Photo of a street in the Philippines

SINGAPORE, June 29 2021 – The Philippine economy is recovering from its recession in 2020, but given the resurgence in COVID-19 infections, economic recovery will only be sustained through a quicker rollout of vaccinations, the implementation of targeted containment measures, as well and continued injection of stimulus.

The economy also faces two main short-term risks: a prolonged wave of COVID-19 infections and potential financial distress in the business sector.

AMRO’s conclusions are contained in its 2020 Annual Consultation Report on the Philippines. Published today, the ASEAN+3 Macroeconomic Research Office’s (AMRO) report was based on its virtual 2020 Annual Consultation Visit to the Philippines and data and information available up to May 25, 2021.

Economic developments and outlook

Economic activity in the Philippines has started to pick up since Q2 2020, when restrictive measures were relaxed. Since then, the economy has continued to gain momentum, but significant slack remains, as indicated by the high unemployment rate of 7.1 percent as of March 2021. A speedy and robust economic recovery is essential to absorbing displaced workers, but the economy can only improve if the COVID-19 pandemic is well contained, such that the economy can reopen fully and business confidence is restored. The government should therefore continue providing strong policy support.

The Philippine economy is forecast to grow by 6.4 percent in 2021 and 6.8 percent in 2022. However, the resurgence of infections since March has weakened the recovery momentum and significantly raised the downside risk to these baseline forecasts.

Signs of inflationary pressure have emerged recently after staying muted in 2020. The headline consumer price index (CPI) rose above the upper bound of the government’s 2-4 percent target range in early 2021, mainly due to supply shocks. And, the COVID-19 pandemic, as well as some strong typhoons in late 2020, have caused supply disruptions which have led to increases in prices of food and other products. The surge in prices is likely to persist for some months, because the normalization of food supply will take time, while fuel prices will be boosted by the low base effect in early 2020.

The annual headline CPI for the Philippines is expected to rise to 4.3 percent in 2021 from 2.6 percent in 2020, before falling to within the target range; registering 3.2 percent in 2022. Timely implementation of effective measures to address the supply constraints could help ease price pressures.

The Philippines’ external position improved significantly in 2020, and should stay robust in 2021. The current account will likely record a smaller surplus in 2021, as economic recovery drives more imports. Capital flows could witness more volatilities, due to spillovers from global financial markets and shifts in market sentiments. Nevertheless, a strong current account and continued capital inflows will likely to lead to an overall balance of payments surplus.

Risks, vulnerabilities and challenges

The Philippine economy continues to face multiple downside risks and challenges in its path to recovery. Two main short-term risks are a prolonged wave of COVID-19 infections, and potential financial distress in the business sector; both of which could lower potential growth, owing to the scarring effects of the pandemic in the medium- to long-term.

The Philippines started vaccinating its population against COVID-19 in early March 2021. While the government may have secured enough vaccination doses, uncertainties over the timing of delivery and administration remain. Meanwhile, the number of new infections is still high, further delaying the reopening of the economy. These factors will constrain the country’s pace of economic recovery.

Policy responses

For the population to achieve herd immunity, a faster rollout of vaccinations is essential, supported by more targeted containment measures.

The government’s four-pillar strategy in 2020 has provided essential support in containing the pandemic; mitigating adverse impacts, and reviving the economy. While expansionary fiscal policy in 2021 will continue to support economic recovery, the recovery is still nascent, and further fiscal support would be critical if the growth momentum proves weaker-than-expected and the economy falters.

Monetary and regulatory policy responses have been appropriate in ensuring ample liquidity in the financial system, but more efforts should be placed on enhancing the effectiveness of monetary transmission and supporting credit expansion. The Bangko Sentral ng Pilipinas (BSP) should collaborate with other government agencies to provide banks with greater incentives to increase lending to the business sector, especially micro, small and medium enterprises.

The development of financial risks should be closely monitored, while the intervention and resolution framework should continue to be strengthened. The BSP’s cautious attitude toward the withdrawal of regulatory forbearance is appropriate. Although the economy has entered the recovery phase, the deterioration of asset quality is ongoing. Efforts to resolve the issue of problem assets could stretch beyond the current policy cycle. To avoid a cliff effect, it is important for the BSP to coordinate closely with its stakeholders and other government agencies when deciding on the extension or withdrawal of relief measures. The passage of several landmark legislations proactively supported by the BSP, such as the Financial Institutions Strategic Transfer (FIST) Act, will help facilitate the resolution of non-performing assets.

Structural policies and reforms are needed to enhance the resilience of the economy to shocks and facilitate the transition to the post-pandemic new normal. To this end, we strongly support the government’s efforts to promote digitalization, invest in infrastructure, and improve the “doing business” environment.

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute toward securing macroeconomic and financial stability of the ASEAN+3 region, which includes 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. AMRO also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.