Fearless forecast on Philippines economy in the wake of Haiyan tragedy

Will GDP be badly hit?

According to J.P. Morgan, a week has passed since Typhoon Haiyan made landfall in the Eastern Visayas islands and assessing the damage and estimating the impact of the typhoon’s impact on the Philippine economy remains difficult.

As access improves to the worst hit areas, more accurate estimates will materialize. In the meantime, we highlight below key points that we think are relevant for the Philippines’ outlook and the regional economy, and we note our own forecast changes.

Here's more:

Growth and inflation: 
The entire population of the Eastern Visayas, which includes Biliran, Leyte, and Samar islands, accounts for less than 4.5% of the Philippines’ population and its share of economic output is even smaller at 2.2% of total national GDP.

The region is mostly agricultural, with coconut being the only crop produced in enough size (11% of total national production) to potentially affect national supply. The region does produce 6% of the country’s rice but most of the harvest had been completed prior to Haiyan’s landfall according to the International Rice Research Institute (IRRI).

Prior to the hurricane season, the National Food Authority  (NFA) stated that rice stocks in the country are sufficient. Thus, even if we assume a 50% drop in economic output from 3Q, the effect on national GDP will be small.

We thus have marked down our 4Q GDP forecast only modestly to 4.5%q/q, saar from 5.7% and we have marked up our 1Q and 2Q GDP forecasts modestly on account of reconstruction. Our 2013 GDP forecast remains unchanged at 7.1% while our 2014 forecast has been raised to 5.8% from 5.6%.

The impact of weather during the hurricane season is always difficult to gauge. While being the worst storm this year, Typhoon Haiyan was the 30th storm to hit the Philippines this year and we already saw some weather-related effects in the October CPI print.

We now expect larger monthly inflation gains in coming months, which has raised our inflation forecast to 2.9% this year from 2.7% and to 3.4% for next year from 3.1%.

The weather related effects are expected to be transitory, and as such, will not likely elicit BSP reaction, especially since inflation forecasts are still comfortably with in the official 4%+/-1% target range. 

Fiscal and BoP: 
President Aquino stated in a televised address that the country has PHP18.7 billion in funds to help rebuild areas damaged by the typhoon.

According to Bloomberg, Treasurer De Leon stated that no extra debt will be issued to fund reconstruction. This is not surprising since once again, the government is running behind on its spending plan for the year.

Through September, the fiscal deficit was only PHP101.2 billion compared to a full-year target of PHP241 billion. Government spending does tend to increase in the last quarter of the year, but there is plenty of fiscal space for reconstruction spending.

Even with some of the above funds expected to be disbursed this year, reaching the 2.0% of GDP deficit target for 2013 will be difficult.