The Bangko Sentral ng Pilipinas, which sets the pace of economic activities in the country, vows to sustain monetary policy support “for as long as necessary” to help boost domestic demand and market confidence, as risk aversion continues to temper credit flow.
BSP Governor Benjamin Diokno said in the latest meeting of the Monetary Board on Aug. 12, 2021 said the reimposition of quarantine measures to arrest the recent wave of COVID-19 infections could pose a risk to economic recovery.
“To this end, targeted fiscal and health interventions, especially the acceleration of the government’s vaccination program, will be crucial in safeguarding public health and preventing deeper negative effects on the Philippine economy,” he said.
Diokno said the BSP would remain vigilant against any emerging risks to the outlook for inflation and growth and would be ready to adjust policy settings as needed to ensure price and financial stability conducive to a sustainable economic recovery.
The Monetary Board on Aug. 12 maintained the overnight borrowing rate at a record low of 2 percent to support economic growth amid the lingering pandemic. The interest rates on the overnight deposit and lending facilities were also kept at 1.5 percent and 2.5 percent, respectively.
Diokno said the board was of the view that the expected path of inflation and downside risks to domestic economic growth “warrant keeping monetary policy settings unchanged.”
Going into the crisis, Diokno said the Philippines had ample fiscal and monetary buffers to deal with shocks”•and these were used extensively and wisely to aptly respond to the crisis.
On the monetary front, manageable inflation allowed the BSP to cut the overnight borrowing rate by 200 basis points from 4.0 percent to a record low of 2.0 percent. The BSP also cut the reserve requirement further to 12 percent from 14 percent, thus freeing up more funds for lending to businesses and households.
On top of these conventional monetary actions, the BSP implemented unprecedented measures to squarely respond to the crisis. It granted provisional advances worth P540 billion to the national government to augment its resources for COVID response.
The BSP’s charter allows it to extend lifeline support to the government in times of crisis, with proper safeguards.
This facility, which allows short-term financing, does not serve as a long-term source of funds for the government because they are temporary, time-bound and capped.
The BSP also purchased government securities in the secondary market to lift market confidence. However, this activity was scaled down, as the economy began to recover.
“In sum, the BSP has so far injected P2.2 trillion [$45 billion] into the financial system, equivalent to about 12 percent of GDP [as of June 10, 2021],” Diokno told a joint foreign chambers economic briefing.
He said domestic liquidity remained ample through the liquidity-easing measures of the BSP.
Diokno believes that strong macroeconomic fundamentals would support the economy’s continued recovery. He cited the country’s strong external position, manageable inflation environment that allows the BSP to keep the record-low interest rates, better employment data, sustained strength of remittances, rebound in exports and imports, foreign direct investments, recovery in factor output, stable peso and the country’s high credit ratings.
The country’s gross international reserves level rose by $0.79 billion to $106.55 billion as of end-July 2021 from the end-June 2021 level of $105.76 billion, driven by the inflows from the national government’s net foreign currency deposits with the BSP.
The latest GIR level represents a more than adequate external liquidity buffer equivalent to 12.1 months’ worth of imports of goods and payments of services and primary income. It is also about 7.7 times the country’s short-term external debt based on original maturity and 5.1 times based on residual maturity.
Meanwhile, inflation or the annual increase in consumer prices, decelerated to a seven-month low of 4.0 percent in July, according to the Philippine Statistics Authority. This brought the average in the first seven months to 4.4 percent, still higher than the upper end of the target range of 2 percent to 4 percent for the year set by the government.
Diokno said the July 2021 inflation was consistent with the BSP’s assessment that inflation could settle close to the high-end of the target range over the near term before decelerating back to within the target by end of the year as the impact of government supply-side measures take effect.
“Meanwhile, inflation is projected to remain firmly within the midpoint of the target for 2022 to 2023. The continued implementation of direct non-monetary interventions to ease supply constraints remain
crucial in tempering inflation pressures,” Diokno said.
“The balance of risks to the inflation outlook remained broadly balanced over the policy horizon. The uptick in international commodity prices due to supply-chain bottlenecks and the recovery in global demand could lend upside pressures on inflation,” he said.
The June 2021 Labor Force Survey showed that the country’s unemployment rate remained at 7.7 percent. Economic managers said figure showed the limits of job creation without major relaxations in quarantine restrictions, especially in Metro Manila.
Although the two-week ECQ in Metro Manila and adjacent provinces might result in job losses, they said the government would maximize this period to accelerate vaccination in high-risk areas to safely reopen economic activities and restore jobs.
While more jobs were expected to be lost during the two-week ECQ (around 444,000), the National Economic and Development Authority said this could be partly reversed if the quarantine period would be used to accelerate the vaccination program.
Exports and imports both registered double-digit growth in June, reflecting improved economic conditions this year relative to 2020 when successive lockdowns were imposed by the government to curb the further spread of the pandemic.
Exports sales in June grew by 17.6 percent to $6.51 billion from $5.53 billion a year ago, although slower than the increase of 30.8 percent in May 2021. The cumulative export earnings from January to June 2021 amounted to $35.90 billion, a 20.9-percent increase from the export value earned from January to June 2020.
Likewise, total imported goods in June amounted to $9.33 billion, up 34.2 percent a year ago. In the first half, the cumulative import value reached $53.34 billion, an increase of 29.8 percent from the import value of $41.08 billion in the same period of 2020.
Strong FDIs and production
Net inflows of foreign direct investments in the first five months of 2021 went up by 37.8 percent to $3.5 billion from $2.5 billion in the same period last year.
Last year, the FDIs posted a net inflow of $6.5 billion. The BSP expects net FDIs to rebound to $7.5 billion this year and increase further to $8.5 billion next year, taking into account the improving global condition.
Manufacturing output also surged in June. The PSA reported that the volume of production index jumped 453.1 percent in June, faster than the 263.2-percent increase registered in May. In June 2020, VoPI dropped at an annual rate of -80.6 percent.