SONA 2021: The economy under President Rodrigo Duterte

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SONA 2021: The economy under President Rodrigo Duterte

By Pilar Manuel, CNN Philippines

Published Jul 25, 2021, 10:01:00 AM

Metro Manila (CNN Philippines, July 25) — Crippled by the global health crisis, the Philippines went into recession — the steepest rate of economic decline so far — at the last year of the Duterte administration, as the government set its sights on a steady recovery backed by an effective COVID-19 pandemic response.

Until halfway through the administration, the economy was on a solid growth track, positioning itself in the radar of the regional community.

“The fundamentals were there for much stronger economic growth when Duterte came in,” Miguel Chanco, Pantheon Macroeconomics senior Asia economist, told CNN Philippines. “The GDP growth rate achieved before the pandemic was consistently 6-7% for the Philippines, right up there with some of the better performing countries in ASEAN like Vietnam."

Fresh from a solid electoral mandate, President Rodrigo Duterte began his term with a 7.1% economic expansion in 2016, the handoff between him and his predecessor, former President Benigno Simeon “Noynoy” Aquino III.

Annual growth was relatively stable under Duterte even as growth fell below the 7 percent mark.

From 7.1% in 2016 , economic expansion was down by a percentage point to 6.1% in 2019, according to official data. In the interim years, growth eased to 6.9% in 2017 and 6.3% in 2018.

The government pointed to slow growth in the agriculture and manufacturing sectors, and the residual impact of a nearly three-decade slowdown in the Chinese economy.

The year 2019 turned out slower as economic output - measured by the gross domestic product (GDP) or the sum of goods and services produced at a given period - grew at a weaker pace, pulled down by low infrastructure spending amid budget issues.

“Infrastructure development has been the focus of the Duterte administration since it started,” the Bank of the Philippine Islands’ (BPI) economic research team told CNN Philippines. “However, the Build, Build, Build program hit a roadblock in 2019 amid the budget impasse in Congress, thereby delaying the implementation of projects."

Nonetheless, Duterte’s economic managers maintained a positive outlook for 2020.

“As Filipinos, there is much that we can look forward to in 2020, as we will continue to invest in the people's future while addressing immediate and medium-term challenges,” then Socioeconomic Planning Secretary Ernesto Pernia said in his year-end statement for 2019.

Pandemic-battered economy

Then came the game-changing global COVID-19 pandemic, and things went downhill.

As the health crisis claimed millions of lives and infected hundreds of millions more, countries shut borders down and restricted movements — triggering global supply chain disruptions and economic meltdowns.

The Philippines was no exception: its economy contracted by a hefty 9.6% in 2020 despite efforts to gradually relax strict quarantine measures later on in the year. COVID-19 jitters hampered business activity and consumer confidence. It was the steepest rate of decline since postwar data in 1946.

Still maintaining the bright side, government economic managers were quick to point out the economy's resilience.

Socioeconomic Planning Secretary Karl Kendrick Chua touted the country's strong pre COVID-19 macroeconomic fundamentals that would help it bounce back from the crisis.

“Clearly, we avoided a lot of trouble. All the strengths that became evident when the challenges were greatest are not due to a stroke of good fortune. This was not luck. This was readiness,” Finance Secretary Carlos Dominguez III said in an Economic Journalists of the Philippines forum in June.

Duterte signed two laws that financed the pandemic response: the Bayanihan to Heal as One Act, which allowed him to realign funds under the 2019 and 2020 budgets for three months; and Bayanihan to Recover as One Act, a ₱165.5-billion stimulus package

Some economists, however, believed the fiscal side fell short in mitigating the economic downturn.

“What you've seen in the likes of, let's say Thailand — it’s been one of the more aggressive fiscally in terms of its support for household spending — we just haven't seen the same sort of support for Filipino households in the same way,” said Chanco, who noted the unspent funds in the second Bayanihan law.

He also pointed out the “on-off” lockdowns that dampened consumption spending.

In May, Chua pushed for a calibrated approach in declaring quarantine restrictions instead of blanket lockdowns to “open as many sectors as we can and address the highest sources of risk.”

Debt, debt, debt

Meanwhile, borrowings helped financed the administration's ambitious infrastructure program 'Build, Build, Build' and, though growing, would not be a cause for concern.

“The government's outstanding debt grew much faster from 2016 to 2019 compared to previous years, but it was manageable given the growth of the economy,” economic researchers at BPI said. “The increase in debt was justified since it was necessary to finance the infrastructure program of the government.”

Chanco noted that before COVID-19, the debt-to-GDP ratio was below 40% “for a number of years,” describing at as a “fairly healthy position.”

