A Japanese bank said the Philippine economy could contract as much as 1.9 percent this year, following the 5.9-percent expansion in 2019, if the lockdown would be extended until May and expanded nationwide to contain the spread of coronavirus.
Nomura said this would be a “bad case” scenario where the negative effects from external factors would be more amplified.
“Hence, we forecast 2020 GDP growth to fall into negative territory to -1.9 percent. Our assumption here, in addition to the external factors, is that social distancing measures locally are extended over the second quarter, with the lockdown lasting until May and expanded nationwide,” Nomura said.
“The disruption in economic activity will be much more widespread, and non-linear effects will kick-in as a result of a combination of massive job losses, more insolvency problems particularly for SMEs, asset quality concerns of banks, which in turn will lead to tighter lending standards and some bouts of social unrest,” it said.
“In this scenario, we would expect the government to raise the fiscal deficit further to 5 to 6 percent of GDP. On monetary policy, we expect an additional 50bp in policy rate cuts by BSP and a further 200bp in RRR [reserve requirement] cuts relative to our base case,” it said.
Nomura said under a “good case” scenario, it expects a 3-percent expansion of GDP, taking into account a trajectory of weakening growth through the second quarter due to a sharp decline in external demand, which is compounded by the domestic disruption from the lockdown, “which we assume gets lifted as scheduled.”
The month-long enhanced community quarantine in the entire Luzon island is set to end on April 12, 2020.
Nomura said a shallow recovery could ensue in the second half as in this scenario where the non-linear effects in the bad case are avoided, and normal conditions return more quickly partly because policy responses gain some traction and containment efforts become relatively successful.
“We see the fiscal deficit remaining at 3.7 percent of GDP, the policy rate still cut by 25bp to 3 percent, and the RRR still reduced by 200 bp in the second quarter,” it said.
Nomura said that in a “base case” scenario, GDP growth is expected to fall to 1.6 percent this year, the lowest since the 2009 global financial crisis.
“But unlike in 2009, the quarterly trajectory in our forecast implies the economy goes into technical recession by the second quarter. This reflects the sharp declines in global growth, particularly the Philippines’ largest trading partners like China and importantly, the US and Europe, depressing export growth sharply for both goods and services (i.e. tourism),” it said.
Nomura said this would hurt overseas worker remittances more significantly than it previously thought, as worker deployment likely would be at a standstill, and worse, job losses especially among contract workers and seafarers (particularly those in cruise ships) would increase sharply.
“This is likely to put significant downward pressure on household consumption, which accounts for 68 percent of GDP. In addition, we believe President Duterte’s decision to place Manila and the entire island of Luzon under a lockdown, enforcing stricter and ‘enhanced community quarantine’ will prove highly disruptive to overall economic activity, because Manila is the economic center and Luzon accounts for nearly 70 percent of GDP,” Nomura said.
Nomura assumed that once the lockdown was lifted in mid-April as scheduled, economic activity would be unlikely to return to normal conditions quickly.
It said apart from the hit to consumer spending due to social distancing measures and the public fear factor lingering, businesses were also facing more supply chain disruptions with the flow of goods and personnel hampered by severe travel restrictions, and further out, more uncertainty in the operating environment.