BSP prepares for post-pandemic economy

Published February 22, 2021, 6:00 AM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) has started its comprehensive review and assessment of when to reduce or scale back the size of liquidity and COVID-19 relief measures to avoid financial distress post-pandemic.

So far, the BSP has infused the financial system P2 trillion in liquidity, or about 11 percent of gross domestic product. “With this amount of liquidity, we are carefully assessing the appropriate timing of the unwinding of all these measures,” said BSP Governor Benjamin E. Diokno during the BSP’s “Ulat Sa Bayan” virtual version of its annual reception for the banking community, also known as Bankers Night.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno (MB file)

It is a statement of caution and preparedness Diokno has often repeated, he said the same thing in June and July of last year when the government eased lockdown restrictions.

“Doing this too late or too early may have serious repercussions on the economy,” he added.

Diokno said the biggest of the BSP liquidity support was in the government securities market. So far, central bank purchases have accounted for 5.60 percent of GDP, followed by BSP’s provisional advances to the National Government which was about three percent of GDP. The latter is an extraordinary BSP provision in the amount of a fresh P540 billion cash advance in January, on top of traditional monetary interventions and regulatory relief measures.

The reduction of banks’ reserve requirement ratio (RRR) with the BSP accounted for 1.17 percent of GDP while the alternative use of RRR as compliance by lending to micro, small, and medium enterprises contributed 0.91 percent. The 200 basis points policy rate cuts in 2020 added another liquidity to the system of 0.29 percent and dividend remittances — also advanced – to the government has added another 0.11 percent.

BSP Deputy Governor Francisco G. Dakila Jr. said the public health crisis brought emerging market central banks to “uncharted waters” and that it was providential that the BSP already have the powers to “flexibly and independently use its policy toolkit to help mitigate the pandemic’s impact on the economy and financial markets.”

“For the first time since the creation of the BSP in 1993, Section 89 of the BSP charter has been put into action when the BSP provided provisional advance to the National Government in the form of a repurchase agreement,” said Dakila. “The BSP’s subsequent actions were critical in ensuring adequate liquidity in the country, building up market confidence, and sustaining credit flow to support the economy.”

BSP Deputy Governor Maria Almasara Cyd Tuaño-Amador said in her own Bankers Night address that the pandemic which she noted did not start off as a monetary or a financial shock – “nonetheless has placed the central bank front and center in the stage.”

“The BSP will continue to play the central role of ensuring the smooth functioning of the economy by providing sufficient liquidity to financial markets and by enabling the credit channels to function well. Our policy responses will continue to be timely and decisive as well as alert and attentive to the challenges that will inevitably come our way,” said Tuaño-Amador.

Last year, Diokno said it could take some time before the BSP withdraws COVID-19 relief measures such as liquidity support and regulatory reprieve granted to banks. The rollout of the COVID-19 vaccines in the Philippines is still uncoordinated to date, and the government and local government units’ plans are still being threshed out.

Diokno has said that the BSP will continue with its evidence-based, data-driven approach to policy making, including deciding when to scale back pandemic support measures.

Diokno said earlier that the BSP is responsible for ensuring that there is sufficient liquidity in the financial system and to prevent the “tightening of financial conditions and financial disintermediation while keeping a close watch on inflation developments.”

He has said that the proper timing for the unwinding of relief will help protect banks throughout the economic recovery phase and give them flexibility to extend more loans to the vulnerable sectors, which are much needed to speed up the country’s bounce-back process.