However, the pandemic turned the tide: the country's outstanding debt ballooned to ₱9.79 trillion as of end-2020 as authorities scrambled to fund the COVID-19 war chest.

Equivalent to 54.5% of the economy, outstanding debt breached the Finance department's mid-year target to keep national borrowing at half the GDP.

“We're sort of getting back to the pre-Aquino levels of national debt, which is a bit more shaky but still sort of acceptable for the Philippines’ level of development and its current credit ratings relative to its other peers,” said Chanco.

Dominguez acknowledged in June that the country's debt level was high but still “sustainable, and that the debt can be handled in the coming years.”

BPI's economic research team said the interest on these loans is “still manageable” given the low borrowing rate locally and overseas. Most of government debt is long-term and peso-denominated which reduced default risks, it added.

Assuming the country is back to the 6-7% growth rate from 2022 onwards, Chanco said the debt stock may gradually decline moving forward. However, he warned things could go south for the ordinary Filipino if economic growth does not match mounting debt.

“You're gonna have to consider more austere fiscal measures to reduce your debt pile. That could hit the ordinary Filipino by a potential increase in taxes or the government could cut spending, which would have a more direct impact on the economy and ultimately, Filipino households,” he said.

Rise in prices of goods mostly stable

Inflation, or the rate of increase in the cost of goods and services, is among economic indicators that directly impact Filipinos.

The Bangko Sentral ng Pilipinas assigned a 2-4% target for full-year inflation beginning 2016. Official data show average annual average inflation settled within the band for 2017, 2019 and 2020. The 2016 number was below target, while 2018 was above it.

Taxes were among inflation drivers in 2018 as the government carried out a massive tax reform program under the Tax Reform for Acceleration and Inclusion (TRAIN) Act.

Duterte touted TRAIN as the first step towards a “simpler, fairer, and more efficient” tax system, while an economist noted its long-term benefits.

“Do we blame Duterte for the spike in inflation then? Yes, because that's what normally happens when you increase taxes on petrol, sin taxes, what have you,” said Chanco. “But at the same time…it’s over the long run better for the inflation environment if it means your budget deficit is kept to a low level because of more tax collection.”

BPI’s economic research team said authorities kept inflation “low and stable in four of the previous five years,” noting the central bank's action to reign in inflation.

Security Bank chief economist Robert Dan Roces praised the “balanced and prudent” support from the central bank especially during the pandemic, as this allowed banks to keep lending while containing risk exposures.

The BSP said it maintains an "accommodative' monetary policy amid the health crisis, counting on lower borrowing costs to help revive the economy. Its surprise rate cut in November 2020 brought the policy rate to the current all-time low 2%.

The final year of Duterte’s presidency

Moving forward, Duterte faces a health and economic crisis in his last year in office, and the presence of more contagious coronavirus variants does not help paint a rosy picture head.

The Philippines remained in recession as the economy shrank again to 4.2% in January to March, the fifth straight quarter of decline. Duterte’s economic team sees growth this year at 6-7%.

The jury is still out on the second quarter growth numbers as main economic hubs Metro Manila and nearby provinces reverted to stricter quarantine measures in late March due to the surge in daily infections that overwhelmed the health care sector again.

Experts are now worried about the highly transmissible Delta variant — blamed for the devastating infections in India and Indonesia — as officials confirmed local transmission.

Trade Secretary Ramon Lopez said in a July interview with CNN Philippines that economic output will return to positive territory in the second quarter, provided the country avoids another surge in cases driven by the Delta variant.

“The primary challenge now for economic authorities will be to improve business and consumer sentiment - likely achievable with a wider vaccination rollout, increased government expenditure, and mitigation of the risks of the new variant,” Security Bank's Roces told CNN Philippines.

Some lawmakers pushed for another stimulus package, the ₱401-billion Bayanihan 3, which aims to give each Filipino ₱2,000 in cash aid. The House of Representatives approved it and the bill is now at the Senate. Economic managers said they await word from Malacañang.

While the proposed law would come in handy if the Delta variant wreaks havoc on the economy, Chanco of Pantheon Macroeconomics said ramping up the vaccination program has a more immediate payoff.

For its part BPI’s economic research team said the risk of a possible credit rating downgrade could be greater if the Philippines fails to sustain its vaccination momentum. Fitch Ratings earlier revised its sovereign rating outlook to “negative” with the lingering impact of COVID-19.

Economic managers said a faster, more efficient vaccine rollout along with the safe, gradual easing of restrictions coupled with the recovery package would help stimulate growth.

Just as the vaccine doses give a ray of hope that commerce will again gain momentum and the work force confident in the additional protection, the economy also needs that proverbial shot in the arm in the crucial endgame of the Duterte administration.

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