THE government now expects the economy to contract by 2 percent to 3.4 percent this year—deeper than its initial expectations—in what could be the worst GDP growth rate of the country since the 6.9-percent GDP contraction in 1985 based on 2018 prices.
This, as the National Economic and Development Authority (Neda) estimated that the Covid-19 impact on the economy could reach P2 trillion or about 9.4 percent of GDP this year, way beyond initial estimates of P1 trillion.
In a special meeting on Tuesday, the Cabinet-level Development Budget Coordination Committee (DBCC) revisited the country’s macroeconomic indicators and fiscal program for this year until 2022, considering the Covid-19 impact.
“The revised assumptions will also allow the government to operate with a more realistic and prudent fiscal stance as it flags the downside risks to the economy and the fiscal program for the rest of the year,” DBCC said in a statement on Wednesday.
The new GDP growth outlook adopted by DBCC is also worse than the Bangko Sentral ng Pilipinas’s (BSP) earlier projection of 0 to -1 percent for this year given the Covid-19 impact. Prior to the pandemic, the economic managers had set a GDP growth target of 6.5 to 7.5 percent this year.
In 1985, the economy contracted by 6.9 percent due in part to the debt crisis the country experienced that year. In December 1985, then President Ferdinand E. Marcos called for a snap election, a move that in months would end his absolute rule of 14 years.
Despite the lower GDP outlook for this year, the DBCC expects the country to recover by 2021, with GDP growth of 7.1 to 8.1 percent, as the economic team aims for the timely implementation of a well-targeted recovery program, alongside efforts of the private sector, to mitigate the economic fallout from the Covid-19 pandemic.
The DBCC also adopted the BSP’s recommendation to revise downward the government’s growth assumptions for goods exports and imports to -4 percent and -5.5 percent, respectively.
“This is in anticipation of the global economy’s sharp contraction as a result of the Covid-19 pandemic,” DBCC said.
For next year until 2022, goods exports is seen to bounce back and grow by 5 percent, while growth in goods imports is projected to recover to 8 percent.
Oil, forex, inflation
THE BSP also recommended a lower price assumption for Dubai crude of between $23.0 and $38.0 per barrel following substantive weakness in global oil consumption amid the Covid-19 crisis. For FY 2021 to 2022, the assumption is that the per barrel price will increase to between $35.0 and $50.0 per barrel.
The DBCC also kept its 2020 to 2022 assumptions for foreign exchange rate of P50 to P54 against the US dollar and its current inflation target range of 2 to 4 percent.
However, average inflation rate for this year is projected to range from 1.75 percent to 3.75 percent “due to subdued demand.”
Meanwhile, deficit spending is also seen to reach P1.56 trillion or 8.1 percent of GDP, 2.8 percentage points higher than the estimate of 5.3 percent of GDP announced last March.
The DBCC attributed the increased deficit spending to the revised revenue and disbursement program.
Expected revenue collection for this year has been revised downward to P2.61 trillion or 13.6 percent, posting a P560.5-billion drop or 17.7 percent, compared with the P3.17-trillion program approved by the DBCC on March 27, 2020.
Disbursements for this year are estimated at P4.18 trillion (equivalent to 21.7 percent of GDP), slightly exceeding the program approved in March by P12 billion or 0.3 percent of GDP.
“The emerging disbursement program takes into account the releases for Covid-19 initiatives charged to savings coming from austerity measures, among others,” it said.
Deficit to GDP
Despite increased deficit spending, the national government’s deficit-to-GDP ratio will remain in the median of comparable countries in Southeast Asia and East Asia, among peers with similar credit ratings, and among other emerging market economies, DBCC said. This, as long as the ratio does not exceed 9 percent.
Below this threshold, the DBCC said the debt-to-GDP ratio will be around 50 percent, far lower than the most recent peak of 71.6 percent in 2004.
Aside from these, the DBCC also approved a lower 2021 cash budget to P4.18 trillion or 19.6 percent of GDP. This is around P460 billion less when compared to the earlier projection of P4.64 trillion in December 2019 following the reduction in revenue estimates for 2021.
However, this is still slightly higher than the P4.10-trillion cash budget this year.
“The DBCC noted that the Philippines has strong economic fundamentals and sound fiscal health. At the same time, the DBCC reiterated its commitment to work with the whole of government in responding to challenges brought about by Covid-19 while helping drive a rapid economic recovery for the country,” it added.
Image credits: Roy Domingo, Nonie Reyes
1 comment