For the past two years, global economic growth has been stifled by the pandemic. Covid-19 has wreaked havoc worldwide, most specially in developing economies, exacerbated by their respective governments’ poor pandemic response.
The yardstick of recoveries from hereon in will be anchored on the speed and efficiency that a country could sweep the virus out of its backyard, and the viability of the revitalization plan that each government could institute.
US-based risk analyst Eric Jurado—born in the Philippines and educated in the US—shared with BusinessWise how foreign investors see the country’s political, economic and risk outlook. He is the Managing Partner of a US-based hedge fund and had stints at GE Capital and The Mitsubishi Trust and Banking Corporation.
Before the pandemic, the Philippines had one of the most dynamic economies in Southeast Asia. With increasing urbanization, a growing middle-class income, and a large and young population, the country’s economic dynamism was rooted in strong consumer demand that was supported by improving real incomes and robust remittances. Business activities were buoyant with notable performances in the services sector (including business process outsourcing), real estate, finance, and insurance industries. The country was also fast becoming a fintech, blockchain, and cryptocurrency hub. This is largely due to the relatively accommodating stance that financial authorities have taken toward cryptocurrency and blockchain adoption.
But the imposition of strict community quarantine measures in the country due to the pandemic, Jurado said, has significantly reined in the country’s real economic growth. “Growth contracted significantly in 2020, driven by significant declines in consumption and investment growth, and exacerbated by the sharp slowdown in exports, tourism, and remittances,” he noted.
Nevertheless, Jurado anticipates the country’s economic growth to rebound gradually from 2021 to 2022, “assuming the virus is contained domestically and globally, and with more robust domestic activity bolstered by greater consumer and business confidence, and the public investment momentum.” He cautioned, however, that “regulatory restrictions on foreign participation in certain industries, the large presence of state‑owned entities throughout the economy, and poor logistical connectivity from island to island remain key structural hindrances for private businesses and foreign investors.”
On the political front, Jurado believes that President Duterte “is expected to retain a strong grip on power even as his term approaches its end in 2022 [since the] coalition that backs him will subsequently remain cohesive under the leadership of his daughter, Sara Duterte.”
He said Duterte has consolidated power in traditional Philippine political fashion by marginalizing his opponents: “The brutality of his crackdown on illegal drug trafficking reflects authoritarian tendencies. Duterte was strengthened politically when his allies swept the 2019 midterm Senate elections.” Jurado called Duterte’s downplaying of the tensions between the Philippines and China “an effort to improve economic relations between the two countries.”
For Jurado, the Philippines would benefit from continued strong remittances, as well as receipts from the business process outsourcing sector, which offset the country’s substantial trade deficit. He said the country’s long-term economic growth prospects have also improved markedly: “The economy will be propelled by fiscal stimulus through 2021, while external conditions remain somewhat challenging. The monetary easing of 2020 will filter through into looser lending conditions, which should help support domestic demand. However, the country’s stalling reform momentum risks deterring foreign investment at a time when manufacturers are relocating or diversifying supply chains away from Mainland China. The country is expected to post a V‑shaped economic recovery in 2021 on the back of a P4.506 trillion 2021 budget. But then again the ongoing Covid‑19 outbreak still poses a substantial risk to the economy, particularly if lockdowns are reintroduced countrywide.”
The Philippines—in comparison to peers, such as Malaysia, Singapore, and China—is a less attractive market for businesses, according to Jurado. “In particular, while a large population size of over 109 million people and a regionally high fertility rate elevate its labor market profile, high security risks weigh heavily on the economic structure and operating environment. Furthermore, regulatory restrictions on foreign participation in certain industries diminish investment opportunities for private investors. At the same time, the country has a disjointed transport and utilities network, with varying but often poor degrees of connectivity from island to island, which hampers the operational efficiency of supply chains. Taken together, these factors mean that there is a high likelihood of investors looking toward more favorable and welcoming markets in the region, such as Malaysia and Vietnam.”
Sovereign, currency, and banking risks are vulnerable to change, he said: “The budget deficit will remain wide as the effects of the Covid-19 pandemic-induced recession linger in 2021. However, the country’s external debt will remain low, despite recent borrowing, as the economy starts to recover, which mitigates the risk of default. Although the peso is likely to experience some volatility as the current account slips into deficit in 2021, support from growing foreign exchange reserves and a recovering economy will prevent disorderly movements in the peso to US dollar exchange rate. The Bangko Sentral ng Pilipinas will keep benchmark interest rates at record lows throughout 2021. This will help to shore up businesses struggling to weather the continued domestic outbreak of the coronavirus, but could also further jeopardize banks’ profitability amid a rising ratio of non-performing loans.”
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