PH needs to step up fiscal support vs COVID-19 in 2021

by Ben O. de Vera, Philippine Daily Inquirer, 3 Nov 2020

The Philippines needed to step up fiscal support for its COVID-19 war chest next year as private-sector demand for financing would rise alongside economic recovery such that the government could not rely on the central bank’s assistance as much as it did this year, the Washington-based Institute of International Finance (IIF) said.

In a webinar organized by financial magazine The Asset last month, IIF deputy chief economist Elina Ribakova noted that the Bangko Sentral ng Pilipinas (BSP)—just like its emerging-market central bank peers—had done an “exceptional” job in providing domestic liquidity as well as extending short-term financing amid the pandemic-induced recession.

Ribakova added that the private sector was also snapping up government securities, allowing the government to raise more money to fight COVID-19 amid low credit demand during the near term.

The BSP’s repurchase agreement with the Bureau of the Treasury offset the sharp contraction of nonresident flows such as foreign direct investments (FDI) and portfolio investments or “hot money” to the Philippines, Ribakova noted.

IIF Asia economist Yuanliu Hu told the Inquirer that they expected nonresident capital flows to the Philippines to drop by 41 percent to $10.2 billion this year from $17.2 billion last year, before rebounding to $17.7 billion next year.

The IIF projected FDI to decline to $6.4 billion in 2020 from $7.7 billion in 2019, while portfolio investment would fall to $3 billion this year from $7.5 billion last year, Hu said.

But Ribakova noted during the webinar that the Philippines was much less reliant on these foreign capital flows compared to its neighbors.

It also helped that on the fiscal side, the Philippines had entered the COVID-19 crisis much better prepared compared to previous financial crises, Ribakova said.

“The policy response has been very forceful, but the concern is on the health-care front, the containment of this pandemic,” she said.

While the Philippines provided ample financial support to the fight against COVID-19 this year, Ribakova said next year would be a different story amid expectations of a protracted pandemic.

“If this situation continues and private-sector demand picks up, will the domestic financial system be able to meet that demand or be saddled by the high issuance from the government?” Ribakova asked.

“There will be a very careful balance going on next year in terms of fiscal position, monetary support and interest to domestic financial institutions and their ability to provide credit,” Ribakova added.

For Ribakova, the fiscal support through a wider budget deficit, which nonetheless stood at the median of the Philippines’ emerging market peers was “relatively significant” even as the best way to ensure that there would be enough ammunition next year was by getting the pandemic under control.

“If the economy is allowed to reopen, [and] provided enough stimulus on the fiscal and monetary fronts,” Ribakova said the Philippines was projected to rebound with 7-percent gross domestic product growth next year to reverse this year’s projected 7.5-percent GDP slide.

Ribakova said the high infections in the Philippines remained the economy’s “Achilles’ heel”—“that’s our biggest concern.”