PH’s economic recovery could take up to 3 more years, MUFG says
It will likely take two to three years for the Philippines to return to pre-pandemic productivity, but the country is unlikely to succumb to “stagflation” or a prolonged economic downturn accompanied by inflation and decline. ‘a still high unemployment rate.
That’s according to Japanese banking giant MUFG, which lowered its forecast for Philippine gross domestic product (GDP) for this year to 4.9% from 6.2% due to the reimposition earlier this year of lockdown protocols. strict due to the resurgence of the COVID-19 case.
But the local economy is not weak enough to be threatened with stagflation, said Sophia Ng, Asia’s global markets analyst at MUFG Bank, noting that real GDP could grow faster next year due to weak base effects and a gradual recovery in consumption and private investment. .
At a press briefing on Wednesday, Ng said the country’s GDP growth could grow at a faster rate of 6.8% in 2022, compared to the bank’s previous forecast of 6.1%.
In 2020, due to shock waves from the COVID-19 pandemic, the country experienced its worst recession in history as the economy contracted 9.6%. Before the pandemic, the GDP had grown by 6-7% per year and generated around 19 trillion pesos of economic output per year.
High oil prices add pressure
With soaring energy prices, the MUFG expects the local inflation rate to average 4.5% this year or the highest since 2018. However, base effects should lead to a inflation rate moderation to nearly 3%, ie the midpoint of the Bangko Sentral ng. The Philippines Target Range (BSP) —next year.
“Even with inflationary pressures in the coming months, we believe the BSP is unlikely to tighten monetary policy prematurely. This would derail the pace of economic activity and be ineffective in containing inflationary pressures which are mainly due to supply side constraints rather than high demand, ”Ng said.
The MUFG expects the BSP to keep its overnight borrowing rate at an all-time high of 2% at least for the next six months and instead resort to other monetary policy tools to support growth.
Asked when the BSP is likely to move into a monetary tightening cycle, Ng said it would all depend on the pace of the economic recovery. Even assuming a gradual recovery next year, she said an interest rate hike would still be unlikely.
“Of course there are risks. We have Asian central banks that are already tightening their monetary policy, ”she said, citing the Bank of Korea and the Monetary Authority of Singapore which had started to raise rates to curb inflationary pressures. Should the BSP be forced to raise rates due to high inflation, Ng said the first interest rate hike would likely come in the third quarter of next year.
A bullish global energy cycle is also seen as additional pressure on oil importing countries like the Philippines. This would translate into a current account deficit equivalent to 1-2% of GDP this year compared to the 3% surplus last year, in turn weighing the peso against the US dollar.
“Usually the rise in crude oil prices tends to coincide with global inflation and optimism about growth, but this time it is definitely not,” said Lin Li, head of markets. Worlds of Asean at MUFG.
MUFG forecasts world oil prices to average $ 82.8 per barrel in the fourth quarter and $ 71.6 per barrel this year and $ 73.7 per barrel next year.
Although there is some improvement in global demand, Li said the natural gas crisis in the UK and the rest of Europe has put pressure on oil prices.
Risks from high fuel prices aside, pandemic risks remained even as the third wave of COVID-19 infection was now over. The decision by local authorities to adopt a “life strategy with COVID-19” has its pros and cons, Ng said.
On the one hand, she said mobility restrictions would be more targeted than generalized, which could help jump-start economic activity to some extent. She also cited attempts to revive the tourism sector by removing the quarantine requirement for fully vaccinated tourists from dozens of countries. “But of course, this has its own risks… especially since the laws imposed by other countries might be different,” Ng said.
“We still believe that some risks remain. This is particularly the case with the slowness of vaccination and the difficulty of supplying and distributing vaccines in the Philippines. It could actually lead to another wave of COVID-19 [cases], not to mention the new COVID variants that could be more resistant to vaccines… ”said Ng. She said mobility restrictions might not be relaxed significantly in the Philippines and if there is a new wave of COVID-19 cases, these could tighten again and affect the pace of economic recovery. .
As the vaccination rate in the country is the slowest in Asean, Ng said that “it would take longer for the negative production gap in the Philippines to really close.”
A negative output gap means that there is spare capacity, or slask, in the economy due to weak demand.
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