‘The BSP affirms its support for the domestic economy while monitoring vigilantly the potential risks to future inflation. Preserving ongoing monetary policy support shall help sustain the economy’s momentum over the next few quarters.” — BSP Gov. Benjamin Diokno
The country’s policy settings and existing regulatory measures will remain supportive of the recovering economy and that withdrawal of relief measures will only be done once full recovery is underway, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said.
“(Since the pandemic) We are getting back on our feet. We have learned to live with the virus better with the government shifting to a risk-based approach to mobility restrictions.
This strategic shift has resulted in better economic and health outcomes,” Diokno said.
Diokno expressed confidence in the Philippines’ economic recovery which grew by 7.7 percent in the fourth quarter of 2021 and 5.6 percent for the whole year.
Diokno said the growth “reflects the impact of the fiscal and monetary policy support during the pandemic and the calibrated imposition of mobility restrictions which enabled many businesses, including public transportation, to continue operation.”
Diokno also cited data indicators which show that the Philippine economy is on the mend, such as improvements in manufacturing, employment, foreign direct investments, and external trade.
“The monetary authorities will continue to provide an enabling environment for the attainment of the Philippines’ long-term economic goals, such as through price and financial stability, and promotion of financial digitalization and sustainable finance,” Diokno added.
Manageable inflation environment
As it affirms its support for the economy while keeping an eye on the potential risks to future inflation, the Monetary Board, during its last policy stance meeting for 2021, decided to keep the key rates of the BSP steady for the ninth consecutive session.
The interest rate on the BSP’s overnight reverse repurchase facility stays at 2.0 percent.
The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.
Diokno, also the Monetary Board head, said they “see enough scope to keep a patient hand on the BSP’s policy levers owing to a manageable inflation environment.”
The primary objective of the BSP is to maintain price stability conducive to a balanced and sustainable growth of the economy and employment.
“Downside risks to the economic recovery emanate from the emergence of new COVID-19 variants as well as the potential tightening of global financial conditions. Hence, preserving ongoing monetary policy support at this juncture shall help sustain the economy’s momentum over the next few quarters,” Diokno said.
Slower annual increase in food and non-alcoholic beverages pulled inflation in December to 3.6 percent, the slowest posted for the year 2021.
The full-year average of 4.5 percent, however, still breached the government’s target range of between 2 and 4 percent and was faster relative to the average inflation in 2020 at 2.6 percent.
Core inflation, which excludes selected food and energy items, also slowed down further to 3.0 percent in December 2021, from 3.3 percent in November 2021. In December 2020, core inflation was observed at 3.3 percent.
In his open letter to the President on inflation, Diokno said the forecasts point to inflation returning to their target range of between 2 and 4 percent for 2022 and 2023.
“The continued and effective implementation of direct non-monetary interventions and policy reforms to alleviate supply constraints remains crucial in keeping the trajectory of inflation within the target band, particularly as risks to the inflation outlook appear to be slightly on the upside for 2022,” Diokno said.
The inflation outlook, Diokno said, is “subject to considerable level of uncertainty given developments relating to the COVID-19 pandemic, which could affect domestic and external economic conditions going forward.”
The BSP Governor yearly issues an open letter to the President and the Filipino people to explain why inflation was below, or in this case above, the government’s target.
In the letter, the Governor also explains the rationale behind the monetary policy decisions for the previous year as well as their assessment of the inflation outlook and policy directions for the next two years.
Respond to emerging challenges
Diokno said they decided to keep monetary policy settings unchanged in 2021 given that “inflation pressures were linked mainly to supply-side factors.”
“In line with best central banking practices, the BSP tends to look through the initial impact of supply shocks because monetary policy has a limited impact on cost-push forces. Instead, the BSP has supported the implementation of non-monetary interventions and reforms to alleviate supply-side constraints,” Diokno said.
Furthermore, he said BSP’s inflation forecasts “indicate a reversion towards the target range in 2022 and 2023, suggesting a manageable inflation outlook.”
“Given these considerations and significant downside risks to domestic economic growth amid the lingering threat of new COVID-19 variants and infections, the BSP has maintained an accommodative monetary policy stance to support the recovery of the economy while looking out for potential threats to price stability,” Diokno said.
Central banks reduce interest rates to encourage borrowing and investing, thereby possibly stimulating economic growth but may hasten inflation. Rates are raised, meanwhile, when there is too much growth.
The actual 2021 GDP growth of 5.6 percent represents a sharp recovery from the 9.6 percent contraction in 2020, but slower than the 6.1 percent expansion in 2019.
Responding to the full-year 2021 GDP results, Karl Kendrick Chua, Socioeconomic Planning Secretary, said the growth in the fourth quarter was much faster than most analyst forecasts, making the country’s expansion among the highest in the region.
“This sustained (2021) growth was driven by the successful management of risks such as targeting the areas with highest risk and allowing the rest of the economy to open,” Chua said. “Our policies to move from a pandemic to a more endemic paradigm have led to broad-based expansions across almost all sectors, despite challenges brought about by the continued persistence of COVID-19 (coronavirus disease 2019), various levels of quarantines, and prevalence of natural disasters.”
