The worst impact of the global financial crisis in terms of economic slowdown will be felt by the Philippines in the second quarter, with the gross domestic product likely to grow a marginal 0.5 percent after a projected expansion of 3.5 percent in the first quarter, according to Barclays Capital.
Global economic conditions are going to get worse before they get better, but the Philippines is "well-placed" to ride out volatility in the international markets, said Barclays Capital senior regional economist Nicholas Bibby.
Remittances of Filipinos working abroad, a key pillar of the domestic economy, are expected to decline 7 percent this year after growing 13.7 percent to $16.4 billion last year, while exports will likely contract by 0.5 percent, Bibby said in a research report.
Heightened risk aversion in emerging markets is now weighing on the performance of Philippine financial assets, but Bibby said the country's relatively robust balance of payments profile and improvement in public sector debt ratios will limit the downside.
Barclays Capital, UK-based global bank Barclays Plc's investment banking division, which has just opened a representative office in Manila, expects the Philippines's GDP to expand at a slower pace of 3 percent this year from last year's growth of 4.6 percent.
The economy will stage a mild recovery in the third quarter, Bibby said, with GDP growth seen at 3.4 percent.
Exports, which slumped 2.9 percent last year, look set to decline further in 2009 due to weaker global demand and, in particular, a sharp downturn in the electronics sector, Bibby said. Electronics account for about 60 percent of the country's merchandise exports.
"We expect the drop in remittances to feed through to private consumption and investment as these flows have fuelled consumer spending and the recovery in the housing market. The impact should be partly offset by rising incomes in the agricultural sector," Bibby said.
Bibby said private consumption this year is expected to slow to 2.5 percent from 4.5 percent in 2008.
"The picture for investment is likely to be more mixed. Private sector activity looks set to soften in line with weaker exports and softening in the property market," he said. "However, we look for public sector-led infrastructure outlays to increase as the government tries to offset the weakness in private sector activity."
In the last two global downturns, remittances— which account for about 10 percent of the Philippines's GDP—fell 11 percent in 1998 and 0.3 percent in 2001, Bibby noted.
While these inflows have become more geographically diverse and more and more Filipinos are moving abroad to work, he said remittances are still expected to decline given the extent of the slowdown in global demand, accompanied by the fall in oil prices which will likely weigh on flows from those working in the Middle East.
The Bangko Sentral ng Pilipinas does not expect remittances to contract this year since the deployment of Filipino professionals continues to grow by double-digit level. The worst that could be expected, according to the BSP, is a zero growth for remittances.
The government, meanwhile, is set to come up with revised macroeconomic assumptions this year that will likely include a negative growth projection for exports.
With the need to shield the domestic economy from the harsh effects of the global recession, Barclays Capital expects the government's fiscal stimulus plan to widen the budget deficit this year to 2.5 percent of GDP from the original goal of P102 billion or 1.2 percent of GDP.
But Bibby said a wider deficit is unlikely to cause undue stress on the government's financial and credit standing.
"The government has room to maneuver, due to its program of fiscal consolidation over the last five years, which has led to a marked decline in national government debt," he said, noting that the national government debt stands at 67 percent of GDP in 2008 compared with 92.9 percent at the end of 2005.
"Although we look for the primary government surplus to fall to 1.1 percent of GDP in 2009, below the 2 percent that is needed to stabilize public sector debt levels, the projected rise in public sector debt should be mild," Bibby said. "We look for a 4-percentage-point rise in 2009 due to a smaller primary surplus and a weaker peso."
Bibby also does not believe the government, which raised $1.5 billion from a bond sale in January and has secured $1 billion in soft loans from World Bank and the Asian Development Bank, will have any difficultly funding the budget deficit.
Borrowing from the domestic market, he said, should also not be a problem for the government, as domestic banks are flush with liquidity. He also believes the country is on course to run a current account surplus equal to 4.7 percent of GDP.
Rising risk aversion toward emerging-market assets has led to concerns about the potential impact of an inability to roll over the Philippines foreign debt, but Bibby said the country has more than enough resources to cover an estimated $5 billion in amortization payments in 2009 and short-term debt of $8 billion.
The Philippines currently has nearly $40 billion of foreign-exchange reserves and is projected by Barclays Capital to run a current account surplus of $7.5 billion in 2009.
Bibby also said soft loans that the country is scheduled to receive this year from multilateral agencies could be increased to at least $1.5 billion from $1 billion.
The small size of the Philippine stock market's capitalization, meanwhile, means that that there is relatively little foreign portfolio money in the Philippines, he said.