BSP chief: Quicker spending by gov’t key to economic activity during pandemic

by Daxim L. Lucas, Philippine Daily Inquirer, 3 Dec 2020

MANILA, Philippines—The central bank called on the national government to accelerate its own spending program to boost growth amid emerging data that the private sector remains gun shy on taking out loans, which are now at their cheapest in history, which would generate economic activity.

At an online press briefing, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno cited the regulator’s record of monetary easing that has so far released over P1.9 trillion in liquidity into the local financial system, equivalent to 9.9 percent of the country’s gross domestic product.

But independent observers have noted that these aggressive measures will take time to fully filter across the economy, unlike fiscal spending which has a more immediate effect.

“The slow adjustment in bank lending rates, together with bank risk aversion and weak loan demand, suggest that the impact of the BSP’s policy actions could take a longer time to materialize,” Diokno said.

“Yet, even as BSP is prepared to implement additional policy measures, fiscal policy should play a more significant role in helping restore market confidence,” he added.

In particular, the central bank chief — who had previously served as budget undersecretary for the late President Corazon Aquino and budget chief for Presidents Estrada and Duterte—noted that public health interventions remained vital to the whole-of-government approach in fighting the pandemic and its effects.

“Fiscal programs will also need to address remaining supply bottlenecks, support domestic demand by extending wage subsidies and loans to support household incomes and ensure employment for displaced workers as the country transitions to the new economy,” he said.

Diokno noted that this phenomenon of relatively low fiscal spending can be observed across the Asean region where “it appears that there could be scope for higher fiscal stimulus.”

“To note, the Philippines’ discretionary fiscal response to the COVID-19 crisis is relatively lower compared to our peers like Indonesia, Malaysia and Thailand,” he said.

With adequate liquidity in the financial system, the BSP noted that domestic interest rates have gradually declined over the past several months.

Last month, the BSP reduced the policy rate to an all-time low of 2 percent. With this latest monetary policy adjustment, the BSP has cut its monetary policy rate by a total of 200 basis points since the start of the COVID-19 pandemic.

Despite this, weak market confidence continues to dampen the financing activity.

Latest data on domestic liquidity and bank lending indicated that credit activity has remained tepid as banks remained generally cautious, while households and businesses remain reluctant to borrow.