Economic setback only temporary

August 11, 2020
Benjamin Diokno

Bangko Sentral Gov.Benjamin Diokno considers as temporary the economic weakness in the country caused by the coronavirus disease 2019 pandemic.

Diokno said the 16.5-percent contraction of domestic output in the second quarter this year, which is larger than the 0.7 percent in the first quarter, “does not mean that the Philippine economy is structurally weak”.

“The contraction is temporary. The economy is robust, characterized by strong fundamentals: falling interest rates, appreciating peso making it the most appreciated currency in Asia; sound external sector with gross international reserves as high as $94 billion; low debt-to-GDP ratio which is the envy of many emerging economies; and robust banking industry with good capital adequacy ratio and low net performing loans ratio,” he said.

He said comparing the negative output of the economy in the second quarter of this year to second quarter prints during the pre-Edsa crisis in 1984-1985, the Asian financial crisis in 1997-1998, and the global financial crunch in 2007-2008 is “inappropriate”.

In the past crisis, he said the peso weakened, interest rates increased, the proportion of debt-to- domestic output increased, the country’s foreign reserves declined, and the banking sector faltered.

“In sum, there were inherent weaknesses in the economy then,” the BSP chief said, citing also the country was even included as part of those called heavily indebted countries. 

Diokno, however, said that in the ongoing pandemic, the growth contraction was caused partly by the enhanced community quarantine, implemented from the middle of March until end of April for mainland Luzon, and extended until end-May for the National Capital Region to limit the spread of the virus, to save lives and to improve capacities of health facilities and testing facilities.

He said growth contracted in the second quarter of this year because of the impact of the movement restrictions and “not because the economy was weak.”

“The setback is temporary. Recovery can come quickly once consumer confidence returns, factories fired up, construction activity particularly the BBB (Build, Build, Build) program is ramped up, and transportation is fully restored,” the monetary chief added.

He said “the immediate cause for the economic plunge in Q2 (second quarter), that is, the strict, nationwide lockdown is a thing of the past”.

“In the near future, while waiting for the vaccine, policymakers will opt for targeted, localized, village-level lockdowns. Hence, the adverse economic impact on jobs, incomes, and livelihoods will be subdued,” he added.

Meanwhile, Fitch Ratings associate director Sagarika Chandra, in a report, said near-term growth outlook for the domestic economy “has continued to deteriorate” due to the pandemic and the community quarantines.

Chandra said the government’s projections on its fiscal gap has also widened.

Economic managers now see a fiscal deficit this year accounting to about 9.6 percent of domestic output from 8.4 percent earlier.

Budge deficit is seen to rise to 8.5 percent of GDP next year from 6.6 percent earlier, while the 2022 figure was revised from five percent to 7.2 percent.

Chandra said they expect “some deterioration in the Philippines’ credit metrics as a result of the pandemic in our last rating review when we revised the Outlook to Stable from Positive and affirmed the rating at ‘BBB’.

She said during the assessment held last May, Fitch Ratings has noted “that the economic projections were uncertain and subject to considerable downside risks depending on how the virus runs its course globally and domestically and the possibility of a further extension or reimposition of lockdown measures”.