Economists: Not done yet, Diokno has more rate cuts up his sleeve
More “liquidity bazooka” is likely to be unleashed by the Bangko Sentral ng Pilipinas (BSP) in the coming months to counter economic shock waves from the new coronavirus disease (COVID-19) pandemic, according to economists.
The BSP could further slash the policy rate to 2 percent this year as the Philippines struggles to contain the virus and its economic fallout, London-based Capital Economics said.
“Given the deterioration in the growth outlook, it is unlikely the [BSP] would have waited until its next meeting on May 21 to lower rates again,” Capital Economics Asia economist Alex Holmes said in an April 16 report titled “Philippines: Emergency rate cut unlikely to be the last.”
The BSP has already cut interest rates by a cumulative 125 basis points (bps) since the start of the year, bringing the policy rate to a record low of 2.75 percent.
ING Philippines economist Nicholas Mapa, in a research note on Friday, also said BSP Governor Benjamin Diokno wasn’t likely done bolstering the economy after the off-cycle 50-bp rate cut on Thursday, citing Diokno’s “provisional authority for 200 bps worth of reserve reduction and a likely 25 bps rate cut in his back pocket.”
Meanwhile, Mapa said the BSP’s move to allow banks to allocate lending to small and medium enterprises (SMEs) to satisfy their reserve requirement could effectively release P360 billion for fresh lending.
“Details on the new directive are forthcoming but Diokno is getting quite creative in churning out new ways to help provide stimulus. Although a different model used by other countries such as the US and Indonesia that have specific funds setup primarily for SMEs, it follows the current trend of BSP flexing while investors look to the fiscal side of the fence to match,” Mapa said.
Mapa said the BSP’s 125 bps worth of rate cuts and up to 400 bps of reserve requirement reduction so far could approximate the “liquidity bazooka” and “print money” suggestion from academics.
But “we’ll have to see if it translates to keeping firms afloat so job retention and job creation can take place,” he added.
Philippine officials have already downgraded their expectations for the economy for this year, forecasting a flat growth or, at worst, a 0.8-1 percent contraction. Capital Economics countered with a gloomier outlook, saying the economy could even shrink by 4 percent this year.
“Given the dreadful outlook for the economy, the BSP is likely to cut further. We suspect that it will lower the policy rate by another 50 bps at its next meeting on May 21, and eventually cut the policy rate to just 2 percent. We also expect a further 300 bps of cuts to the reserve requirement ratio,” Holmes said.
But Diokno said on Friday the Monetary Board had canceled the scheduled May 21 meeting on the monetary policy stance given the “appropriate” rate cuts so far in the first half.
Holmes noted “rate cuts would help the economy by lowering interest payments for indebted companies and households, but with firms reluctant to invest and consumers either unwilling or unable to spend, rate cuts will not be as effective as normal.”
“Strict quarantine measures were recently extended up until the end of this month. Data on the movement of people from Google suggest that the measures in the Philippines are having a dramatic impact on economic activity. Our analysis suggests that GDP (gross domestic product) will likely be 15-20 percent lower as long as these measures remain in place,” Holmes added.
Capital Economics senior economist Shilan Shah also said in a separate April 16 report titled “Will a drop in remittances cause further pain?” that “a drop in remittances would increase the risk of a protracted period of economic weakness for the Philippines, Cambodia and much of South Asia.”
“Without support from remittances, Vietnam would be running a current account deficit, while the existing shortfalls in the Philippines, Cambodia and all of South Asia would be significantly larger,” Shah said.
As such, “a drop in remittances would add to economic woes already facing the Philippines, Bangladesh and Pakistan, where measures to contain the spread of the coronavirus have created severe economic hardship for the poorest,” Shah added.
Last year, Filipinos living or working abroad sent back home a record $33.5 billion in personal—cash and in kind—remittances.
