Expecting that the previous rate cuts, totaling 200 basis points (bps), would help the recovery of the economy to pick up speed, the policymaking Monetary Board yesterday decided to maintain the key rates of the Bangko Sentral ng Pilipinas (BSP).

The interest rate on the BSP’s overnight reverse repurchase facility remains at 2.0 percent after the previous meeting’s 25 bps cut.

The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.

Benjamin Diokno, BSP governor and head of the Monetary Board, said the “monetary policy settings remain appropriate.”

“The Monetary Board believes that an accommodative monetary policy stance, together with sustained fiscal initiatives to ensure public welfare, should quicken the economy’s transition toward a sustainable recovery,” Diokno said.

Central banks reduce interest rates to encourage borrowing and investing, thereby possibly stimulating economic growth. Although this move may hasten inflation, the Monetary Board has room to move as prices of major commodities are expected to remain at comfortable levels.

Rates are raised, meanwhile, when there is too much growth, which is not the case now. Global economic activity, including that of the Philippines, is expected to slow down this year as almost all countries are affected by the virus.
Diokno said the inflation environment remains benign.

“The latest baseline forecasts have risen slightly due to the sharp increase in global crude oil prices and the higher-than-expected food inflation in November. However, since the rise in food prices is transitory, it is expected that the future inflation path will remain firmly within the government’s 2-4 percent target over the policy horizon,” Diokno said.

He added the balance of risks to the inflation outlook “leans toward the downside from 2020 to 2022 owing largely to potential disruptions to domestic and global economic activity amid the ongoing pandemic.”

Diokno said the Board noted that the resurgence of coronavirus disease 2019 (COVID-19) cases globally “has tempered economic activity with the reimposition of preventive measures in recent weeks.”

“Optimism over the delivery of vaccines has lifted market confidence, supporting improved prospects for global growth. On the domestic front, the Monetary Board also observed early indications of improved mobility and sentiment. While recent natural calamities could pose strong headwinds to growth, the further easing of quarantine measures should help facilitate the recovery of the economy in the coming months,” Diokno said.

The move was widely expected by economists.

Michael Ricafort, Rizal Commercial Banking Corp. chief economist, said as average inflation from January to November stands at 2.6 percent, the decision results in “negative interest rate returns and making any further cuts in local policy rate somewhat challenging for now.”

Ricafort said total cuts so far in 2020 is at -2 percentage points (or -200 bps) from 4 percent in end-2019, considered among the most aggressive worldwide.

“However, inflation is expected to ease from December 2020 to February 2021 to a little over 2 percent or even slightly below 2 percent largely due to higher base/denominator effects prior to COVID-19, thereby could still support any additional monetary easing measures, going forward.” Ricafort said.

“Inflation could fundamentally pick up in 2021 especially if economic recovery picks up further, especially with any additional measures to further re-open the economy especially if the COVID-19 vaccine rolls out in 2021 that could help lower new COVID-19 local cases, increase infrastructure spending, and lower base/denominator effects starting March 2021 or exactly a year after the COVID-19 lockdowns/pandemic started that would mathematically lead to higher year-on-year inflation rate thereafter, assuming all other factors remain the same,” he added.

Alex Holmes, Asia economist of London-based Capital Economics, however, sees “more easing to follow in 2021.”

“With the recovery proving weak, further easing is likely next year. The pause was no surprise,” Holmes said.

According to Holmes, the BSP “sounded hopeful of the recovery picking up speed, noting that the accommodative monetary stance and fiscal initiatives should quicken the economy’s transition to a sustainable recovery.”

“But we suspect the recovery in the quarters ahead will disappoint. GDP saw a lackluster rebound in the third quarter, with the pace of contraction only easing from -16.9 percent year-on-year in the second quarter to -11.5 percent. And we have penciled in another weak rebound in growth this quarter, to -8.5 percent,” Holmes said.

With the virus still not under control, Holmes said restrictions will need to remain in place for longer, which will further hold back the recovery.

“Promising news on vaccines looks unlikely to quickly change the situation. While the Philippines is reportedly close to securing 25 million doses of the Sinovac vaccine, that would only be enough to inoculate just over 10 percent of the population. What’s more, the economic scars from the downturn, including business insolvencies, weaker household balance sheets and higher unemployment, will weigh heavily on demand for many months to come. Overall, we are expecting the economy to contract by 9.5 percent this year and grow by 11 percent in 2021, which would still leave output around 10 percent lower than its pre-crisis trend by the end of next year,” Holmes said.

