A London-based think tank sees an interest rate cut of up to 50 basis points (bps) by Philippine monetary authorities to fill the gap in fiscal response to the COVID-19 pandemic which was deemed lacking in the face of a deep plunge in economic activity.
Capital Economics, in a report dated July 28, said it saw evidence “that the fiscal response in the Philippines has been inadequate in the face of a huge slump” in economic activity.
New estimates made by the Asian Development Bank (ADP) showed that the Philippines’ war chest for COVID-19 response as of mid-July reached P1.04 trillion, or 5.7 percent of gross domestic product (GDP).
The Inquirer earlier reported that Capital Economics had projected Philippine GDP to slide by 18 percent year-on-year in the second quarter of 2020—at the height of the longest and most stringent COVID-19 lockdown in the region.
“Strict containment measures, which began in late March, remain in place in parts of the country,” Capital Economics said.
“Monthly data suggest they are having massive economic impact,” it said.
“Manufacturing production volumes were down nearly 45 percent in April and May. Export values recovered slightly in May but were still down over 35 percent,” Capital Economics said.
“The high-frequency data that we track suggest the recovery in economic activity has been sluggish,” the think tank said.
“Timely data on the movement of people suggest that while the economy probably bottomed out in May, activity remains very depressed and is recovering much slower than elsewhere,” Capital Economics added.
In June, most of the country was placed on a less-restrictive general community quarantine (GCQ) that allowed 75 percent of the economy to operate, following about 2.5 months of enhanced community quarantine (ECQ) which sent about 3/4 of the economy to paralysis.
For Capital Economics, the Philippines’ fiscal policy response was “lackluster.”
“After jumping in April, spending was not significantly higher in May or June than its monthly average in the first quarter,” it said.
“The Bureau of the Treasury noted that in June, primary spending missed its programmed allocation by 8.5 percent,” Capital Economics said.
Primary expenditures net of interest payments, or so-called productive spending, rose 29.5 percent year-on-year to P1.83 trillion during the first half, but fell 8.5-percent below the P1.99-trillion program. The Treasury had blamed the delayed implementation of the social amelioration program’s (SAP) second tranche.
“Monetary loosening has been stepped up in the face of the worsening economic outlook,” Capital Economics said.
“The central bank cut its policy rate by 50 bps in late June, to 2.25 percent,” it said, referring to the Bangko Sentral ng Pilipinas (BSP).
June’s hefty rate cut resulting in the current record-low policy rate was aimed at “[helping] mitigate the downside risks to growth and [boosting] market confidence,” BSP Governor Benjamin E. Diokno had said.
In its wake, Capital Economics said it expected another 50 bps rate cut.