YEARENDER: RP relatively unscathed by global crisis – BSP chief

MANILA, Philippines – Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. believes that the Philippine economy was left relatively unscathed by the “financial crisis” that led to a global economic slump.

Tetangco said fiscal and monetary reforms adopted by the government helped cushion the full impact of the global financial crisis.

“To a large extent, the Philippine economy was relatively unscathed by the global crisis because of underlying cushions in the form of a critical mass of reforms and in the form of sustained macroeconomic policy prudence,” Tetangco said.

Unlike other economies, he explained that the Philippines avoided a recession due to several measures adopted by fiscal and monetary authorities.

“I don’t know about the other countries but what we are seeing is that we avoided recession while a number countries in the region registered negative growth rates,” he added.

Philippine economic managers through the Cabinet-level Development Budget Coordination Committee (DBCC) see the country’s gross domestic product (GDP) expanding between 0.8 percent and 1.8 percent this year from 3.8 percent last year.

Tetangco said the economy’s resilience was evident in 2009 as the GDP expanded by 0.7 percent in the first three quarters of the year amidst contractions in other jurisdictions, including in the Asian region.

He pointed out that the economy continued to draw strength from strong domestic demand and solid macroeconomic fundamentals.

At the height of this crisis during the last quarter of 2008, he said the BSP endeavored to prevent such a meltdown in financial markets and a freezing in the credit markets from occurring.

“We ensured monetary policy was appropriately accommodative. We ensured there was sufficient and evenly distributed liquidity in both the peso and dollar funding markets,” the BSP chief said.

The BSP’s Monetary Board started adopting liquidity enhancing measures in November 2008 and started its easing cycle in December through the reduction of key policy rates.

In all, the board slashed interest rates by 200 basis points until July this year to a record low of four percent for the overnight borrowing rate and six percent for the overnight lending rates.

“We can maintain the current policy stance for some time. The consensus view is that inflation could remain well behaved, held back by the presence of spare capacity and relatively weak demand,” Tetangco added.

With these measures, he said, lending activities continued, domestic financial markets stabilized, and the banking system remained sound.

According to him, the domestic economy is on the rebound but there is a need for more reforms to fully achieve the country’s potential.

In the area of monetary policy, Tetangco said inflation targets would continue to be our guide in policy-setting.

“This means we shall continue to be watchful of other key developments especially in terms of liquidity growth, capacity utilization and the state of the financial markets. We would continue to exercise vigilance over inflation developments, in line with our mandate of promoting price stability,” he said.

He added that the central bank would also continue to support external policies including a market-determined exchange rate and the review of foreign exchange regulatory environment to help further insulate the economy against global risks.

The BSP, according to Tetangco, is confident that inflation would stay within the projected level of 2.5 percent to 4.5 percent this year, 3.5 percent to 5.5 percent in 2010, and three percent to five percent in 2011.

Inflation eased to a year-to-date average of 3.2 percent as of end-November from 9.4 percent in the same period last year. The consumer price index is expected to range between 3.7 percent and 4.6 percent in December.

The BSP chief said the appropriately accommodative monetary policy made possible by the benign inflation environment helped to make sure that the generally sound banking system was able to perform its critical function of intermediating funds to the productive sectors of the economy.

“This positive confluence of events allowed our economy to continue to attract foreign investments and to grow even during this deep global crisis,” Tetangco said.

Most economists and analysts believe that the world economy exited recession in the third quarter of 2009 and is set to grow at a pace of around three percent next year.

“After two years of what has been characterized as the deepest global recession in over 60 years, we are now witness to clear signs that the crisis is ending and that the global economy is on the cusp of a recovery,” the BSP chief said.

While the global recovery is underway, Tetangco reiterated that the “great crisis” has left real scars that may take some time to heal.

He added that there continue to be risks including the shape that the global recovery, the timing and quality of exit from easy monetary policy by the major central banks, the fickle investor sentiment towards emerging markets, and the potential capital reflow to the region.

“The cautious nature of the global recovery would have implications on the strength of Philippine economic growth,” he said.

A sluggish upturn in global economic activity, according to the BSP chief, would present a downside risk to the domestic economy through its impact on exports and investments.

Economic managers see the country’s GDP growing at a faster rate of between 2.6 percent and 3.6 percent next year.

Singapore-based DBS Bank Ltd. sees the Philippine GDP accelerating faster at 4.8 percent next year on the back of strong consumption brought about by robust remittances from overseas Filipino workers (OFWs).

“The economy will continue to plod along on the back of global recovery,” the investment bank stated in its Economics Markets Strategy for Q1 2010.

DBS sees private consumption expanding by 4.8 percent next year from 3.4 percent this year. Merchandise exports on the other hand would expand by 19 percent next year after contracting by 25 percent this year.

On the other hand, New York-based investment bank Goldman Sachs sees the country’s domestic output growing by 4.2 percent next year from the projected 1.6 percent growth this year on the back of continuing fiscal stimulus as well as robust OFW remittances. –Lawrence Agcaoili (The Philippine Star)