Bangko Sentral ng Pilipinas Governor Benjamin Diokno on Monday pushed for substantial, targeted fiscal and monetary policies to prevent the economy from slowing down further amid the COVID-19 pandemic.
Diokno said in a presentation during a virtual briefing with Presidential Spokesman Harry Roque that such economic policies would be needed amid the expected weak aggregate demand as the country gradually emerged into the new economy.
“Until we have a vaccine or a successful treatment to the coronavirus, we will see a significant bulk of consumers holding back on their consumption,” he said.
“To address weaknesses in aggregate demand and mitigate further economic contraction, there is a need for substantial targeted economic policies, with fiscal policy at the front line and monetary policy playing a supporting role,” Diokno said.
He said, however, that the country’s macroeconomic fundamentals were strong going into the pandemic. He said the Philippine economy posted a sustained economic growth while inflation remained low and stable before the onset of the pandemic. The economy has been growing at an annual rate of at least 6 percent since 2012.
Before the pandemic, the inter-agency Development Budget Coordination Committee predicted that the economy would grow by 6.5 percent to 7.5 percent in 2020. The forecast was downgraded to negative 2 percent to negative 3.4 percent this year. The economy is expected to rebound by 7.1 percent to 8.1 percent in 2021.
The gross domestic product contracted by 0.2 percent in the first quarter, a turnaround from the 5.7-percent growth a year ago and 6.4-percent expansion in the fourth quarter of 2019. The contraction was the first since the fourth quarter of 1998, thus ending 84 consecutive quarters of positive growth.
These results are consistent with the latest projections of the International Monetary Fund that the global economy would dip by 4.9 percent in 2020, followed by a 5.4-percent rebound in 2021.
Economists agreed the contraction in the second quarter could be deeper because the extended lockdowns comprised almost the entire April to June period.
“Without doubt, the downturn in the second quarter of 2020 will be deeper as the extension of the lockdown further dampens domestic demand and lowers production activities. This is reflected in the Philippine manufacturing PMI, which fell to a record low of 31.6 in April from 39.7 in March. It improved slightly in May to 40.1, but it is still way below the 50- point expansion threshold,” Diokno said.
Diokno said unlike other countries, the Philippines was in a strong position to face this crisis because it had greater monetary and fiscal space.
The peso is among the top-performing currencies in the region this year. Diokno said the continued investor confidence in the local currency could be attributed to the favorable macroeconomic fundamentals of the country relative to its peers.
He said the country’s external sector had adequate buffers against external headwinds. The gross international reserves level of $93.3 billion as of end-May 2020 was the highest on record.
“As policymakers, we want to prevent the initial economic shock from having a long-lasting damage to our economy. While fiscal policy plays the leading role in the overall response against this pandemic, in that it can provide targeted relief to the most vulnerable sectors of the society, monetary policy plays an important role as well,” he said.
Diokno said to mitigate economic fallout, the BSP reduced the policy rate by 175 basis points this year, including 25 bps cut in February and 50 bps each in March, April, and June.
The BSP also lowered the reserve requirement ratios of banks by 200 basis points to 12 percent, and the regulator entered into a repurchase agreement with the national government amounting to P300 billion.
The BSP earlier remitted P20 billion in advance dividends to the national government.
Diokno said the BSP would remain data-driven in crafting monetary policy as it considers the range of tools and policy measures available that may be required to combat the crisis.
“The BSP is prepared to use the full range of its monetary instruments and to deploy monetary policy and regulatory relief measures as needed to save lives, jobs, and livelihoods consistent with its price and financial stability goals,” he said.