attract more investments
- Strengthening of institutions and rule of law
- More effective response against the COVID-19 pandemic
- Focus on economic recovery measures from the pandemic such as the reopening of the economy, creation of more jobs, improving the government’s fiscal position, and increased infrastructure spending
- Continuation of economic and fiscal reforms
- Promotion of greater inclusion and unity among politicians, or strong support from lawmakers needed to pass more reform measures that require legislation
- Improved diplomatic relations with the biggest trading partners and sources of foreign investments.
“Some potential market excitement is possible over the new President (as seen in previous presidential elections), but [the market’s on] wait-and-see on policies and reforms,” Ricafort said.
TSB
