Last week, the ACERD Director, Dr. Cielito Habito, talked about the potential growth paths of the economy in light of the lockdowns. Under the most optimistic scenario, the economy can get back to its 2019 gross domestic product level by late 2022. However, if we keep bungling our recovery, then we are looking at 2025. Hence, the title of this column says it all.
Economic growth will be a major campaign theme in next year’s elections. Those who want to win next year—from President to Barangay Captain—must understand the extent of the damage done to the economy by Covid-19 and the seemingly inadequate government response.
Three things need to be seriously considered. First, we should think about how to adapt to Covid-19 instead of merely avoiding it. Countries like Australia, Singapore, and Thailand have learned that an avoidance approach requires lockdowns that have long-term adverse effects on the economy. We now know that Covid-19 is simply not going away, as it is also adapting and will most likely become endemic. The policy approach, therefore, should now shift to thinking strategically per sector. McKinsey Institute recently suggested that industries and sectors should be classified according to physical proximity. From here, it can be carefully analyzed which industries can practically adapt without need for repurposing or reimagining how services can continue, albeit in a different and more efficient form without threat of zero to low-capacity operations. The Philippines is a 60 percent services economy highly concentrated in urban centers. We are already seeing the rapid transition of food and retail to e-commerce. This transition is not without costs, as it is giving up a lot of jobs. To go into this transition will require not only vaccinating workers but also investments in upskilling, reskilling, and even basic Internet connectivity throughout the country. Should these be provided as public goods?
Second, the Philippine economy is 40 percent dependent on international trade. Our trade deficit is about 10 percent of our economy. That is, we import more than what we export. The challenge is that our imports now include more food products because local production continues to be unproductive compared to international producers. The pandemic has created a huge backlog in the shipping industries as a result of lockdowns and quarantine requirements. Industry sources say that shipments are at least two months delayed. The delay has led to the increase in container shipping fees estimated to have doubled already. This worsened when a ship got stuck in the Suez Canal in March 2021 for six days, exacerbating the already worsening container shortages. The natural effect of this is global price inflation, especially of imported goods. Already, the high prices have been reflected by the United States and some countries in Europe. This supply bottleneck also affects us on the export side. Electronics, being the major export of the country, are mostly inputs to the global electronic market production. If the shipments are delayed, there will be knockoff effects to our own domestic production for exports.
Finally, we must also consider that the world tried to keep afloat during this pandemic through government borrowings. Almost every country, whether developed or developing, has packaged some form of stimulus to keep the economy going. As these are largely financed by debts, there will be a reckoning period when they need to be repaid. The Philippines also borrowed heavily in both the domestic and international markets, growing by almost 20 percent from pre-Covid levels. This is not a local phenomenon, and that is why it is more concerning as the world has to contend with the need to eventually pay these debts without disturbing the recovery for which they have been borrowed in the first place. This could well explain why smaller firms are avoiding borrowing at this time because of the uncertainty of paying back. As the latest debacle of the largest Chinese real estate company shows, the knockoff effect can ripple to asset prices beyond China. The bottom line is that for all these borrowings, there is a reckoning time to pay debts back.
These are realities that strategists of whoever wants to be in place next year should be carefully thinking about. Any desire to return to growth and how fast that will be should carefully consider how to address these three elements. The key is understanding that the pandemic is not a unique national issue. It has the same blunt impact all over the world, regardless if a country is rich or poor, but its repercussions are unique in the way the response is developed, implemented and delivered. It is not too late to think of it this way.
Dr. Alvin P. Ang is a Senior Research Fellow at the Ateneo Center for Economic Research and Development.