Discernment, Determined, and Fearless: Policy Making From Crisis to Recovery
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 have exercised decisive and rapid liquidity provision to quickly avoid potential liquidity strains following the surge in uncertainties associated with the pandemic. In the case of the Philippines, the COVID-19 pandemic has forced the Bangko Sentral ng Pilipinas (BSP) to mobilize its monetary instruments and other extraordinary measures to help ensure adequate liquidity in the system, restore the functioning of financial markets and minimize the scar effects on the Philippine economy. These measures include (a) a reduction in the policy rate by a cumulative amount of 200 basis points (bps) in 2020; (b) reduce the reserve requirement ratios (RRR) by 200 basis points for universal and commercial banks (UKB) and non-bank financial institutions with quasi-banking licenses (NBQB) and by 100 basis points for banks in savings and rural / cooperative banks; (c) interim advances to the national government; and (d) purchases of government securities on the secondary market, among others. The cumulative reduction in the BSP policy rate since February 2020 by 200 basis points is a testament to the policy space the BSP has been able to create and brings the overnight RRP rate to an all-time low of 2.0%. These key rate cuts were aimed at lowering the cost of borrowing and supporting economic activity.
Likewise, the RRR reduction was aimed at avoiding liquidity strains in the banking sector and ensuring sufficient domestic liquidity. The BSP provided bridge financing worth 300 billion yen to the government via a buyout agreement, and which was fully settled in September 2020. Interim advance to the government, as specified in Sec. 89 of the BSP Charter – in the amount of 540 billion yen was granted in October and was fully repaid in December 2020. The last advances of 540 billion yen were made in January 2021 and will be fully settled by now on July 12, 2021. In scale, these advances were made in accordance with the BSP Charter and aimed to cope with the extraordinary impact of this health crisis. In accordance with its charter, the BSP also sent 20 billion euros in dividends to the national government. Overall, the BSP injected more than 2.2 trillion yen into the financial system, which is equivalent to around 12.1% of 2020 GDP in June 2021.
Smooth transition from crisis management to risk management
Market sentiment has improved since March 2020, as evidenced by government primary auction oversubscription for government securities and continued demand for these securities in the secondary market. In addition, an increase in activity has already been observed in the local capital market. Companies were able to issue stocks and bonds to raise funds and support their activities. Equity raised on the Philippine Stock Exchange in the first 5 months of 2021 has increased by over 150%, driven by increases in financial and non-financial corporations.
Likewise, corporate bond issuance for non-financial corporations increased 25% year-on-year from January to May 2021. However, bond issuance growth for financial corporations remained negative. Despite abundant liquidity in the system, much of the liquidity was reabsorbed by the monetary operations of the BSP. As of May 25, 2021, the outstanding amount absorbed via the BSP liquidity facilities amounted to more than € 2,200 billion. Lending activity and asset price fluctuations continue to be dampened by weak economic activity and banks’ risk aversion, thus moderating the likelihood of credit-fueled asset price inflation . Real estate prices, on the other hand, remain broadly in line with market fundamentals and within the historical range. Nonetheless, 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 disconnection between financial markets and the real sector that an environment prolonged low interest rates could trigger.
An accommodating policy as a catalyst for stability and recovery
Overall, the accommodating monetary policy of the BSP has helped to lower the cost of borrowing, revive activity in the government securities market and maintain confidence in the banking system. Inflation should remain manageable. The year-to-date average inflation rate of 4.4% is higher than the government’s annual inflation target of 3.0% ± 1.0 percentage point for the year, but this follows mainly supply-related factors. These factors include the reduction in pork supply due to African swine fever and the impact of rising international oil prices on domestic petroleum products. The risk of second-round effects of inflationary pressures on the supply side is mitigated by the spare capacity of the economy. The recent high inflation figure is in line with the BSP’s current assessment that inflation is expected to settle near the high end of the target range in 2021 before returning to near the midpoint in 2022. The BSP also believes that the risks to the inflation outlook are broadly balanced. Going forward, the BSP will continue to focus on maintaining its accommodative monetary policy for as long as necessary. This would complement government initiatives to combat the effects of the pandemic until economic recovery is fully engaged.
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