Huge risks ahead

“The door to recovery is now fully open,” declared Socioeconomic Planning Secretary Karl Kendrick Chua when he presented last week the economic numbers for 2021.

Gross domestic product (GDP), a measure of the value of goods produced and services rendered in the economy, expanded by 5.6 percent last year, beating the government’s forecast of 5 to 5.5 percent. The expansion in the fourth quarter was most surprising at 7.7 percent, fueled by what economists described as “revenge spending,” or consumers splurging on purchases for the holidays after being confined to their homes for nearly two years.

Chua is confident that return to pre-pandemic levels is imminent despite the Omicron surge, adding that the economy remains on track to hit the more ambitious growth target of 7-9 percent in 2022, as long as restrictions are eased before this quarter ends.

He points to the “significant” decline in COVID-19 infections now following the Omicron outbreak this month that placed many areas under the stricter alert level 3. If the downtrend in infection continues, Chua predicts that a shift to the less stringent alert level 2, particularly in Metro Manila and neighboring provinces that account for half of the economy, will not only gain P3 billion a week, but also pave the way to the lowest alert level 1.

Not to dampen the economic optimism now pervading the government, there are huge risks ahead, which Chua himself acknowledges.

These include rising oil prices, the strong likelihood that the US Federal Reserve Board will raise interest rates, and the dismal performance of the agriculture sector.

Brent crude, the international oil benchmark, last week hit $90 a barrel for the first time since 2014. The rising cost of oil, traced to growing geopolitical tensions between Russia and Ukraine and the tight supply when global demand is picking up due to increasing economic activities, is a threat to inflation in emerging economies such as the Philippines. It will raise transport fares, electricity rates, and the prices of basic consumer goods. As consumer sentiment is dampened, the consumption-driven economy will slow down.

An increase in US interest rates, on the other hand, will raise debt servicing cost, trigger capital outflows as money always go where it will grow (putting pressure on the peso as demand for dollars for repatriation abroad increases), and generally force local monetary authorities to raise interest rates to remain competitive. This, in turn, has the effect of also dampening domestic business activities.

“Emerging economies should prepare for potential bouts of economic turbulence,” the International Monetary Fund warned earlier this month, citing the risks posed by faster-than-expected Federal rate increases predicted to “rattle financial markets and tighten financial conditions globally.”

The Philippines is particularly vulnerable since it has amassed a pile of foreign debt. The country’s total pandemic-related foreign borrowings, accumulated since March 2020, have now ballooned to $22.55 billion, or about P1.2 trillion. The country’s total outstanding debt, both external and domestic, swelled to P11.93 trillion as of end-November 2021, from P8.22 trillion as of end-2019, or prior to the pandemic.

On the domestic front, there’s the recurring problem about the agriculture sector’s dismal performance. Earlier branded by the Duterte administration’s economic team as the weakest link in the economy, the farm sector shrank by 1.7 percent in 2021, or worse than the previous year’s decline of 1.2 percent. To a large extent, this has been due to the limited attention and development assistance it has been getting from the government for decades now.

Finally, there’s the presidential election in May. While such political exercises have the effect of boosting the economy through massive election-related spending, the uncertainties attendant to this year’s polls have already kept investors at bay. Pantheon Macroeconomics senior Asia economist Miguel Chanco cautioned that despite the hefty rebound in private consumption in the last quarter of 2021, other economic sectors “leave little to be desired.”

He adds: “In particular, gross investment rose by just 3 percent quarter-on-quarter … This suggests that pre-election uncertainties are settling in much earlier than we expected. We reckon that businesses will remain on the sidelines in the first half of this year, at least until the political dust settles.”

The Philippines is not out of the woods yet, but barring the emergence of another deadly COVID-19 variant, the possibility of the US calibrating its rate hikes, and the May elections being credible and peaceful, there’s the real prospect of the economy finding its way back to the pre-pandemic growth path.

One thing remains certain at this point: the next administration will have a lot on its plate, economically speaking.