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BSP could be more ‘expansionary’ – IMF

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By LEE C. CHIPONGIAN

The International Monetary Fund (IMF) said the Philippines can accommodate a more expansionary policy stance with the Bangko Sentral ng Pilipinas (BSP) providing the push or stimulus as it cuts its benchmark rate lower.

“The Philippines has policy space and could adopt a more expansionary macroeconomic policy stance should downside risks materialize. Under these adverse risk scenarios, fiscal stimulus should be prioritized toward public capital and social spending programs,” the IMF said in its latest country report on the Philippines, part of its 2019 Article IV Consultation with government officials.

“The BSP also has substantial space to lower its policy rate if downside surprises materialize,” the IMF said, and added that the “moderate fiscal stimulus planned for 2020 and the monetary policy easing since mid-2019 are consistent with the economy moving back to growing at capacity and achieving the inflation objectives in the baseline outlook.”

BSP Governor Benjamin E. Diokno, known as a pro-growth and expansionary central bank chief, said that key to ensuring growth sustainability is the approval of critical measures that will ensure the government can maximize on its growth agenda.

“I believe that the IMF’s assessment of the domestic economy reflects multi-sectoral efforts to foster inclusive economic growth,” he said on Monday. “In line with this, the BSP will continue promoting price stability, financial stability, and an efficient payment and settlement system while pursuing legislative initiatives that will enhance our capacity to pursue our mandates.”

In the meantime, the IMF said that while a moderate fiscal stimulus and BSP rate cuts will “balance” the economy, it cautioned against increasing high credit growth as the economy expands. It said that the “risk of and from high credit growth will likely increase even with appropriate macroeconomic policy settings, given the low global interest rate environment.”

The IMF said “macroprudential policy response should be proactive, including, at this time, through an update of the macroprudential tool kit. At the same time, the economy also faces downside risks. While the current expansionary macroeconomic policy stance provides some insurance against such risks, a sharper-than-expected downturn would call for a more expansionary policy stance.”

Diokno and the BSP noted the following key findings of the IMF’s updated Staff Report, as published in January and released this month, namely:

That despite the slowdown in the first half of 2019 due to temporary government underspending and external trade uncertainty, the Philippine economy continues to perform well, having regained momentum in the second half of the year.

Inflation continued to decline to settle at 2.5 percent in December 2019. Bank lending growth slowed down but stabilized at 10.5 percent in September 2019 or as of the end of the IMF mission.

Gross international reserves reached $88 billion as of end-2019, which is 200 percent of the IMF’s reserve adequacy metric. The 2019 external position is in line with medium-term fundamentals and desirable policy settings.

“Overall, the IMF outlook on the country is positive,” said the BSP, quoting the IMF’s assessment that the Philippine economy continues to be a strong performer despite recent headwinds.

The BSP also cited the IMF’s support of the BSP legislative and reform agenda. “The IMF also recommends enhanced public investment management through promotion of greater competition and public access to information in the procurement process. These measures will contribute to the timely and cost-effective implementation of the government’s massive “Build, Build, Build” program.”

The BSP said the IMF endorses the “bolder implementation” of key policies such as further lifting of restrictions on foreign direct investments, broadening of scope of poverty reduction efforts, mobilization of resources for climate change adaptation and mitigation, robust implementation of the AML/CFT regime, and easing of the stringent bank secrecy law.

“These IMF recommendations are in line with the BSP’s legislative and reform agenda,” said the BSP.

The BSP, with Congress and other key government agencies are working together for the immediate passage of the following measures: amendments to the Anti-Money Laundering Act of 2001 and the Human Security Act of 2007, amendments to the Agri-Agra laws, and reforms in financial consumer protection and deposit secrecy.

Diokno has vowed to work closely with Congress to include and prioritize the measures that are crucial to the BSP’s legislative agenda.

“We believe that these structural reforms will provide robust support to the country’s economic goals and to the government’s objective of securing an ‘A’ credit rating. Down the road, we see this having a favorable impact not just on the country’s development efforts but on the lives of Filipinos as well,” said Diokno.

An “A” credit rating means lower borrowing costs for the country and a “favorable investment environment which support economic growth.”

The Philippines’ credit ratings were upgraded to investment grade in 2013. Currently, the country has a “BBB/Stable” ratings from Fitch Ratings, “Baa2/Stable” from Moody’s Investor Service, and a “BBB+/Stable” from Standard & Poor’s.

The Philippines is currently rated one notch above the minimum investment grade by Fitch and Moody’s, and just a notch off an “A” rating from S&P Global.

The latest IMF assessment is based under Article IV of the IMF’s Articles of Agreement where IMF holds bilateral discussions with members, collects economic and financial information, and discusses with officials the country’s economic development and policies.

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