How the Philippines Can Recover From One of the World’s Longest Lockdowns

One of the world's longest lockdowns has disrupted the growth trajectory of the Philippines. From Asia's darling, it is on the verge of reclaiming its old status as the region's sick man. However, the country can still bounce back and mitigate the impact of the pandemic on its consumption-driven economy.

Edson C. Guido
May 16, 2021

In 2019, the Philippines was among the fastest-growing economies in Southeast Asia, expanding at a 6.1 percent gross domestic product (GDP) growth rate, second only to Vietnam among major Association of Southeast Asian Nations (ASEAN), an economic union comprising ten member states in the region. 

However, the COVID-19 pandemic has thrown a wrench in its development, crippling its economy as the government imposed one of the world’s longest lockdowns.

As a result, the Philippine economy suffered a 9.5 percent GDP contraction in 2020, the worst in the region and the steepest in its post-war history. It was later revised to 9.6 percent.

Beginning March 15 last year, large swathes of the economy have had to shut down to curb the spread of the virus. Yet, despite calls to reopen, the government has maintained it will keep restrictions in place, especially in hotspots such as Metro Manila, the nation’s capital.

More than one year later, the Philippines holds the second-highest number of cases in the region, resulting in more than 18,000 total COVID-19 deaths, even with painstaking restrictions.

When the number of cases peaked in 2020, the country became the region’s epicenter after recording the worst COVID-19 outbreak. As of publication, the Philippines is yet again reporting the most number of cases in Southeast Asia, with cases rising exponentially in March and peaking in April, higher than what was recorded in 2020.

Having one of the lowest fiscal stimulus packages in Southeast Asia also made matters worse as its consumption-driven economy took the biggest hit. Filipino tycoons have been pushing for more government stimulus to revive the economy but the government remains unmoved, cautious in providing direct transfers to the most vulnerable sectors.

Even before the pandemic ravaged the country, the Philippines already lagged behind its regional peers in attracting investments with its restrictive policies and high cost of doing business, among other structural issues. After peaking at a record-high of $10.3 billion in 2017, foreign direct investments declined for three consecutive years up until 2020. 

In addition, foreign investments approved by promotion agencies contracted by 71 percent in 2020, falling to its lowest level since 2017, the first full year when Philippine President Rodrigo Duterte assumed power. Approved foreign investments refer to commitments approved by investment promotion agencies like the Philippine Economic Zone Authority. If these investment pledges materialize after a few years, they will be classified as foreign direct investments. The decline in investment pledges is an indicator of weak confidence for investments in the Philippines.

Economic recovery 

Despite the grim outlook, the Philippines still has the potential to rise from its ashes in the post-pandemic era, especially after the passage of a bill dubbed by over 50 business groups as one of the largest economic reforms in decades.

On March 26, President Duterte signed the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE). CREATE intends to lower the corporate income tax rate to 25 percent from 30 percent, which used to be the highest in the Southeast Asian region. This figure will then be reduced further by one percentage point per year from 2023 to 2027. The law also seeks to rationalize fiscal incentives with hopes of enticing new investors.

The measure, intended to reduce the costs of doing business, will make the Philippines more competitive in attracting foreign investments in the region. This will result in economic growth and job creation, among others, which can help fast-track the country’s recovery back to its recent glory.

Further, an outright five percentage point reduction in the tax rate will also provide immediate relief to businesses that have struggled during the pandemic. The slash in income tax rate will massively help companies continue with their daily operations and retain their workers, among others.

Apart from CREATE, the government is also pushing for several economic measures to ease foreign ownership restrictions further and liberalize the economy. These include amendments to the Retail Trade Liberalization Act, the Foreign Investments Act, and the Public Service Act. The government’s objective is to open more businesses, including those in the local retail sector to foreign participation.

Shifting gears

The Philippines can also leverage its position as the worldwide leader in Internet usage after the pandemic forced daily activities to shift online as more people stayed and worked at home. The latest Digital 2021 report revealed that around 74 million people used the Internet in January 2021, which is roughly 67 percent of the country’s total population. 

Each Filipino, on average, spent 11 hours surfing the Internet per day, four hours higher than the global average. While online, 80 percent bought something, a figure, again, higher than the worldwide standard. This behavior reflects a higher e-commerce adoption in the country, suggesting more opportunities for other businesses to expand from physical brick-and-mortar stores to online. 

