March 14, 2022
MANILA — The impact of Russia’s invasion of Ukraine on the global economy, especially expensive oil, will spill over to the Philippines by way of slower growth this year as consumer spending takes a hit, plus harder-to-achieve sustainability goals, think tanks said.
On Friday, Capital Economics slashed its 2022 gross domestic product (GDP) growth forecast for the Philippines to 7.2 percent from 8 percent previously, alongside downgraded projections for eight other Asian countries in its report covering 12 economies. The London-based think tank retained its pre-war forecasts for Indonesia, Malaysia and Singapore, citing the “negligible” impact of the conflict on these countries.
Capital Economics’ lower 2022 GDP growth estimate for the Philippines nonetheless remained within the government’s 7 to 9 percent target range, and was still among the fastest in emerging Asia, just behind Vietnam’s 8.8 percent and Bangladesh’s 8 percent. The think tank kept its 2023 growth forecast for the Philippines at 8.5 percent — the highest in the region.
“Movements in energy prices have no direct impact on real GDP. But there are indirect effects caused by shifts in real income. For net-energy consuming economies, which includes most of Asia, the main hit from higher prices will come through a reduction in real incomes,” Capital Economics senior Asia economist Gareth Leather said.
Capital Economics jacked up its 2022 headline inflation forecast for the Philippines to 4.3 percent — above the Bangko Sentral ng Pilipinas’ (BSP) 2 to 4 percent target range of manageable price hikes — from 4 percent previously.
Price subsidies
“Temporary shocks to real income don’t necessarily cause spending to fall. Asian households typically have high savings. On previous occasions when global oil prices have spiked, they have dipped into them to offset at least some of the hit to their real incomes. We expect the same this time. Support will come either in the form of energy price subsidies,” Capital Economics said.
In the Philippines, for instance, the government will give away a total of P6.1 billion in fuel subsidies and discounts to agricultural producers this month and next month to ease the burden from skyrocketing oil prices.
“The upshot is that while higher energy prices will cause consumption to weaken, they will not do so by much. In many countries the impact will be offset by a loosening in COVID-19 restrictions,” Capital Economics added.
Here in the Philippines, the economic team had been pushing to move the entire country to the lowest alert level 1 restrictions so that reopening more productive sectors of the economy can mitigate shocks wrought by the Ukraine-Russia war.
In a March 10 report, the Washington-based Institute of International Finance (IIF) said that “by our yardstick, the Philippines, Brazil, Indonesia, India and Colombia look better insulated than many emerging market peers” from economic vulnerabilities to the ongoing conflict. The IIF’s estimates showed very little Philippine exports to and imports from both Ukraine and Russia.
But the IIF said that “on ESG metrics, South Africa, Indonesia, and the Philippines all face significant challenges, including on carbon efficiency, environmental protection, and a range of social issues” due to their heavy reliance on oil to run their economies. ESG stands for environmental, social and [corporate governance among socially responsible public and private investors.
“Despite some improvements over the past decade, emerging markets still have substantial room to reduce their carbon footprint and thus to mobilize resources toward domestic renewable energy sources. South Africa, Indonesia, Thailand and the Philippines could benefit the most from the clean energy transition,” the IIF said.
Including the Philippines, where yields sought by domestic creditors had climbed since the Ukraine-Russia war erupted, the IIF said that “geopolitical tensions have prompted a sharp surge in borrowing costs for many emerging markets.”
“The economic and financial impact could be particularly severe for emerging market economies, particularly for those that entered this new wave of uncertainty with weaker fundamentals: the postpandemic recovery remains incomplete and uneven for many emerging markets and low-income countries, government debt levels are at record highs, government borrowing needs are hovering well above prepandemic levels, and international investor appetite for emerging market securities had registered weak even before the conflict escalated,” the IIF said.