Year-Ender

The Bangko Sentral ng Pilipinas’ (BSP) nearly P2 trillion liquidity injection in the pandemic-hit financial system did what it’s supposed to do --- prop up confidence in the market amid the recession and uncertainty of when COVID-19 will be contained.

Despite the BSP’s aggressive response both conventional and unconventional in the past year, it wasn’t enough and the independent institution’s governor, Benjamin E. Diokno, has said many times that they could not do it alone, that the BSP is not the only game in town, that the economy needed the fiscal backing to complete the monetary stimulus.

Nine months into the longest lockdown in the world, consumer demand remains low and still not much confidence to boost bank lending even as businesses are allowed to operate at 50 percent capacity in key areas such as in Metro Manila since June.

As far as ensuring sufficient liquidity or money supply in the financial system, the BSP has done enough: cuts in policy rate and reserve requirements (RR); asset purchases; and liquidity support.

Diokno said the BSP has already injected a total of P1.9 trillion of liquidity into the system, a sizeable amount relative to the GDP or about 9.6 percent equivalent, and more than the 3.8 percent to GDP fiscal stimulus provided by the government.

 “While we continue to identify what the economy requires amidst the pandemic, this global

recession would have to be addressed by a whole of market approach,” said Diokno in an email.

 “Liquidity is important but we need the complete package, from fiscal and economic policies, to new legislation and certainly to the market’s own initiatives to re-boot the economy,” he stressed.

In the book “BSP Unbound: Central banking and the COVID-19 in the Philippines” written by BSP officials, they listed, discussed and explained in 188 pages everything they have done since the pandemic was declared in March.

Diokno said the BSP, like all central banks around the globe, “suited up and aggressively unrolled” its arsenal of policy toolkits as “defense against systemic collapse”. As an economist and former budget chief, he knew central banks were among the first responders and had to act quickly, veering away from its “usual gradualist approach”.

The BSP had to move fast to prevent deep damage to the financial system and implemented aggressive policy cuts of 200 basis points or two percent since February until November, with some pauses in between. Diokno described the BSP actions as larger-than-normal liquidity injections, and mirrored other central bank’s recalibration of lending facilities and also implemented “massive asset purchases”.

“These were complemented by regulatory relief measures (and) these extraordinary measures bought time for the government to rescale and redesign its war plan against the pandemic,” he said.

Diokno is confident that BSP’s response to the health crisis was done in a timely and decisive manner. “We acted quickly by providing ample monetary stimulus to mitigate tightening liquidity conditions, boost business and consumer confidence, and ensure the continued orderly functioning of the financial system,” he said.

The conventional route was predictable. Because inflation is manageable amid the pandemic, the BSP reduced the policy rate to a record low of two percent and it also cut the RR by 200 basis points to 12 percent, unleashing about P220 billion of extra bank funds. The lower RR ratio which was aimed at solving liquidity tightness, increased domestic liquidity to double-digit growth.

The BSP’s auction volumes in the overnight RRP window and term deposit facility were also temporarily reduced at the height of the lockdown period to bring the policy rate closer to the floor of the interest rate corridor. This has since been gradually normalized by June and July.

 “The combined reductions in the policy rate and RR ratio are seen to contribute to lower market interest rates, faster domestic liquidity growth and  a depreciation of the exchange rate compared to the scenario without policy actions. These factors could lead to slightly higher inflation and improved growth prospects over the policy horizon. Nonetheless, the BSP projects that inflation is likely to remain firmly anchored within the government’s target range following

these policy adjustments,” according to BSP Unbound.

The extraordinary measures, in the meantime, includes short-term provisional cash advances to the National Government (NG) of P300 billion released in March as emergency anti-pandemic funds which was fully-paid by September. A fresh P540 billion was again released in October to the NG. In a report by Bloomberg, National Treasurer Rosalia V. De Leon has disclosed that the government will again renew this P540 billion loan for continued pandemic response.

To help banks cope with the adverse impact of COVID-19 restrictions and the recession, the BSP implemented a long list of time-bound regulatory and operational relief measures. These measures was supposed to encourage banks to provide more credit in support of businesses and households during the pandemic.

Diokno said the pandemic-induced “New Economy” will be a balancing act of money and credit growth, fiscal stimulus, low interest rates – all bound together in a non-inflationary package. The recovery is gradual and he’s said that a full bounce back will happen in 2022. For now, interest rates are low and private demand are weak, and this makes the transmission from financing conditions to private spending limited.

“The health crisis has required central banks to be nimble,” said Diokno earlier. “The inflation decline in other countries led to increased pressure for central banks to adopt further measures, including unconventional ones, to stimulate their respective economies (and the) crisis has also taught us that there are limits to what monetary policy and unconventional central bank measures can do.” 

The BSP has indeed done a lot, but BSP officials also know that the pandemic will make the expected impact of policy rate cuts and reduction in reserve requirements on market rates and banks’ funding costs to take a while to materialize. 

Still, inflation targeting even amid the pandemic, is BSP’s primary mandate to ensure inflation continues to be manageable. If they do this right, growth and employment is sustainable.

Ensuring low and stable prices will help facilitate economic recovery and employment opportunities, said Diokno. “This is critical during this pandemic, when changes in economic conditions tend to be abrupt and unpredictable, and tend to have lingering effects,” he said.

BSP Deputy Governor Francisco G. Dakila Jr. said they don’t know yet what will be the full impact of all of BSP’s response on the real economy, but this early, they could see indications that its “quick and forceful monetary response resulted in an observed easing and improvement in domestic liquidity conditions.”

“The current pandemic has underscored the BSP’s central role as an agent of macroeconomic stability during periods of crisis. In response to the pandemic, the BSP undertook unprecedented measures to ensure liquidity in the financial markets and provide support to the real economy,” said Dakila in BSP Unbound. “While these measures are necessary and appear to have had initial success, the full extent of the pandemic and its implications on the economic landscape remain unknown. Given this uncertainty, it is important to be aware of the limits and trade-offs associated with central bank policies to ensure that the BSP’s long-term objectives are not compromised,” he noted.