The COVID-19 pandemic has had a sweeping impact on economies and financial systems around the world. The outlook for global economic growth has dimmed considerably in the first quarter of 2020, while turbulence in financial markets has constrained liquidity. These developments have prompted authorities around the world to undertake coordinated actions and policy measures to cushion economic activity and stabilize financial markets.
As in other countries, the Philippine domestic short-term funding market has experienced signs of strain and volatilities in the latter part of February. Following the virus outbreak, heightened volatility in the domestic financial markets has emerged. Concerns over the outbreak have further weakened global outlook and investment sentiment, resulting in flight to safe-haven assets and temporary increase in risk premium in the local debt markets.
With the brewing tightness in liquidity condition and amid a benign inflation outlook, the BSP has acted swiftly by announcing a series of extraordinary measures to support domestic liquidity. Specifically, the policy rate has been reduced four times in 2020 by a cumulative 175 basis points (bps) to 2.25%—by 25 bps on February 6, and by 50 bps each on March 19, April 16, and June 25. Reserve requirement for commercial banks has also been reduced by 200 bps to 12%, effective April 3, 2020.
Other extraordinary measures to shore up market confidence and cushion domestic economic activity include the timely suspension of the term deposit facility auctions for certain tenors; temporary reduction in the term spread on the peso rediscounting loans relative to the overnight lending rate to zero; and various time-bound relaxation of various regulations pertaining to compliance reporting, calculation of penalties on required reserves, and single borrower limits.
With the knowledge that the pandemic requires the immediate implementation of needed health and social protection programs, the BSP has extended funding support to the government to add to the financial arsenal against COVID-19. Specifically, the BSP has purchased P300 billion worth of government securities under a 3-month repurchase agreement with the Bureau of Treasury. It has also remitted P20 billion as dividend to the government, even if it is no longer required to make such dividend payments under the newly amended BSP charter. These efforts have been aimed at supporting the real economy while the economy is unable to operate on a full scale.
So far, early indicators suggest that domestic liquidity conditions and market functioning have improved considerably from the volatilities in the financial markets seen in the early part of the pandemic. The decisive and extraordinary monetary policy actions of the BSP have stemmed the emerging tightening in financial conditions and restored confidence and the orderly functioning of the financial system. The timely liquidity injection has also prevented the spillover of real economy shocks into the financial markets, which could have led to another round of macroeconomic vulnerabilities.
Moreover, the BSP has long recognized the importance of mobile banking and payment services of banks and emerging financial technology companies in widening the reach of financial services in the country. The containment measures implemented during the pandemic have highlighted the necessity to speed up progress in the areas of online banking and e-payment. There is a need to scale up the reach of contactless payment facilities such as PayMaya and GCash to include public markets, sari-sari stores, and public utility vehicles.
The adoption of the National QR code standard (QR Ph) to enable interoperable payments for person-to-person (P2P) and person-to-merchant (P2M) transactions is another important reform. The expeditious implementation of the national ID system will enable inclusive and innovative digital finance. It will also ensure the establishment of a reliable database for the design and impact assessment of government policies.
The BSP is mindful of the delicate balance between encouraging the banking sector to provide the required assistance to the economy and maintaining the health of the banking sector so it would be able to support the economy in the recovery phase. Thus far, the complementarity between price stability and financial stability toolkit has provided adequate leg room for the BSP to undertake independent policy actions that guard against long-term economic distortions. Should conditions warrant, there remains significant scope for conventional monetary policy, adeptly complemented by regulatory flexibility, to support the liquidity requirements of the Philippine economy.
Finally, the BSP will continue to work closely with the banking community, other government agencies, and Congress to craft other assistance programs to help sectors affected by the pandemic, hasten their recovery, and stimulate the economy at large. The calibration of the BSP’s policy settings remains heavily data driven. As such, the BSP shall remain vigilant of domestic and global developments to ensure that its policy decisions remain flexible and appropriate to challenging economic conditions.
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