The COVID-19 pandemic is comparable to a massive natural disaster, requiring a set of policy responses that are “matalino, matatag, at matapang.” Monetary authorities exercised decisive and swift liquidity provision to promptly ward off potential liquidity strains following the spike in pandemic-related uncertainties.
In the case of the Philippines, the COVID-19 pandemic required the Bangko Sentral ng Pilipinas (BSP) to mobilize its monetary instruments and other extraordinary measures to help ensure adequate liquidity in the system, restore financial market functioning, and minimize scarring effects on the Philippine economy.
These measures include (a) reduction in the policy rate by a cumulative 200 basis points (bps) in 2020; (b) cut in the reserve requirement ratios (RRR) by 200 bps for universal and commercial banks (UKBs) and non-bank financial institutions with quasi-banking licenses (NBQBs) and by 100 bps for thrift banks and rural/cooperative banks; (c) provisional advances to the national government; and (d) purchases of government securities in the secondary market, among others.
The cumulative policy rate reduction of the BSP since February 2020 of 200 basis points is a testament to the policy space that the BSP has been able to build and brings the overnight RRP rate at a historic low of 2.0 percent. These policy rate cuts were intended to reduce the cost of borrowing and to support economic activity.
Source: Elgin, Ceyhun, Gokce Basbug, and Abdullah Yalaman. “Economic Policy Responses to a Pandemic: Developing the Covid-19 Economic Stimulus Index.” In COVID Economics: Vetted and Real-Time Papers, 40–53. 3. The Centre for Economic Policy Research (CEPR), 2020. http://web.boun.edu.tr/elgin/COVID_19.pdf; Elgin, Ceyhun. “Ceyhun Elgin’s Website: COVID-19 Economic Stimulus Index (Version: May 7, 2021),” 2021. http://www.ceyhunelgin.com/. “‹
Likewise, the reduction in the RRR aimed to avert liquidity strains in the banking sector and to ensure sufficient domestic liquidity. The BSP provided bridge financing worth ₱300 billion to the government via a repurchase agreement, and which was fully settled in September 2020.
Provisional advance to the government—as specified in Sec. 89 of the BSP Charter—of ₱540 billion was granted in October and was fully repaid in December 2020. The latest advances of ₱540 billion was made in January 2021 and will be fully settled by July 12, 2021. Short-term and limited in magnitude, these advances were made in accordance with the BSP Charter and aimed to address the extraordinary impact of this health crisis.
In accordance with its Charter, the BSP also transmitted ₱20 billion in dividends to the national government. Overall, the BSP has injected to the financial system more than ₱2.2 trillion, which is equivalent to approximately 12.1 percent of 2020 GDP as of June 2021.
Smooth transition from crisis management to risk management
Market sentiment has improved since March 2020, as can be seen from the oversubscriptions in the government’s primary auctions for government securities and continued demand of these securities in the secondary market.
Moreover, an increase in activity has already been observed in the local capital market. Firms have been able to issue equities and bonds to raise funds and sustain their businesses. Equity capital raised in the Philippine stock exchange in the first 5 months of 2021 rose by more than 150 percent, arising from increases from both financial corporations and non-financial corporations.
Similarly, corporate bond issuances for non-financial corporations rose by 25 percent year-on-year in January–May 2021. However, growth in bond issuances for financial corporations remained negative.
Notwithstanding ample liquidity in the system, much of the liquidity has been reabsorbed through the BSP’s monetary operations. As of May 25, 2021, the outstanding amount absorbed through the BSP liquidity facilities amounted to more than ₱2.0 trillion.
Lending activity and asset price movements continue to be dampened by weak economic activity and banks’ risk aversion, thus moderating the likelihood of asset price inflation fueled by credit. Property prices, on the other hand, remain broadly in line with market fundamentals and within historical range.
Nonetheless, the BSP remains on the lookout for any emerging risks to financial stability, including the build-up of imbalances in asset markets that could lead to a potential disconnect between financial markets and the real sector that a prolonged low interest rate environment could trigger
Accommodative policy as catalyst for stability and recovery
Overall, the BSP’s accommodative monetary policy has helped bring down the cost of borrowing, revived activity in the government securities market, and maintained confidence in the banking system.
Inflation is expected to remain manageable. The year-to-date average inflation rate of 4.4 percent is above the government’s annual inflation target of 3.0 percent ± 1.0 percentage points for the year, but this stems principally from supply-side factors. These factors include the reduction in pork supply due to the African Swine Fever and the impact of higher international oil prices on domestic petroleum products.
The risk of second-round effects from supply-side inflation pressures is blunted by the spare capacity of the economy. The recent elevated inflation figure is consistent with the BSP’s prevailing assessment of inflation likely settling near the high-end of the target range in 2021 before reverting close to the midpoint in 2022. The BSP also believes that risks to the inflation outlook are broadly balanced.
Looking ahead, the BSP will continue to focus on keeping its monetary policy stance accommodative as long as necessary. Doing so would complement the government’s initiatives to address the effects of the pandemic until the economic recovery gets fully underway.
