By Business Mirror, March 4, 2020; Business Mirror

International think tank Fitch Solutions has cut its growth forecast of the Philippine economy for 2020, as the coronavirus disease (Covid-19) is likely to affect four of the country’s main economic streams.

Fitch Solutions—the research arm of Fitch Group—said in an announcement on Tuesday that it has lowered its projection for Philippine economic growth to 6 percent, down from the earlier forecast of 6.3 percent.

“We expect the Covid-19 outbreak to weigh on growth in the first half of 2020. As such, we have lowered our 2020 growth forecast […] to account for growing external headwinds, noting that risks to our forecast are weighted to the downside should the virus spread more aggressively,” the research group said in a statement.

This projection, the group noted, is still subject to potential downturns should a sharp rise in the number of cases occur. According to Fitch Solutions, this would ultimately result in reduced domestic activity and hamper the tourism sector further.

Aside from lower domestic activity, Fitch Solutions also flagged lower exports and tighter global financial conditions as downside risks from the ongoing global health crisis.

“We had seen downside risks to growth given the expectation of lower growth in China, but with the outbreak beginning to have a global impact and proving disruptive to supply chains across continents, we see the external shock to the Philippines as more pronounced. Investors have also grown more concerned about the potential impact of the outbreak on the Philippine economy, as reflected by the Philippine Stock Exchange [PSE Composite Index -PSEi] falling 7.9 percent in the week February 24 to 28,” Fitch Solutions said.

4 major channels

Although the Philippines has relatively fewer cases than other neighboring countries, Fitch Solutions’ assessment showed that the Philippine economy will likely suffer through major constraints in four major channels.

“First, through a slowdown in tourism arrivals; second, disruption to exports and supply chains; third, interruptions to infrastructure projects; and fourth, through reduced remittance inflows,” the research firm said.

Weaker tourism arrivals are expected to weigh on growth in 2020, as tourism and travel-related employment, retail sector activity and investment are impacted. The Chinese government’s order for the suspension of international tour sales on January 24 and outbreaks across the region, particularly in South Korea, is likely to result in a slump in arrivals to the Philippines.

“We expect tourist receipts to weaken as a result given that Koreans account for 25 percent of inbound arrivals to the Philippines,” Fitch said.

Tourism and travel accounted for 24.7 percent of the economy in 2018 and 26.4 percent of employment.

Disruptions to supply chains and export demand are also likely to impact growth but to a lesser extent than some of its regional peers. Fitch Solutions said manufacturers are seen to face some supply constraints as a result of the coronavirus spread and this may result in some temporary delays to output over the near term.

The government’s infrastructure drive could also be at risk, Fitch Solutions noted, given the country’s relatively high percentage of Chinese foreign direct investments (FDI). The think tank said the inability of Chinese workers to travel in some cases has meant delays for projects, particularly Chinese-led projects which tend to rely on Chinese labor.

Mainland China accounted for around 12.3 percent of FDI inflows between January and November 2019, with South Korea, Singapore and Japan also key sources of investment flows.

“Travel restrictions and quarantine periods in place across Asia [are] likely to result in disruptions to investment decisions, which could prove a headwind to the infrastructure boost we had been expecting,” Fitch Solutions said.

Remittances, the country’s most resilient dollar faucet, are also at risk. The virus has hit economies, such as China, Hong Kong, Singapore, South Korea, Japan, Italy and Iran—which together account for around 17.3 percent of remittances. Fitch Solutions expects contraction in flows from these countries.

“Moreover, the spread of the virus on the Diamond Princess cruise ship and reported cases linked to the MS Westerdam cruise ship are likely to see reduced demand for cruise ship holidays,” the think tank said.

“Philippine workers receive 21.7 percent from sea-based work, with cruise ships accounting for a significant share. As such, a potential collapse in cruise travel demand could pose a threat to employment and remittance flows,” it added.