Major credit watcher Moody’s Investors Service on Thursday downgraded its 2020 economic growth forecast for the Philippines to -7 percent from its previous estimate of -4.5 percent because of the worse-than-expected impact of the COVID-19 health crisis.
The downgrade was contained in Moody’s Credit Opinion report released on Sept. 2. Moody’s expects the Philippine economy to rebound next year and grow by 6.8 percent.
Moody’s said that in 2020 forecast, it considered the 0.7-percent contraction in the first quarter and the deeper 16.5-percent decline in the second quarter. This brought the first-half contraction to -9 percent.
It said the record contraction in the April-June quarter reflected the severe impact of the enhanced community quarantine on domestic demand with household consumption falling 15.5 percent and gross fixed capital formation plunging 53.5 percent, both of which contributed to a collapse in import demand of around 40 percent.
Exports of goods and services also fell 37.0 percent, reflecting similar pressures on external demand on account of the global pandemic shock. By contrast, government consumption rose 22.1 percent over the same period, although the large increase also incorporated base effects from weak public spending in the first half of 2019 on account of delays to the implementation of the national budget.
It said that in light of rising coronavirus infections following the relaxation of strict lockdown conditions at the beginning of June, the government re-imposed tighter containment measures for Metro Manila and surrounding areas in the first two weeks of August.
“A sharp deterioration in labor market conditions and faltering remittance inflows has weighed on consumer sentiment and spending. The non-seasonally adjusted unemployment rate rose to 17.7 percent in second quarter 2020, a record high, from 5.3 percent in the previous quarter,” it said.
Remittances from overseas Filipinos fell 9.9 percent year-on-year in the second quarter, the first quarterly contraction since 2015.
Moody’s said the plunge in manufacturing production, by both value and volume, were driven by disruptions to operations as the rebound in May and June from the trough in April mirrored developments related to the tightening and relaxation of pandemic curtailment measures.
It said the ongoing restrictions on domestic and cross-border travel had hampered tourism and related industries with foreign visitor arrivals. “In the context of these trends, our projection of an economic recovery in the second half—while still intact—will be less robust than previously assumed,” it said.
“Combining this view with the sharp contraction over the first six months of 2020, we have lowered our full-year real GDP growth forecast to a contraction of 7.0 percent, down from our earlier expectation of a 4.5-percent drop,” Moody’s said.
Moody’s previously gave the Philippines and investment grade rating of “Baa2” with a stable outlook, a credit profile characterized in recent years by strong economic performance, a strengthening fiscal position and limited vulnerability to external shocks, although the global coronavirus outbreak will disrupt or potentially reverse these trends.
It said the stable outlook reflected the view that the recovery from the acute shock posed by the coronavirus outbreak would restore rapid economic growth relative to peers, complemented by the stabilization and eventual reversal of the deterioration in fiscal and debt metrics.
It said the factors that would prompt an upgrade of the Philippines’ sovereign rating include evidence of a more rapid reversal of the deterioration in fiscal and debt metrics stemming from the coronavirus shock. This would likely entail a sustained restoration of economic growth to rates similar to those recorded prior to the outbreak.
Factors that could lead to a downgrade include the emergence of macroeconomic instability that would lead to a greater deterioration in fiscal and government debt metrics and/or an erosion of the country’s external payments position.