Financial systems need time to heal

The International Monetary Fund (IMF) reported Tuesday that the financial systems remain impaired, despite recent reports that the world was slowly recovering from the global economic turmoil.

“Global economic activity is starting to pick up, but financial systems remain impaired and domestic and external imbalances persist in many economies,” the IMF said in a statement.

The IMF added the global economic recovery was expected to be slow as financial institutions and markets worldwide struggle to cope with unemployment levels rising to new highs. “[Also] an impaired financial system needs time to heal before it can intermediate financial capital effectively.”

The term intermediate means allowing those need money to access funds of those with excess funds.

The IMF also said the timing of the withdrawal of monetary and fiscal stimulus or the implementation of exit strategy should be considered to support economic recovery.

“On the one hand, a premature exit could stifle the recovery. On the other hand, delaying the withdrawal of stimulus could be inflationary. At the same time, the dramatic increase in fiscal deficits and government debt levels exac‑erbates sustainability concerns for a number of economies,” the institution explained.

Central banks have decreased their interest rates to spur economic growth as part of the monetary stimulus. Most of the governments in the region posted higher budget deficit because of higher spending particularly in the infrastructure sector.

Also because of low interest rate environment, the borrowing cost went down, which led to higher levels of debt.

IMF said the high demand for credit was expected to continue and may result in an asset bubble. “By accommodating loosening credit conditions and rising debt, monetary policymakers increased the risks of a bust. The evidence suggests that policymakers should react more strongly to signs of increasing macrofinancial risk.”

Exit strategy

Since there are now initial signs of economic recovery and greater stabilization of financial markets, the Bangko Sentral ng Pilipinas (BSP) believes that there was a need to start thinking of exit strategy. But the central bank has to first to determine if there are clear and stronger signs of private-sector activity, like growing consumption levels or investments.

Central bank Deputy Governor Diwa Guinigundo earlier said that the critical issue in an exit strategy was the timing. Exiting too early could set back the so-called green shoots, but acting too late could fan demand pressures and generate higher inflation, he explained.

The central bank has reduced its key policy rates by 200 basis points, bringing down the overnight borrowing and lending rates to 4 percent and 6 percent, respectively.

The move was intended to lower bank-lending rates or to make the borrowing cost much cheaper for individual and corporate borrowers.

Bangko Sentral also injected liquidity into the financial system by expanding of the rediscounting budget and lowering of reserve requirement

The monetary policy has helped support the domestic demand and minimize the corrosive feedback loop stemming from weaker economic and financial conditions, as well as the government’s increased spending.

Because of government’s fiscal stimulus program, the deficit ballooned to P210 billion in August with expenditures outpacing revenue collection. For the whole year, the government has projected a P250-billion budget deficit.

Policy to buttress growth

Central bank Governor Amando Tetangco Jr. earlier said that the possible shift in monetary policy would be gradual to support economic expansion.

The governor said that Philippine economy would grow within the economic manager’s forecast of gross domestic product (GDP) growth of 0.8 percent to 1.8 percent this year. GDP, a key economic indicator, is the total cost of all goods and services produced in a country in a year.

He said the underlying strength of the economy was supported by the continued liquidity growth and sustained loan growth. The governor added that he expected strong remittance inflows, which would drive consumption growth and business process outsourcing (BPO) earnings would drive GDP growth.  –Maricel E. Burgonio, Senior Reporter, Manila Times