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publication June 14, 2021

Navigating a Challenging Recovery in the Philippines (Philippines Economic Update June 2021)

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STORY HIGHLIGHTS

  • The resurgence of COVID 19 cases and the reimposition of stringent quarantine measures held back early signs of an economic rebound.
  • The economy is expected to recover over the forecast horizon, but there are significant downside risks.
  • The key policy challenges are to manage the pandemic, effectively deliver social protection, and mobilize private sector participation in the recovery.

Recent Economic and Policy Developments

  • The economy remained in recession, contracting by 4.2% year-on-year in the first quarter of 2021. The growth contraction was fueled by weak domestic demand, driven by the combination of containment measures, weak confidence, and rising inflation.
  • Meanwhile, tepid external demand was driven by the sharp contraction in services exports amid lingering restrictions and weak demand for international tourism while goods exports recovered.
  • The public sector was the main driver of growth with an expansionary budget.
  • The impact of the recession is broad-based, affecting all sectors, i.e. industry, construction, manufacturing, services, trade, transportation, accommodation and food services.
  • The Central Bank of the Philippines (Bangko Sentral ng Pilipinas) maintained its key policy rate at 2.0% throughout the first four months of 2021 to support the economic recovery.
  • The authorities also accelerated public spending. Stimulus spending and infrastructure investment drove public spending from 19.1% of GDP in the first quarter of 2020 to 23.4% of GDP in the same period in 2021.
  • The unemployment rate decreased to 7.1% in March 2021 after remaining steady at 8.7-8.8% in the past five months.

Outlook and Risks

  • The growth prospects hinge on the country’s ability to manage the COVID-19 health crisis.
  • The economy is projected to expand at 4.7% in 2021, before accelerating to 5.9% in 2022 and 6.0% in 2023. The economic recovery will contribute to renewed progress in poverty reduction.
  • Growth prospects are subject to significant downside risks.
    • A resurgence of infection due to the entry of new virus variants is the most significant risk, which may yet overwhelm the healthcare system.
    • Ineffectively containing the virus or implementing the mass vaccination program may extend mobility restrictions, which could lead to further job and income losses, disrupt businesses, and delay economic recovery.
    • External risks include a slower-than-expected global recovery, disruptions in international logistics and global value chains, and trade protectionism.

Policy Recommendations

  • The key health policy response remains the management of the virus and roll out of the vaccination program.
  • Effectively delivering social protection programs will help reduce the extent to which the crisis adversely affects long term human capital accumulation.
  • Mobilizing greater private sector participation in public infrastructure projects will be important as the government faces limited fiscal space in the short term.
  • Relaxing restrictions on FDI is expected to boost the economic recovery.

Special Focus on Subnational Finance

Local governments have played a crucial role at the front lines of the COVID crisis. A current lack of resources prevents local government units (LGUs) from fulfilling their devolved mandates.

  • The Mandanas Ruling that will be implemented in 2022 is the first step towards strengthening decentralization and improving local service delivery.
  • Large disparities in LGUs’ financial resources have led to persistent inequalities across LGUs.
  • Implementation challenges can be addressed successfully through improved coordination and strategic planning and budgeting.
  • Addressing the structural challenges of decentralization requires a long-term investment in designing institutional arrangements that will ensure the success of decentralization.
  • Policy Recommendations for the implementation of the Mandanas Ruling
    • Short-term
      • Clearly define, communicate, and coordinate the re devolution of functions.
      • Minimize inefficient allocation of LGU budgets by focusing on implementation ready programs and projects.
    • Medium-term
      • Support capacity building in local government units.
      • Reduce inequality by re devolving gradually and targeting national government support toward disadvantaged LGUs.
      • Strengthen systems of monitoring and evaluation within government.
    • Long-term
      • Amend the Local Government Code to address fundamental challenges towards effective service delivery.
      • Strengthen demand for transparency and accountability.

MULTIMEDIA

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June 10, 2021 Report Launch Replay