Bernardo M. Villegas
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Alternative Economic Scenarios for 2021

          There were both good and bad news contained in the report by the Philippine Statistical Authority on the Philippine GDP and its components for the third quarter of 2020.  The good news is that the worst is over.  The GDP decline for the third quarter of 11.5 per cent was slower than that of the second quarter which had been downgraded from 16.5 to 16.9 percent.  Also encouraging was the continuing increase in agricultural output of 1.2 percent, repeating its performance of a positive growth in the second quarter.  For me, this is the brightest spot in an otherwise continuing gloomy economic outlook. Before the pandemic, agriculture had always been the laggard, the achilles heel of the economy—a result of decades of neglect and mismanagement.  Now there seems to be a light at the end of the tunnel of low agricultural productivity that has been the greatest dampener of economic growth and the most important cause of mass poverty in the country.  The pandemic has helped to open the eyes of our leaders—both in the public and private sectors—that food security should be our most important concern as the economy returns to normal after the pandemic.  The so-called new normal should not be a return to business as usual as regards the way we manage our agricultural sector.  At both the national and local government levels, the most important concern should be to endow the small farmers with all the infrastructural and other support they need to increase their incomes, especially in the coconut regions where poverty incidence is the highest.  This has been accentuated by the recent spate of typhoons that have hit the Bicol region the hardest.  Bicol is primarily a coconut producing area.

         Another encouraging news about the third quarter is that there is evidence that the State is beginning to be the primary engine of growth, which it should be in times of crisis such as we are experiencing.  The growth of 5.8 per cent in government spending is reassuring that, despite all the accusations of corruption we hear from Senators and the President himself, especially against health and DPWH officials (with special mention of  the regional directors), there is a clear sign that the Government is the lead sector. This will have to be the case at least for the next two years until we see firm signs of a strong recovery of the consumption and private investment sectors.  These two sectors dropped by 9.3 per cent and 37.1 percent, respectively during the third quarter.  With consumption spending declining, it was inevitable that imports would fall by 21.7 percent.  With the whole world economy going into a deep recession, exports took a hit of -14.7 percent.

 

         The bad news was especially concentrated in such job-intensive sectors such as Accommodation and Services (-52.7 percent); Construction (-39.8 percent); Durable Equipment (-34.4 percent) and Transport and Storage (28.1 percent).  Two services components, Health and Social Work as well as Wholesale/Retail Trade had only single-digit declines of 4 percent and 5.4 percent, presaging a quicker recovery if the economy can avoid more lockdowns in the future.  The huge declines in some key sectors came as a surprise to most analysts who were predicting narrower GDP declines in the third quarter.  Before the PSA came out with the final figures, figures as low as 7.1 percent drop were being forecasted.  The median forecast was 9.6 percent decline in a Bloomberg poll.  Looking forward to the fourth quarter of 2020 and first quarter of 2021, I would be more cautious and project another double-digit GDP decline in the fourth quarter and still negative GDP growth for the first quarter for 2021.  From the weather pattern we have seen so far, we should expect more devastating typhoons in the coming months all the way to the end of December.  As we have experienced in the past, typhoons that come late in the year (like Ondoy) can do more damage than those early in the rainy season.  Already there are estimates that typhoons Roland and Ulysses have  taken as much as 1 to 2 percentage points from our GDP.  The other worrisome trend is what we are witnessing in very developed countries in Europe as well as the US, i.e. second or even third waves of the Coronavirus with even increased rates of infection as people start discarding safety measures such as wearing masks and social distancing.

 

         Given the threats of more devastating typhoons in the next few months and the possibility of more lockdowns as the Philippines suffers from new waves of the virus, the outlook for the next six to eight months continues to be very uncertain.  Since we are at the mercy of the pandemic and the Philippines may benefit from any vaccine most probably only late in 2021, it is highly probable that there will continue to be GDP declines way into the second quarter of 2021.  We should already factor into the short run the possibility of the Philippines suffering the same fate of more developed countries experiencing new waves of infection with the subsequent imposition of stricter lockdowns.  If the Philippine Government overreacts to these new waves, then we should expect the major engine of growth, consumption, to once again suffer as it did in the second and third quarters of 2020.  Until and unless consumption spending recovers and is able to post positive growth rates, we should expect GDP to continue declining.  Our only hope is for our Government, both at the national and local levels, to be  more realistic in accepting higher rates of infection as a fact of life and refrain from imposing severe lockdowns on the premise that we have already limited the number of deaths and have achieved high rates of recovery from COVID-19.  As long as we can get the public to strictly abide with the safety measures (wearing masks, washing hands, and keeping social distance), we should continue to relax movements of people.  I believe in the saying that the epidemic of fear is even worse than the virus itself. 

 

         Once Filipinos can more easily travel from one province to another and from one island to another, domestic tourism will be a strong vehicle for a large increase of consumption expenditures, including accommodation and related services, travel and transport, dining out, discretionary purchases of tourism-related goods, etc.  This greater freedom of movement should start with the Christmas season of 2020 and sustained through the first quarter of 2021.  If this can be done, then we may able to avoid another decline of GDP in the first quarter of 2021.  Otherwise, more lockdowns will guarantee the continuation of negative growth rates for GDP and such sectors as accommodation and related services, wholesale and retail trade, and transport and storage.  Also, fundamental to attaining growth early in 2021 is the timely passing of the P4.5 trillion budget, despite all the controversy about corruption in DPWH and other government departments.  The Philippine government fiscal response to the pandemic is still the weakest in the Southeast Asian region.  Since the Government is in a position to borrow more heavily because of its strong fiscal position, there should be an effort to bring the pandemic-related expenditures from its present low level of about 2 per cent of GDP to at least 5 percent.  Some of our Southeast Asian neighbors spend as much as 10 percent or more of their GDP in addressing the recession brought about by the pandemic. I, therefore, submit two alternative economic scenarios for 2021: a) continuing GDP declines up to the first quarter of 2021 if the Government overreacts to new waves of the Coronavirus compounded by low rates of expenditures of the Government; or  b) a 4 percent increase of GDP in the first quarter of 2021 if the Government refrains from imposing more lockdowns even if there are second or more waves of the virus and if the Government is able to spend a greater percentage of GDP on both relief and stimulus packages during the ongoing recession.   For comments, my email address is bernardo.villegas@uap.asia.