Philippines: election year to deliver 7-9% growth? Curb your enthusiasm

Economic and Financial Analysis

3 February 2022
Article
                  Philippines: election year to deliver 7-9% growth?
                  Curb your enthusiasm
                  Philippine GDP grew 5.6% in 2021, but can the economy sustain this
                  momentum?

                  We remain optimistic about the growth outlook for the Philippines

                      Content
                      - Recent economic performance
                      - Strong growth in 2022? Curb your enthusiasm
                      - Omicron disruption
                      - Fiscal handicap for incoming administration
                      - Et tu Ben?
                      - Growth momentum intact but may fall short of target

                  Recent economic performance
                  The Philippines managed to string together a decent run of three-quarters of gross domestic
                  product (GDP) growth in 2021. Aided by a favourable base and helped along by the gradual
                  easing of mobility restrictions, full-year GDP growth settled at 5.6%, better than the official
                  growth target of 5-5.5%. Despite the better-than-expected performance, it has become clear
                  that growth momentum was held back during Covid-19 waves induced by new variants. During
                  these periods, the national government was forced to reinstate mobility restrictions, weighing

on momentum.

Strong growth in 2022? Curb your enthusiasm
Philippine economic managers remain optimistic about economic prospects in 2022. The official
forecast for 2022 GDP was pegged at 7-9% with growth expected to get a boost from national
elections scheduled in May. And although recent history shows us that election-related
spending tends to bolster growth momentum, we highlight certain developments that could
force us to tone down expectations for this year.

Omicron disruption
This year got off to a less-than-ideal start with daily Covid-19 infections surging with the arrival
and spread of the Omicron variant. The surge in infections resulted in yet another round of
mobility curbs in the capital region and surrounding provinces.
And although early data points to a less burdensome impact on the healthcare sector, the
disruption caused by restrictions will likely reverse positive trends in consumer and business
sentiment. The impact of Omicron also appears to have filtered through to the manufacturing
sector with the latest manufacturing purchasing managers' index (PMI) reading showing a
stagnation in activity. This highlights that growth momentum will likely take its queue from
virus containment, and growth momentum could be hampered should the country experience
additional Covid-19 waves in the coming months.

Manufacturing activity stalls during Omicron shutdown

Source: IHS Markit

Fiscal handicap for incoming administration
The fiscal situation in the Philippines deteriorated substantially during the pandemic. The
government was forced to roll out support measures during lockdowns while also dealing with a
steep drop in revenue collection due to weaker economic output. As a result, the debt-to-GDP
ratio rose sharply to 60.5% by end-2021 and is expected to remain above 60% until 2023. The
incoming administration will inherit a substantial debt pile which could constrain the ability of
the next president to support the economy.
Previous election years showed a noticeable slowdown in government expenditures in the
quarters after the May elections. A new economic team will likely struggle to hit the ground
running, all the more so with the current fiscal state. We therefore expect a slowdown in

government outlays by the second half of the year, which could weigh on the overall growth
outlook.

High debt-to-GDP to handicap incoming president

Source: Bureau of the Treasury Philippines and Philippine Statistics Authority

Et tu Ben?
Bangko Sentral ng Pilipinas (BSP) Governor Ben Diokno has never shied away from being tagged
as a “pro-growth” central bank governor. Throughout the pandemic, he vowed to maintain an
accommodative stance “for as long as necessary” to ensure a sustainable growth trajectory.
Diokno has remained dovish even in the face of imminent rate hikes from the Federal Reserve
and other central banks, ruling out rate hikes for at least the first half of the year. Despite these
dovish undertones from Diokno, we have pencilled in a salvo of rate hikes from the BSP with the
first adjustment as early as 2Q. The deterioration in the external position by the end of 2021
suggests that the Philippine peso (PHP) will continue to come under pressure ahead of the
projected March Fed rate hike. This, alongside a decent 1Q GDP report, could be enough to
convince Diokno to join the rate hike chorus.
A reversal from the Philippine monetary authorities will likely nip the recent rebound in bank
lending in the bud. Bank loans had managed to revert to growth recently, due in part to
economic reopening. Demand for credit has been sensitive to rate hikes in the past and we
expect BSP’s rate hike salvo to cap the recovery in bank lending and weigh on overall capital
formation.

Bank lending rebound to be capped by BSP rate reversal

Source: Bangko Sentral ng Pilipinas

Growth momentum intact but may fall short of target
Despite these speed bumps, we expect the Philippine economy to post a respectable expansion
in 2022. The gradual economic reopening has helped revive household consumption which has
resulted in a rekindling of business sentiment. Election-related spending may indeed support
economic activity in the first half of the year as the campaign season peaks in April.
Growth may fall short of current aspirations, however, with momentum disrupted by the surge
in cases linked to the Omicron variant. Meanwhile, a likely slowdown in government outlays will
be felt in the second half given the fiscal handicap passed on to the new administration. Lastly,
the potential reversal in stance by the BSP is expected to cap the recent bounce in bank lending
activity which in turn could limit capital formation. We remain optimistic about the growth
outlook for the Philippines, but we believe GDP growth may ultimately fall below expectations
and settle at 5.3% for the year.

Nicholas Mapa
Senior Economist, Philippines
nicholas.antonio.mapa@asia.ing.com

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