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Economy may shrink by as much as 1.9% — Nomura

A customer takes her items through a plastic barrier as a preventive measure against the coronavirus disease 2019 (COVID-19) in a 7-Eleven convenience store in Quezon City, Metro Manila, Philippines, March 26, 2020. -- REUTERS/ELOISA LOPEZ

March 31, 2020 | 12:32 am

The Philippine economy may contract by as much as 1.9% this year if the Luzon-wide lockdown is expanded nationwide and lasts until May, according to a report by Nomura Global Research.

In a note sent to reporters on Monday, Nomura said it has downgraded its 2020 gross domestic product (GDP) growth forecast for the Philippines to 1.6% from the initial 5.6%, amid the coronavirus disease 2019 (COVID-19) outbreak. This was its lowest forecast for the Philippines since the 2009 global financial crisis.

It also expects a 3% growth for the Philippines in a “good” case scenario, and a contraction of 1.9% in a “bad” case scenario.

Nomura said the 1.6% growth outlook assumes the Luzon-wide lockdown is lifted by mid-April, although economic activity is not likely to immediately normalize. It also took into account the sharp decline in global growth, especially in the country’s largest trading partners including China, the United States and Europe.

“This will also hurt overseas worker remittances more significantly than we previously thought, as worker deployment likely will be at a standstill, and worse, job losses especially among contract workers and seafarers (particularly those in cruise ships) will increase sharply,” the report said, adding this would put “significant downward pressure” on household consumption, which accounts for 68% of GDP.

“In addition, we believe President [Rodrigo R.] Duterte’s decision to place Manila and the entire island of Luzon under a lockdown will prove highly disruptive to overall economic activity, because Manila is the economic center and Luzon accounts for nearly 70% of GDP,” it said, citing continued supply chain challenges due to travel restrictions.

In its “bad” case scenario, Nomura assumes that fallout from the coronavirus pandemic will be “much more amplified,” pushing the Philippine economy into negative territory.

“Our assumption here, in addition to the external factors, is that social distancing measures locally are extended over Q2, with the lockdown lasting until May and expanded nationwide. The disruption in economic activity will be much more widespread, and nonlinear effects will kick in as a result of a combination of massive job losses, more insolvency problems particularly for SMEs, asset quality concerns of banks, which in turn will lead to tighter lending standards, and some bouts of social unrest,” Nomura said.

For this scenario, Nomura said it expects the government to widen the fiscal deficit to 5-6% of GDP, and an additional 50 basis points (bps) in policy rate cuts by the central bank. Another 200 bps in reserve requirement ratio (RRR) cuts is also seen.

On the other hand, the “good” case scenario shows GDP growth at 3%, assuming the lockdown is lifted as scheduled and a shallow recovery is seen in the second half.

The Philippines is bracing for a slowdown this year, amid the growing economic fallout from the coronavirus pandemic. Last year, the economy grew by 5.9%.

The National Economic and Development Authority (NEDA) said last week that GDP growth is estimated at 4.3% to -0.6%, depending if the pandemic is contained.

Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno has also said the economy could contract or settle at a 1% growth. — Luz Wendy T. Noble