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June 10, 2020

PHILIPPINES: Consumers may continue to feel under the weather

BY Bob Herrera-Lim

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( 5 mins)
  • Confidence is weak in the government’s immediate ability to manage the public health risks.
  • The only government stimulus program so far is equal to 1.1% of GDP, with the administration’s economic team resisting a legislative initiative for an additional 7% spending plan.
  • As borders start to reopen, the flow of returning migrant workers abroad — signaling a decline in remittances — is likely to increase..

Several movement and business restrictions were eased at the start of June in the greater metropolitan Manila area and its surrounding provinces where the bulk of the country’s industrial centers are located. These areas together account for more than half of the country’s economic output. However, beyond the initial spike of activity, the rest of the economic restart — and by consequence the recovery of broad consumer confidence — may be slower compared to other countries in Southeast Asia.

Three factors may be negatively affecting consumers’ sentiments and spending abilities in the next few months: weak confidence in the government’s ability to manage the persistent health risks from the virus; the government’s so-far conservative fiscal approach to stimulus; and the potential for the decline in remittances to be more pronounced in the second half of the year.

A risk-averse public

As of 10 June, the Philippines officially has had 23,732 cases and 1,027 fatalities, with the high fatality rate indicating significant under-testing. Since late March there has been intense political and public debates over the need to raise the country’s testing rate, but the Department of Health seems significantly constrained by lack of trained personnel and equipment for PCR testing, which in turn limits contact tracing. As a result, the private sector is implementing a hodgepodge of testing systems, mostly based on antibody kits, to at least reassure their employees and customers that their workplaces are safe. Many offices are resorting to limited work hours and alternating work days for their employees to reduce the possibility of infection. Because of the weak government response, Secretary of Health Francisco Duque is widely distrusted across the political spectrum; as early as April, a majority in the Senate signed a resolution asking President Rodrigo Duterte to remove him.

Possibly reflecting its own reluctance to risk public anger through a misstep, the government remains very conservative in its approach to reopening. Mass public transportation is still severely restricted in the capital, particularly for the small buses that primarily serve the poor. The education department is nominally following Duterte’s order to not have face-to-face schooling until a vaccine is available. However, this may not be feasible for many students in lower-income classes and rural areas, where technology and internet connections are unaffordable, inaccessible or unreliable. More likely than not, the education department will ask the president to walk back his order.

Consequently, people are still noticeably risk-averse, which argues against them quickly returning to malls and restaurants or seeking out travel and public entertainment. The lack of a reliable public health insurance system is also likely to drive up the savings rate, even among the middle class. Local governments are also wary of transmission from the more congested capital, and therefore implement a laborious set of restrictions — from travel authorizations from the police (a bureaucratic impediment more than anything else) to medical certificates (which are already of dubious value given the known issues with rapid antibody test kits) to home quarantine for incoming visitors — that are a substantial disincentive to travel. So far, airlines only allow a limited subset of travelers, particularly workers returning from abroad headed to thier homes, individuals stranded outside their homes, or those authorized to travel. Consequently, the labor force, especially those in lower-income service jobs, faces serious mobility problems. Public risk-aversion may decline once the testing regime reports daily cases in the dozens, rather than the current low hundreds — but whether this occurs this June or July remains unclear.

Limited stimulus and a question of how much remittances will shrink

Congress adjourned on 7 June without any new stimulus package. The total stimulus has so far been only USD 4bn (1.1% of GDP, the lowest among the large Southeast Asian economies), and there is a pending stimulus bill equal to 7% of GDP. Congress resumes session in July, but the powerful Secretary of Finance is against its proposed PHP 1.3tn package, so a lower amount may eventually emerge sometime in the third quarter. Also, anecdotally, the cash hand-outs promised in the first stimulus have not yet been fully paid out because of the absence of a comprehensive database that made the central government reliant on a patchwork of lists prepared at the village level, resulting in delays and corruption. This is in fact one factor that has made the Secretary of Finance averse to another large-scale cash grant.

Finally, tens of thousands of foreign workers are expected to return within the next few months, mainly workers from the Middle East and seafarers now waiting in several European and US port cities. Lack of flights and testing capacity have limited the number inbound to the Philippines, and workers will likely try to hold out in their host countries as they wait for a rebound (even though this may cause them to deplete their savings). Last year, remittances reached USD 33.5bn, equivalent to roughly 10% of GDP, and the amount has increased annually for the last 18 years. That growth streak will likely be snapped in 2020, with remittances expected to contract by 10% – 20%. Workers from the Middle East are likely to have less savings and access to credit or social safety nets in their host countries compared to their counterparts who work in the developed economies, thus making it likely that remittance declines will also be disproportionately felt by the poor.

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