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Moody’s sees PHL economy to contract 2.5% in 2020

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Debt watcher Moody’s Investor Service on Tuesday said the Philippine economy is seen to contract further for the entire 2020 due to the impact of the COVID-19 pandemic.

In its latest report, Moody’s said it expects the county’s gross domestic product (GDP) to contract by 2.5% this year —the first full-year economic contraction since 1998.

The credit watcher’s forecast is much worse than the 0% to -0.8% GDP that the economic managers have estimated.

Moody’s cited the “rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and financial market turmoil are creating a severe and extensive economic and financial shock.”

In the first quarter of 2020, the Philippines’ GDP contracted 0.2% - the first time since 1998 - due to the eruption of the Taal volcano in January, the decline in tourism and trade due to the COVID-19 pandemic in February, and the enhanced community quarantine (ECQ) in March. 

Acting Socioeconomic Planning Secretary Karl Kendrick Chua said the economy will contract further in the second quarter, taking in consideration the full impact of the ECQ, before slightly recovering in the third and fourth quarters.

Moody’s, likewise, said that as the ECQ will encompass much of the second quarter, we expect high-frequency data to continue to deteriorate despite the implementation of countercyclical policy stimulus, including handouts to vulnerable, low-income households.

Growth will also be pressured by weakening external demand, it said.

“We also expect remittances to soften substantially, reflecting not only job losses and falling income among overseas Filipinos, but also severely restricted deployment of new workers abroad,” the credit watcher said.

Government debt is also seen to rise to around 45% of GDP on the back of “lower growth and substantial fiscal stimulus.”

“A wider fiscal deficit and consequently higher borrowing needs will be amply met by sufficient domestic liquidity, continued strong access to overseas funding markets and a pipeline of loans from multilateral sources, such as the World Bank and the Asian Development Bank,” Moody’s said.

The debt watcher noted that in mid-April, the government raised $2.35 billion in dollar-denominated debt in two tranches —$1.0 billion in ten-year paper at around 2.5% per annum and $1.35 billion at less than 3% over 25 years.

“The Bureau of the Treasury expects to secure around $7 billion in program loans from development partners at favorable terms, including a grace period of three to five years and lengthy repayment terms, mitigating the impact on its debt servicing requirements even as the nominal amount of debt rises,” it said.

Moody’s also said that it expects the current account deficit to remain narrow and stable in 2020 as the negative impact on exports, tourism, remittances and other services receipts will be offset somewhat by lower oil prices and subdued import demand on account of slower economic growth.

“Even as emerging markets globally endured capital flight, the Philippines' gross international reserves reached a record high of $89.0 billion in March 2020, implying the stability of the overall balance of payments,” it said.

Despite expecting a deeper economic contraction this year, Moody’s affirmed the Philippines’ investment grade credit rating with stable outlook.

“The stable outlook on the issuer balances positive and negative factors,” it said.

The debt watcher said it expects the Philippines' real GDP growth to “remain robust relative to peers” and that its fiscal metrics will continue to strengthen as the government continues to make progress on its socioeconomic reform agenda, particularly on tax reform.

“However, the global coronavirus outbreak threatens the Philippines through a number of channels, including trade, supply chain linkages, investment, remittances and tourism, while stringent containment measures will also sharply curtail domestic demand,” it said.

“In addition, the combination of lower revenue resulting from weaker economic growth and higher spending to mitigate its impact will lead to wider government deficits and higher debt,” it added.

Domestic political developments, such as the administration's controversial campaign against illegal drugs, also present downside risks to the country's institutional profile and could hinder the further implementation of reform, according to Moody’s.

Moody’s affirmed its “Baa2” rating. Obligations rated "Baa2" are subject to moderate credit risk and are considered medium grade and may possess certain speculative characteristics.

“Strong domestic demand provides a buffer against external economic shocks, such as those posed by cyclical swings in global trade and commodities prices,” it said.

“Moreover, the Philippines' young and growing population supports private consumption and reduces the burden of ageing-related costs on the economy and government finances,” it added.

Remittances from overseas Filipinos - which totaled 8.4% of GDP in 2019 - also support private consumption, liquidity in the banking system and the external payments position.

At the same time, the business process outsourcing (BPO) industry and tourism have made significant contributions in recent years to growth in the services sector and the widening surplus in the services trade balance. — RSJ, GMA News

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