Diokno: Sound economic fundamentals aiding PH recovery

MANILA, Philippines—The Philippines’ recovery from the deepest output contraction since World War II is being supported by sound fundamentals which would pave the way for a much stronger economy after the pandemic, according to the country’s chief monetary regulator.

Speaking before Japanese investors at an online forum recently, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno pointed to the 11.8-percent growth in the second quarter of 2021 as evidence of this.

In addition, manageable inflation, stable banking sector and robust external payments position, among other fundamentals, will support recovery and help keep the economic effects of the pandemic temporary, he explained.

“The Philippines’ economic fundamentals remain sound,” Diokno told clients of Japan-based financial service firm Nomura. “While the pandemic poses challenges in the short term, the country continues to enjoy bright medium- and long-term growth prospects.”

BSP estimates that inflation will slightly exceed the 2-4 percent target range this year due to supply factors but will ease toward the midpoint of the target band next year and in 2023. Policy makers are hoping that more a favorable inflation scenario will attract more investments and lead to job creation and income growth.

The government’s economic managers expect the economy to grow between 4 and 5 percent in 2021 and accelerate to a range of 7 to 9 percent in 2022.

In terms of banking sector stability, Diokno said banks in the country have kept their capitalization and liquidity buffers well above what is required  and their exposure to bad debts was manageable throughout the crisis. Banks remain capable of supporting growth of the economy, he said.

On the country’s external accounts, the BSP chief said buffers are sufficient to manage impact of shocks, including market reaction over pending move of the US Federal Reserve to raise interest rates to pre-pandemic levels.

“Our external liquidity buffers continue to be more than adequate,” the BSP governor said. “Our hefty [gross international reserves], steady inflows from remittances and [business process outsourcing firms], and recovery of exports and [foreign direct investments] will support the peso.”

Dollar reserves, based on preliminary data, reached $108.05 billion as of end-August this year, higher than the country’s outstanding external debt. Latest data showed that external debt amounted to $97 billion as of end-March this year.

Diokno said the peso, which has depreciated by 3.5 percent against the US dollar since the start of the year, remains relatively stable.

The manageable weakening of the local currency against the US dollar was broadly in line with the behavior of other emerging market currencies, as demand for the dollar rises amid the anticipated policy normalization by the Fed.

He added that the country’s flexible exchange rate policy helps protect the peso against speculative attacks.

“The market determined exchange rate is our first line of defense against external shocks,” he said.

TSB