From GDP to national debt, learn about how COVID-19 has affected the economy of the Philippines, and the Philippines’ economic outlook.
Before COVID-19, the Philippines was one of the most dynamic economies in East Asia. The Philippines’ economic progress relies upon strong consumer demand, a thriving labour market, and remittances received from overseas. Increased urbanisation, a growing middle class, and a young population help to drive these.
In this article, we’ll explore the recent revival of the Philippine economy, how COVID-19 has affected this, and what we can expect from the future.
The Philippines economy before COVID-19
Once colloquially known as the “Sick Man of Asia,” the Philippines’ economy enjoyed a period of resurgence from 2010 to 2016, thanks to the efforts of former president Benigno Aquino. Aquino set out to create a system that prioritised sustainable growth over quick wins. He pursued graft and tax evaders and increased transparency and accountability.
The Philippines received its first investment trade ratings; Fitch Ratings was the first, followed by Moody’s Investors Service and S&P Global in 2013. As the Philippines rose to prominence among emerging-market darlings, foreign direct investment poured into the country.
The Philippines economic growth stalled somewhat with the premiership of President Rodrigo Duterte – however, there was still much to be optimistic about. The services industry, which includes business process outsourcing, real estate, tourism, and the banking and insurance industries, performed well.
Growth was bolstered by strong economic foundations and a globally competitive workforce. The Philippines was well on its way to becoming an upper-income country, having maintained an average annual growth rate of 6.4% between 2010 and 2019, up from 4.5% between 2000 and 2009.
In recent years, the Philippine economy has made strides in achieving inclusive growth. Poverty has fallen from 23.3% in 2015 to 16.6% in 2016. The impact of COVID-19, on the other hand, has stalled this upward trend in real wages, with negative implications for poverty reduction in the Philippines. Resuming growth may reverse this negative trend once more.
The impact of COVID-19 on the Philippines economy
In January 2020, the country’s first COVID-19 case was recorded, and by March, the country had been placed under a strict community quarantine, restricting mobility and commercial activity. While these actions delayed the spread of COVID-19, they had serious negative consequences for family incomes, jobs, education, food security, and businesses.
Impact on the Philippines GDP
The pandemic caused the Philippines’ economy to decline to its lowest level since World War II, with GDP decreasing by 9.5% in 2020. It’s the worst drop since records began in 1947, and it’s also the first time the economy has shrunk since 1998, when it contracted by 0.5%. When the tightest lockdown was implemented in the second quarter of 2020, GDP fell as low as -16.9%.
Foreign Direct Investments (FDI)
The economic impact of the coronavirus pandemic reduced foreign direct investment (FDI) by 24.6% to $6.5 billion in 2020, down from $8.7 billion in 2019. Since the peak in 2017, FDI has dropped for the third year in a row. To boost the economy, the government is relying on foreign investment, and hopes to entice foreign investors to invest in the Philippines, using legislative measures such as corporate tax cuts.
As a result of the COVID-19 crisis, the Philippines’ national debt increased by 26.7% to P9.7 trillion in 2020. As of the end of January 2021, this had risen to P10.3 trillion, thanks to the government’s decision to take out a new bridge loan from the BSP (Bangko Sentral ng Pilipinas, or Philippine Central Bank) to cover its financial obligations.
Revenue fell by 9% in 2020 due to rising expenses. The Bureau of Internal Revenue’s collections fell by 10.3%, and the Bureau of Customs’ collections fell by 14.7%, resulting in an 11.4% reduction in tax revenues. The Philippine government faced a P1.37-trillion budget deficit in 2020 due to higher expenses and decreased revenue.
Impact on businesses
Between April and July 2020, 88% of businesses reported a drop in sales, and between July and November 2020, 67% reported a drop in sales. The biggest cause of decreased sales was limited operation (58%) and customers’ inability to visit brick-and-mortar establishments (38%).
A high number of businesses reported severe liquidity problems, with many claiming to be cash-strapped and behind on payments. 66% of businesses lacked sufficient cash to cover all costs and liabilities, such as wages, suppliers, taxes, and loan repayment, for more than a month. 48% of businesses were in default.
Despite cautious optimism that sales and employment will improve over the next three months, many businesses expect their financial situation to worsen.
Last year, the government passed two financial stimulus bills that gave targeted aid to workers in specific industries, although some critics have called them insufficient.
Two-thirds of businesses have adopted or increased use of the internet, social media, specialised applications, and digital platforms in various business tasks, with these businesses reporting that digital solutions accounted for 10% of their sales. In response to COVID-19, the use of digital solutions has increased across all company sizes, sectors, and locations.
According to the Philippine Statistics Authority, the annual unemployment rate in 2020 was 10.3% or 4.5 million unemployed Filipinos. Since April 2005, this is the highest annual unemployment rate ever recorded. Sadly, the problem appears to be worsening – according to the PSA, around 4 million Filipinos were unemployed in January 2021. This is more than the 3.8 million people who were unemployed in October 2020 and the 2.4 million who were unemployed in January 2020.
Meanwhile, in January 2021, the number of underemployed – employed people who expressed a need for more hours of work – is estimated at 6.6 million, or 16% of the total employed population. This underemployment rate is greater than the 14.4% rate in October 2020 and the 14.8% rate in January 2020.
The economic outlook for the Philippines
The Philippines may face a longer road to recovery than its neighbours. It has imposed harsher and longer-lasting movement restrictions, as well as more conservative fiscal stimulus, causing economic scarring that will make it more difficult for the economy to recover.
More companies have reopened since the community quarantine was lifted (63% in November, compared with 45% in July), but only a tiny percentage are operating at full capacity (9%). While some company owners shuttered their doors to comply with government regulations (9%), others (21%) chose to do so despite the lessened community quarantines. Approximately 7% of businesses have permanently closed.
GDP fell 9.5% in 2020, the greatest drop since records began in 1946. Nonetheless, the quarterly numbers show that the decline has slowed since the pandemic began. In April, the unemployment rate rose to 8.7%, equating to 4.14 million Filipinos. In May, inflation reached 4.5%, significantly beyond the government’s objective of 2-4%.
A tough 2021
It is expected that GDP will remain stagnant in 2021, while the rest of Southeast Asia will bounce back from recession. President Rodrigo Duterte intends to spend a record 4.7 trillion pesos ($98 billion) this year in the hopes of achieving a 7.5% GDP growth rate.
Much rests in the hands of the Philippine political class. On June 1, the Philippine House of Representatives passed a third stimulus package in a near-unanimous vote, which supporters claim will bring much-needed economic relief to unemployed Filipinos. The bill has yet to be approved by the Senate.
The road to economic recovery
Any economic recovery will be dependent on the nation’s vaccination programme. To attain herd immunity, the government wants to vaccinate 70% of the country’s 100 million people by the end of 2022, but it has only struck deals for approximately one-third of the doses needed so far.
In 2021-2022, economic growth is predicted to gradually recover – providing that the virus is contained both domestically and globally, and that domestic activity is strengthened by increased consumer and corporate confidence and public investment momentum.
According to Moody’s, the Philippines’ economic output will not return to pre-pandemic levels until the end of 2022. China, Taiwan, South Korea, and Vietnam, on the other hand, have already returned to their previous output levels, while Indonesia and Thailand are predicted to do so later in 2021.
The Philippines economy faces a long road to recovery; the impact on businesses and livelihoods will be felt for many months to come. Jobs will be in short supply – with certain sectors, such as tourism and sales, worse affected than others.
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