The Philippine Central Bank, for its part, picked up on the trend and also pointed to the pandemic as the catalyst for accelerating the digitalization of the financial industry. In the past months, digital payments rose in both volume and value as people resorted to online transactions after the government imposed a lockdown.

The Philippine government also encouraged the private sector to adopt alternative work arrangements through work-from-home setups, which have become the new normal for more than a year, to help stem the spread of the virus.

Digitalization of a nation

All these, however, would be in vain unless the country improves its digital infrastructure and Internet connectivity. The World Bank noted that the Philippines’ high-speed Internet penetration is far below its regional peers. The Philippines' download speed is one of the slowest at just half of the average rate in Southeast Asia, and yet, one of the most expensive.

The World Bank blames the country’s low investment in Internet infrastructure and the existing duopoly in the market. Basic economic theory can explain that a highly concentrated market usually leads to higher prices and lower quality of service.

Fortunately, the government has recently launched major initiatives, including selecting a third telecommunications player and the National Broadband Plan, which aims to expand the coverage of fiber optic cable and wireless technology across the country. While these initiatives are not enough to break the stranglehold of the two major players in the near term, they are a start. 

More investments in digital infrastructure would be necessary to make the Internet in the country faster, more reliable, and more affordable. It is also important to ensure accessibility in rural areas, which will create more jobs in areas outside the capital. With an Internet-savvy population, the Philippines will surely benefit from this accelerated digital transformation across different sectors to adapt to the changing landscape.

Boosting the country’s digital economy can also greatly benefit micro, small, and medium enterprises, which are the main backbone of the economy, accounting for more than 99 percent of the businesses operating in the Philippines. The digital economy will also generate employment as this sector has the biggest share of employment in the country at more than 60 percent.

Vaccine rollout

Lastly, the Philippines needs to strategize the deployment of vaccines given the extremely limited supply. The Philippines was the last nation in Southeast Asia to obtain an initial shipment of around a million vaccines for its 110 million population. 

This slow procurement might further push back the expected date of widespread vaccination, which the Economist Intelligence Unit forecasted to happen during the fourth quarter of 2023. This predicted time frame was the latest among major ASEAN nations.

The pace of the rollout has also been slow in the first few weeks. At this rate, Bloomberg estimates that the Philippines will take more than ten years to vaccinate 75 percent of its population.

This is why the Philippine government needs to look closely at the infection trends to have a more efficient vaccine rollout. More than 40 percent of the confirmed COVID-19 cases in the Philippines came from Metro Manila. If Central Luzon and CALABARZON, the two regions closest to Metro Manila, are included, they would already comprise two-thirds of the country's total infections. 

In March, areas with the highest cases all came from these three regions, prompting the government to put Metro Manila and select provinces in Central Luzon and CALABARZON in a “bubble” while also imposing additional restrictions.

In all, these three regions collectively account for nearly 60 percent of the national economic output. The government is studying this vaccine rollout strategy of prioritizing the said regions after the surge of new cases in Metro Manila.

Recovery in sight

Google’s mobility data show that more than a year into the lockdown, the number of visitors in retail and recreation areas, workplaces, parks, and transit stations has yet to return to the level observed before the pandemic. The report used a baseline sample taken from January 3 to February 6, 2020. And for a country that is heavily reliant on domestic consumption, mobility restrictions in urban centers would hurt the economy.

As such, the government is taking the right step of looking into the possible strategy of inoculating Filipinos who reside in Metro Manila and nearby provinces, after, of course, prioritizing frontline workers. Doing this will be key to herd immunity in the economic capital, which has a population of 14 million, thereby restoring consumer confidence as the economy recovers. In the meantime, the Philippines can also scale up its social safety nets, such as putting more money in people’s pockets, as recommended by the private sector.

Only with a calibrated relaxation of restrictions in specific sectors and a targeted vaccination strategy will the Philippines be poised to revive its consumption-driven economy in the coming years and emerge from one of the world’s longest lockdowns.

Edson C. Guido is the Head of the Data Analytics Team of ABS-CBN News, the Philippines' leading media organization. He launched the team when he joined in 2017, dedicated to analyzing broader macroeconomic trends and crunching large datasets. Prior to ABS-CBN News, Edson worked at the World Bank, where he processed and analyzed datasets published in official reports. He is a Ph.D. candidate at the University of the Philippines School of Economics, where he also finished his undergraduate and master’s degrees and graduated with the program's highest honor.