Nicholas Mapa, ING Bank Philippines senior economist, said, however, that the central bank has only narrow window to keep rate untouched for just a bit longer.
“Indications that the Fed will likely be hiking rates by 3 or more times this year suggest that BSP may need to adjust its own policy stance, regardless of inflation or growth dynamics. BSP has indeed help solidify the economic recovery but 2022 will likely be the year of the Fed rate hikes and BSP could consider adjustments as early as second quarter of this year,” Mapa said.
Mapa noted that, after enjoying the holiday season and unleashing bouts of revenge spending, the economy will see some wind knocked out of its sails as Omicron runs over NCR+.
“On top of the threat of Omicron there are several other factors that will likely whittle down our ambitious 7-9 percent growth target for the year. The current 4th wave of Covid may or may not result in the hard lockdowns of yesteryear but it will likely dent both consumer and business expectations in the near term at the very least,” Mapa said.
On balance, Diokno said there remains enough scope for the BSP “to keep a patient hand on its policy levers to support the economic recovery.”
“Preserving ongoing monetary policy support shall help sustain the economy’s momentum over the next few quarters, especially amid downside risks to the economic recovery.
Nevertheless, the BSP stands ready to respond to potential second-round effects arising from supply-side pressures, in line with its price and financial stability objectives,” Diokno said.
Financial system sustains resilience
Diokno also stressed that the sustained resilience of the Philippine financial system amid the COVID-19 pandemic enables banks to support the country’s financing needs.
The BSP’s Report on the Philippine Financial System for the First Semester of 2021 underscores this fact.
“The banking system displayed continued growth in assets and deposits and posted sufficient capital and liquidity buffers. The acceleration of digital transformation reinforced banks’ continued delivery of financial products and services during the pandemic,” Diokno said.
In the first semester of 2021, according to the report, the banking system displayed solid footing as evidenced by continued growth in assets, deposits, and capital, as well as sufficient capital and liquidity buffers, net profit and ample loan loss reserves.
Total assets of the banking system rose to P19.811 trillion as of end-June 2021 and represented 107.2 percent of the country’s annualized nominal GDP.
BSP said the asset expansion was primarily channeled to lending and investment activities while funding was mainly sourced from deposits, followed by capital and bonds.
Across banking groups, universal and commercial banks (U/KBs) still made up the bulk of the banking system’s total assets at P18.33 trillion while thrift banks (TBs) and rural and cooperative banks’ (RCBs) share stood at P1.19 trillion and P296.5 billion, respectively.
As to composition, loans remained the largest portion of the banking system’s asset mix at 52.4 percent. This was followed by financial assets other than loans and cash and due from banks with 26.2 percent share and 17.8 percent share, respectively.
But the report noted that credit activities during the period remained muted as the emergence of the new Delta variant and the risk of infection continued to affect prospects for economic recovery. Gross loans declined by 0.4 percent as of end-June 2021, slower than the 5.2 percent growth rate in June 2020.
By economic activity, loans remained broad-based. Real estate activities received the largest loans from the banking system at 19.3 percent share. This was followed by wholesale and retail trade, loans for household consumption, electricity, gas, steam and air-conditioning supply and manufacturing with shares of 10.9 percent, 10.7 percent, 9.8 percent, and 9.4 percent, respectively.
Consumer loans, meanwhile, slipped by 2.8 percent to P1.94 trillion. This decline may be attributed to pessimistic consumer outlook and net tightening of overall credit standards for household loans.
The lending and investment activities of the banking system were mostly funded by deposits which grew by 7.6 percent to P15.34 trillion as of end-June 2021, lower than the 10.9 percent registered growth last year.
The capital adequacy ratios (CARs) of banks improved to 17.2 percent and 17.7 percent on solo and consolidated bases, respectively, from the previous year’s 16.4 percent and 16.8 percent. These CARs remained well-above the minimum thresholds set by the BSP at 10 percent and the Bank for International Settlements (BIS) at 8 percent.
In terms of liquidity buffers, banks maintained ample supply of liquidity, relatively higher than the BSP’s minimum requirements. U/KB industry’s consolidated Liquidity Coverage Ratio and Net Stable Funding Ratio stood at 196.4 percent and 144.5 percent, respectively, notably higher than the 100 percent required by the BSP. For smaller banks, particularly stand-alone TBs, RBs, CBs, the minimum liquidity ratios were at record highs, surpassing the 20 percent minimum requirement.
The report likewise highlighted the satisfactory performance of the foreign currency deposit system, trust entities, quasi-banks, and other non-bank financial institutions during the period under review.
“Given the continuing uncertainty posed by the global pandemic, the BSP will continue to monitor risks and vulnerabilities that may put undue pressure on the financial system,” Diokno said.
“Lastly, the BSP will continue to adopt prudential standards that will strengthen risk governance, promote responsible innovation, and uphold financial integrity in supervised institutions. These efforts will be complemented by initiatives aimed at deepening the domestic capital market, advancing financial inclusion, and mainstreaming of sustainability principles, in coordination with other authorities.”
