The partial reopening of the Philippines in mid-May after the coronavirus shutdown will go some way to resetting the nation’s growth after the economy shrank for the first time in 22 years, and its gross domestic product (GDP) hit negative territory at 0.2% year-on-year in the first quarter (Q1) of 2020.
Taking a longer term view in its mid-May statement, the Development Budget Coordination Committee said the virus’ impact was likely to cause the nation’s GDP to contract by 2% to 3.4% in 2020, adding that a well-targeted recovery program together with private sector support could see GDP bounce back to 7.1-8.1% in 2021.
On the upside, April’s inflation rate dropped to 2.2%, from the previous month’s 2.5%, helped along by a 20-year low in crude oil prices. Despite recent upheavals, inflation continues to remain well within the Bangko Sentral ng Pilipinas’ (BSP) target of 2-4% this year.
The ongoing global Covid-19 pandemic and its continuing disruption to business and supply chains makes a much anticipated economic rebound in Q3 look less likely with recovery now not expected until later in the second half of the year (H2), since supply chains and businesses need time to get back to full operations.
In its recent monthly report, First Metro Corporation (First Metro), the investment banking arm of Metrobank Group, predicts the nation’s economy will slow severely in Q2 since that quarter bears the full impact of the Luzon lockdown.
However, the government’s stimulus package, which is expected to be approved by Congress early next month, will help facilitate the start of a gradual recovery for the economy. First Metro added, “The bond market will remain volatile as a result of uncertainty stemming from the virus, offset in part by BSP liquidity actions and government’s ability to borrow abroad.”
Supporting liquidity
Along with other central banks in the region, the BSP acted swiftly to counteract the coronavirus’ impact and ensure the nation’s financial system had sufficient liquidity. First Metro described its actions as “extraordinary measures”.
This included purchasing government securities (GS) on the secondary market, a move that First Metro believes is likely to continue until markets return to normal.
“The measure is aimed at reassuring market participants of demand for GS should they need to liquidate their holdings,” it stated, adding that this window will remain open between April and June this year, or until market conditions return to normal.
The BSP also scaled down its daily overnight reverse repurchase volume offering, to encourage counterparty lending, reducing interest rates on overnight lending and deposit facilities to 3.25% and 2.25%, respectively. It also entered into a three-month repurchasing agreement with the government.
“Further monetary policy easing of around 25 basis points (bps) seems likely to occur in the second half of the year after the BSP’s 50 bps policy rate cut in April, when policy rates moved to 2.75%,” First Metro said.
And as of March 30, the Monetary Board trimmed its reserve requirement ratio (RRR) on deposit liabilities of universal and commercial banks by 200 bps, a move aimed at calming markets and encouraging banks to continue lending to retail and corporate sectors.
Market moves
In late April, the Philippines government raised $2.35 billion in bond sales – a move that mirrored other emerging markets in the region – to shore up reserves and counteract the impact of lockdowns both locally and globally.
While the bond market showed brisk activity, bond yields fell back to pre-COVID crisis levels thanks to liquidity provided by BSP and National Government deficit spending.
First Metro analysts described the equities markets as ‘consolidating’ with the Philippines Stock Exchange Composite index (PSEi) experiencing some of the world’s heaviest losses at 21.6% month-on-month in March before recovering by 7.1% month-on-month in April.
On a more positive note, First Metro is optimistic that the situation will normalise in H2 and its analysts predict the PSEi will end the year above the 6,000 level. However, foreign investment outflow picked up the pace in March, to P14.8 billion ($292 million), an uptick of 62% from February’s figure of P9.1 billion.
Meanwhile, it remains to be seen what uncertainties, if any, deteriorating relations between the US and China will add to the Philippines’ and the region’s recovery, as it adjusts to the new normal.
