NextGen Day

2021 will be remembered not only for the pandemic but also for another year of historically low-interest rates, a policy aimed at boosting the economy while promoting financial inclusion and digitalization of financial transactions.

The Bangko Sentral ng Pilipinas (BSP) has kept its key policy rate at 2% since November 2020, in order to encourage banks to lend more and help the economy recover from the pandemic’s effects.

Last year, the BSP’s policy-making Monetary Board (MB) lowered the central bank’s key policy rates by 200 basis points, as part of its response to the pandemic’s economic impact.

It has so far injected about PHP2.3 trillion worth of liquidity into the domestic economy through different measures such as rate cuts and a 200-basis-point reduction in the banks’ reserve requirement ratio (RRR).

“2021 displayed mankind’s resilience once again,” remarked BSP Governor Benjamin Diokno.

After five quarters of negative growth, the Philippines, for example, has produced two consecutive quarters of growth beginning in the second quarter of this year.

Gross domestic product (GDP) increased by 12% in the second quarter of this year, up from a decades-low -17 percent in the same period last year.

It was followed by a 7.1 percent GDP expansion in the third quarter, prompting economic managers to raise the year’s growth forecast to 5-5.5 percent, despite decreases in previous months.

Unemployment

Unemployment has dropped to roughly 7.4% in October after peaking at 17.6% in April of last year when the government imposed a lockdown to combat the spread of coronavirus sickness (Covid-19).

In addition, the manufacturing sector has improved, with the purchasing manager’s index (PMI) reaching an eight-month high of 51.7 percent in November, and trade has continued to improve.

These changes have occurred as the government strengthens its quarantine procedures and allows more people to return to work, allowing the economy to gradually return to pre-pandemic levels.

“The Philippines has improved its viral containment, but we must all be cautious as new strains emerge.” “The government’s virus-containment policy has moved from broad-scale lockdowns to more precise granular lockdowns,” Diokno said.

The financial system is being digitalized.

Diokno stated that they will continue to push for further digitalization of the banking system in the coming year, an aim that gained traction during the pandemic as more individuals turned to digital transactions to reduce their risks of catching Covid-19.

The BSP has established a Digital Payments Transformation Roadmap, with the goal of making digital payments account for half of all transactions by 2023.

Since more individuals have understood the convenience of utilizing various digital payment platforms, the percentage of digital transactions has climbed to 20.1 percent of all transactions as of 2020, and this is likely to rise further towards the end of 2021.

Financial inclusion has also been a priority for the BSP, allowing more people, particularly those from low-income households, to participate in the official financial system.

By 2023, it wants at least 70% of Filipino adults to be part of the formal financial system.

As of the second quarter of 2021, over 53% of adult Filipinos are enrolled in the system, up from around a third a few years ago.

“Faster payment processing speeds up capital turnaround and, as a result, income growth,” Diokno said.

“Looking ahead to 2022 and beyond, the Bangko Sentral ng Pilipinas (BSP) is working tirelessly to make the Philippines’ economy better than it has ever been. The goal isn’t just to get back what was lost. We are preparing for a post-Covid economy that is more technologically advanced, more inclusive, and more sustainable than ever before, in addition to strong growth,” he said.

“Monetary policy will remain in step with other initiatives to speed our economic recovery,” the central bank president added.

Environmental protection contribution

He also believes that the central bank’s role should be expanded to include not just the economy but also the environment, noting the fact that “climate change is real and its consequences are severe.”

The Philippine government aims to reduce carbon emissions by 75% by 2030, in accordance with the UN Framework Convention on Climate Change.

In April 2020, the BSP issued the “Sustainable Finance Framework,” legislation that requires banks to incorporate sustainability concepts into their operations.

In October 2021, it also announced the “Environmental and Social Risk Management Framework,” which compels banks to set environmental and social goals, including green finance.

“With sustainability at the forefront of policymaking, the Philippines is paving the path for a climate-resilient economy and citizenry,” Diokno added.

“We must not let the Covid-19 dilemma pass us by; we must learn from it.” “We will rebound and rebuild better,” he added, referring to a more technologically advanced, inclusive, and sustainable economy for all Filipinos.

Economists and debt raters alike have taken note of all of these factors.

Government monetary policy

In an emailed response to questions from PNA, Rizal Commercial Banking Corporation (RCBC) chief economist Michael Ricafort said, “the BSP has done a great job in ensuring the continuation of accommodative monetary policy, by at least keeping the key policy rate at the record low of 2% since November 2020.”

“Despite some pick-up in inflation to above the upper end of the 2-4 percent inflation target,” he said, “this decision is important to support and sustain the economic recovery prospects after reeling from the adverse economic/business effects of the series of lockdowns since last year up until a few months ago.”

The central bank’s liquidity infusion policies, he said, have “helped the continuation of excess liquidity in the financial sector, which fundamentally helps sustain short-term interest rates around record low levels” since 2020.

He explained that having extra cash “helps generate greater demand for loans/credit, which encourages more investment, which provides more jobs/employment and other business/economic prospects.”

In terms of bridging financing, he said the BSP’s billions in zero-interest loans to the national government reduce the need for the NG to borrow from commercial fund sources to support its Covid-related projects, among other things.

This action, he noted, prevented “at the very least, crowding out consequences” and “helped keep short-term interest rates/financing costs around record low levels, which helped encourage more demand for loans/credit and fuel more investments and other business/economic activities.”

He also claimed that several regulatory relief initiatives aimed at micro, small, and medium-sized enterprises (MSMEs), such as permitting banks to lend to MSMEs as RRR compliance, assisted small firms by providing more funding.

He also thinks the central bank’s bid to digitalize the payments system is a benefit.

“Increased adoption of digital/online banking aided financial inclusion, as complemented by the increased availability of mobile/data services to more areas, especially in the countryside/rural areas where the unbanked population remains relatively high, alongside efforts by the national government to also increase digitalization of transactions and other services, such as the distribution of financial aid/assistance for the poorest families, among others,” h

In light of the need to maintain/continue the accommodative monetary policy to fundamentally support and sustain economic recovery prospects in the aftermath of the lockdowns earlier this year, Ricafort expects the low-interest-rate environment to last “in the foreseeable future or for as long as necessary.”

In terms of policy responses, he said the Philippine monetary authorities must strike a “delicate balancing act,” noting that “continued accommodative monetary policy (is) still doing more of the heavy lifting to support and sustain economic recovery prospects amid the lack of additional funds for economic stimulus.”

The imminent tightening of the Federal Reserve’s key rates, which are now between zero and 0.25 percent, is one factor that is expected to influence the BSP’s policy decisions in the coming months.

The Fed has increased the size of its monthly bond purchases to USD30 billion, with the tapering expected to complete in early 2022.

It is also expected to begin raising the Fed Funds Rate in 2022, with a 75-basis-point increase. By 2023, the key rates are expected to rise by 75 basis points, with another 50 basis points expected in 2024.

“Any potential hike in the local policy rate in the future would likely follow any Fed rate hikes from 2022-2024, with the start of Fed rate hikes after the end of the Fed’s tapering of bond purchases by early 2022 (brought earlier vs. the previous estimate of mid-2022), all of which are part of the efforts to better control, curb, and manage the elevated US/global inflation,” he added.

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