Philippine economy to shrink by 4%
o Fitch Ratings is now forecasting that the Philippine economy will likely contract by 4% in 2020 due to the impact of the COVID-19 pandemic. This is lower than their initial growth forecast of 6% pre-COVID-19 and -1% in May this year. Fitch also expects that Q2 2020 GDP figures will likely be worse than the 0.2% contraction recorded in Q1 2020. For 2021, Fitch projects a 7.4% growth, faster than their previous 7% growth forecast.
Colliers initially noted that the country’s economy is likely to be affected by the impact of the COVID-19 pandemic. The last time the Philippine economy contracted, in 1998, residential rents declined by 15 percent while office lease rates plunged by 16 percent before recovering in 2000 and 2004 respectively. In our opinion, the pandemic will likely be worse than the Global Financial Crisis but not as bad as the Asian Financial crisis as the financial system is strong and interest rates are as low as they have ever been. In our opinion, the government and the central bank’s implementation of prudent fiscal and monetary policies will likely instill confidence in the Philippine economy including property. Earlier, Colliers noted that the property market is likely to post a slower, U-shaped recovery from 2021 to 2022.
Construction to bounce back
Several analysts expect the construction sector to bounce back as the government has allowed the resumption of public and private construction projects. They added that the government’s Build, Build, Build program is important for the country’s economic recovery. Data from the Philippine Statistics Authority (PSA) showed that construction is among the sectors likely to shed the most number of workers in Q1 2020. Meanwhile, analysts expect the construction sector to be the key beneficiary of the government’s ramped up infrastructure spending post-COVID-19. Latest data from the PSa valued the construction sector at P488.52 billion, with labor productivity at P546,379. The average salary of every employee is P255,093 per annum.
Data from PSA showed that public construction posted a 0.3% growth in Q1 2020 from the 9.1% contraction recorded in Q1 2019 due to the timely approval of the 2020 national budget which supported the implementation of infrastructure projects throughout the country. Meanwhile, private construction grew by a measly 4.4% from the 26.5% in the same period of 2019 as work stoppage due to the community quarantine in Luzon and supply chain disruptions pushed back the development of office towers, residential units and malls. We believe that both public and private construction are likely recover in 2021 as the government realigns its infrastructure spending and private developers recapture the demand for both office spaces and residential projects.
• BSP may cut key rates by 25 bps in June
Economists are expecting the Bangko Sentral ng Pilipinas (BSP) or central bank to continue cutting policy rates as a response to the COVID-19 pandemic. They expect BSP to cut 25-basis-points (bps) after inflation decelerated in May. Aside from the lower inflation, the policy rate cut could also be triggered by the need to provide additional economic stimulus after the country’s unemployment rate drastically rose to 17.7% from 5.1% due to the pandemic.
Some condominium buyers might consider this as an opportunity to buy condominium units to take advantage of better pricing in the market due to softer demand. The central bank lowered the interest rate by 50bps in March, in addition to the 25bps cut in February. The potential 25bps cut for June will likely result in lower mortgage rates, and further entice opportunistic residential investors to purchase lower-priced condominiums in the market. Colliers believes that if the pandemic persists beyond 2020, prices in the secondary condominium market are likely to soften. In our opinion, buyers should watch out for discounts in the mid-income segment, priced from PHP3.2 million (USD62,800) to PHP6 million (USD117,600) per unit. The low mortgage rates should also help propel overall take up in the Metro Manila condominium market especially once pent-up demand kicks in starting Q1 2021.