The COVID New (Ab)Normal: The Economic Challenge for the Philippines and Southeast Asia

ASPI Vice President Daniel Russel interviewed President and Chief Operating Officer of the Ayala Corporation in the Philippines Fernando Zobel de Ayala on the economic impact of the pandemic on the Philippines and Southeast Asia, the implications for digital banking and fintech in Southeast Asia, and what lessons could be learned from this experience.

Q: What are likely to be the longer-term economic after-effects of COVID-19 on the Philippines and the rest of Southeast Asia?                                  

A: COVID-19 has had a very significant impact on the Philippine economy and Southeast Asia as a whole. First quarter economic results across Asia showed contractions in several economies — for some, the first such contraction in gross domestic product since the 1998 Asian Financial Crisis. Second quarter figures could well show a bigger contraction, as it will show the full impact of the pandemic and the quarantine measures that Southeast Asian economies imposed.

As we have already seen, I believe that there will be a significant reduction in the amount of travel that we do. However, beyond this, I believe there will be major changes in the way we work, the way we interact with people, and the way we transact. On this last point, this is something we have already seen, given the rapid transformation in digital banking and payments systems, which we believe will only accelerate in the coming months.

Regarding the global supply chain and the manufacturing industry, these sectors have been greatly impacted by the pandemic. However, we are steadily seeing signs of revival as economies and distribution channels are gradually reopening. We are fortunate that supply chains concentrated within Asia have seen less of an impact than elsewhere. There is greater disruption in Asian supply chains that need transpacific or transatlantic links. This has been unfortunately caused by the global reduction of trade and movement of goods, which require ships and planes to wait longer to consolidate their cargo before leaving for their destination.

With all these shifts and the many others, I believe that there will now be noteworthy changes in national economic priorities. First, most governments around the world did not have adequate healthcare facilities to handle this pandemic. I believe that governments will have learned much from the crisis and will increase their attention to this sector. Second, education will have to evolve to be ready for online learning. While we recognize infrastructure challenges, the shift to online education has the potential to improve the accessibility of learning at a massive scale.

Admittedly, it is hard to predict how long it will take for Southeast Asian economies to recover to pre-COVID levels. However, the early recovery of the Chinese economy, the increasing trade within the region, and the decreasing dependence on Europe or the U.S. gives me much hope that Asia will bounce back faster compared to other parts of the world.

Q: What are the implications for digital initiatives in banking and Fintech in the region?

A: Digital initiatives in banking and fintech have been growing quite fast in the last few years. The COVID-19 crisis further accelerated this transformation as the need to access financial services in a safe and secure manner became a high priority.

Here in the Philippines, over the past four months of quarantine, we have seen Filipinos embrace the safety and convenience of digital financial services. From our experience at the Ayala Group, our Bank of the Philippine Islands now sees digital transactions comprising 87 percent of all its total transactions. Our e-wallet and payments platform GCash, meanwhile, has grown to over 20 million users and a 75,000-strong merchant network. Its daily active users and daily active transactions have jumped by 138 percent and 157 percent, respectively, since the start of the quarantine.

These are encouraging numbers that came from just a few months of quarantine. We believe we are at a major inflection point leading to greater financial inclusion through digital finance. This will be a significant development, especially for the 66 percent of Filipinos who are part of the unbanked population.

This COVID-accelerated shift to digital financial services is also happening in other parts of Asia. Digital financial services, particularly in Southeast Asia, have become mainstream as banks, insurers, telecommunications companies, e-commerce platforms, and even governments move into this sector.

300 million Southeast Asian adults today are either financially underserved or totally unbanked. Financial inclusion through digital solutions can enable these segments to enjoy an improved quality of life. Use cases are becoming more ubiquitous, with transactions, bills payments, investments, loans, peer-to-peer transfers, high-yield savings accounts, and insurance just being the tip of the iceberg. The challenge now is to continue growing this sector and make it as frictionless, accessible, and ubiquitous as possible. This will require massive investments in telecom infrastructure. Trust is also a critical cornerstone for these efforts and will need to be built between businesses, regulators, and the general public.

China has largely become a cashless society with an 83 percent digital adoption rate. Singapore, Indonesia, Malaysia, and Thailand are normalizing digital payments, and adopting digital touchpoints, ranging from national payment gateways to standardized QR codes. I am optimistic that these developments point to an Asia that may lead the way in inclusive digital finance for years to come.

Q: What are some of the things that you feel you learned from the COVID-19 experience? 

A: This crisis has shown me the incredible resilience and adaptability of people in the face of new challenges. For instance, our shift to a work from home program happened right after the country went on strict quarantine. While productivity was initially not as high as in an office environment, the time saved from exhausting daily commutes gave our colleagues the flexibility to accomplish their work and spend more time with their families. We see productivity steadily improving as everyone is now starting to get comfortable with online meetings. We recognize that there are advantages to having an office environment and face-to-face meetings. However, the risk of COVID infection has forced us to adjust to this new reality, and it is fortunate that our organization adapted well to these new demands.

We have also seen rapid innovation within our organization to improve how we interact with our customers and serve their needs. As mentioned earlier, transactions with our banking clients are now predominantly digital and online, which is much more efficient compared to branch-based transactions. At the same time, our real estate business improved their digital experiences for prospective buyers. We have been able to still sell real estate products online, which is now at 70 percent of our pre-COVID sales level. Our telecommunications business has also been able to develop a whole range of fintech products and has given many unbanked individuals access to very competitive financial products.

At a broad level, I have also seen the speed and scale at which the private sector in our country has stepped up in upgrading our medical facilities and expanding essential services to help deal with this crisis. As we worked closely with our government counterparts, we have seen a renewed appreciation of the strong benefits that coordinated public-private initiatives can bring.

Finally, on a personal level, I feel healthier and have enjoyed the opportunity to spend time with my family. The foreign studies of my children and my travel schedules pre-COVID made it very difficult for us to be together. The last four months that I have spent with them have certainly been very special.