THE Cabinet-level Development Budget Coordination Committee (DBCC) now expects the economy to contract deeper by 5.5 percent this year, potentially marking the country’s worst economic downturn in 35 years.
The latest assumption of DBCC on the country’s GDP growth is even worse than its previous projection in May of -2 to -3.4 percent this year.
Should the economy shrink by 5.5 percent this year, this would be the lowest since the 6.9-percent GDP contraction in 1985 based on 2018 prices. 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.
In a statement on Thursday, the DBCC said the downward revision was made on July 28 based on the updated indicators on the impact of the Covid-19 pandemic on tourism, trade and remittances throughout the year.
For next year, the DBCC has also cut its GDP growth forecast to 6.5 to 7.5 percent from 8 to 9 percent previously.
Despite this, the DBCC is optimistic that the country is “on track to economic recovery” as the national government continues its pump-priming activities, including the government’s “Build, Build, Build” infrastructure program and revitalization of industry and services sectors.
However, it expressed confidence that the economy will grow at a slightly faster pace of 6.5 percent to 7.5 percent, up from its earlier projection of 6 to 7 percent.
Goods exports and imports growth are also now expected to plunge by 16 percent and 18 percent, respectively, due to a slowdown in global trade amid the pandemic. This is far worse than the 4 percent and 5.5 percent earlier expected by the economic team. For 2021 and 2022, it retained its earlier forecast that goods exports will grow by 5 percent while goods imports will grow by 8 percent.
Meanwhile, remittances from overseas Filipino workers are seen to fall by 5 percent this year, but are expected to return to the normal annual growth rate of 4 percent in 2021 and 2022.
Higher deficit targets until 2022
Government’s economic managers also approved much higher budget deficit targets over the medium term from this year until 2022 on the back of projected lower state revenue collections and higher disbursements.
The DBCC’s new deficit target this year is now 9.6 percent of GDP, higher than the 8.4 percent of GDP it set in May. This was due to the cut in the estimated revenue take to P2.52 trillion from P2.61 trillion and the expected hike in disbursements to P4.34 trillion from P4.225 trillion previously.
State revenues are seen to drop because of the expected contraction in real GDP growth and the P42 billion in estimated forgone revenues from the implementation of the proposed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. This will reduce the corporate income tax rate (from 30 percent to 25 percent) to provide much-needed assistance to the business sector and help micro, small, and medium enterprises (MSMEs) retain their workers.
On the other hand, disbursements are also seen to rise this year as the government anticipated additional spending of P140 billion under Bayanihan to Recover as One Act or Bayanihan II being pursued in Congress.
Deficit targets are also revised upward to 8.5 percent in 2021 and 7.2 percent in 2022 from earlier projections of 6.6 percent and 5 percent, respectively.
Despite these adjustments in deficit spending, the DBCC said it is confident that the national government’s debt will be kept at a sustainable and responsible level, “within the 60 percent internationally-recommended debt threshold,” by 2022. This was significantly up from DBCC’s previous estimate of 52.3 percent of GDP.
Budget Assistant Secretary and spokesman Rolando U. Toledo also told the BusinessMirror the DBCC is now seeing much higher debt-to-GDP ratios of 53.91 percent for this year and 58.28 percent next year from their earlier estimate of 49.8 percent and 51.5 percent, respectively.
Other assumptions updated
Aside from its outlook on GDP, the DBCC also narrowed down its inflation forecast to a range of 1.75 percent to 2.75 percent, from 1.75 to 3.75 percent due to subdued demand. Inflation assumption for 2021 to 2022 was retained at 2.0 to 4.0 percent as prices are expected to remain stable.
The price of Dubai crude oil per barrel for this year was also revised upward from $23 to $38 per barrel to $35 to $45 per barrel, based on the futures market. For 2021 and 2022, the assumption has been maintained at $35 to $50 per barrel.
It also narrowed its projection on the exchange rate of the peso against the US dollar to 50 to 52 for this year, and maintained its assumption of 50 to 54 for 2021 and 2022.
Image credits: Bernard Testa