The Monetary Board yesterday decided to cut the key rates of the Bangko Sentral ng Pilipinas (BSP) by 25 basis points, saying “uncertainties remain elevated” both locally and globally.

The interest rate on the overnight deposit now stands at 2 percent. The interest rates on the overnight deposit and lending facilities were likewise reduced to 1.5 percent and 2.5 percent, respectively.

In a statement, BSP Governor Benjamin Diokno said the Monetary Board observed global economic prospects have moderated in recent weeks amid the resurgence of coronavirus disease 2019 (COVID-19) cases.

Diokno said the Monetary Board noted that “while domestic output contracted at a slower pace in the third quarter of 2020, muted business and household sentiment and the impact of recent natural calamities could pose strong headwinds to the recovery of the economy in the coming months.”

“Given these considerations, the Monetary Board assessed that there remains a critical need for continuing policy support measures to bolster economic activity and boost market confidence,” Diokno said.

“With a benign inflation environment and stable inflation expectations, the Monetary Board sees enough policy space for a reduction in the policy rate at this juncture to uplift market sentiment and nurture the country’s economic recovery amid increased downside risks to growth,” he added.

Benign inflation

But Diokno stressed latest baseline forecasts continue to indicate a benign inflation environment over the policy horizon, “with inflation expectations remaining firmly anchored within the target range of 2 to 4 percent.”

“The balance of risks to the inflation outlook also remains tilted toward the downside owing largely to potential disruptions to domestic and global economic activity amid the ongoing pandemic,” Diokno said.

Faster price increase for some food items like meat and fish caused inflation to slightly rise to 2.5 percent in October, data from the Philippine Statistics Authority showed.

In September, inflation was at 2.3 percent while in October last year, inflation was posted at 0.8 percent.

This brings the year-to-date inflation for 2020 at 2.5 percent, still near the low-end of the government’s full-year target range of between 2 and 4 percent.

Karl Kendrick Chua, acting socioeconomic planning secretary, however, said upside risks such as the adverse impact of inclement weather and the lingering presence of the African swine fever remain.

“Aside from the ongoing pandemic, the country has been facing adverse weather conditions in the recent months. Effects of typhoons and La Niña on the agriculture sector and food prices pose upside risks to inflation,” Chua said.

He said while latest projections from the Department of Agriculture show that supply of key food products is likely to remain sufficient until the end of the year, agricultural damage may put food supply at risk, and thus put pressure on prices.

Stimulus absent

Nicholas Mapa, ING Bank senior economist, said the Monetary Board was “forced into action as fiscal stimulus is largely absent and may likely delay a sharp rebound in growth.”

“Despite the fresh round of easing, we are not confident that bank lending will pick up anytime soon given the dimming growth outlook with unemployment elevated and consumer sentiment still negative,” Mapa noted.

He said the rates were reduced “in a bid to resuscitate falling bank lending and combat the economic recession.”

“Although real policy rates are now even deeper into negative territory at -0.5 percent, the central bank pressed on with a fresh round of rate cuts as the fourth quarter GDP (gross domestic product) is now expected to worsen from the previous quarter’s 11.5 percent contraction,” Mapa said.

He explained that agriculture and real property damage from a string of violent typhoons is expected to shave 0.15 percentage point off from the 2020 growth and “may have convinced Diokno to act while fiscal stimulus remains largely modest.”

“The lack of fiscal stimulus may likely delay a sharp rebound in growth, which in turn will keep bank lending and investment appetite muted in the near term. We believe that BSP will likely pause at its December meeting now that real policy rates have fallen even deeper into negative territory with the central bank likely calling for a renewed push for additional fiscal spending to address the freefall in economic activity as COVID-19 infections remain elevated in the country,” Mapa said.

The country’s gross international reserves (GIR) level last month breached the $100-billion mark, reflecting inflows mainly from the central bank’s foreign exchange operations and government’s foreign currency deposits.

Bangko Sentral ng PIlipinas data showed the GIR as of end-September climbed by $1.54 billion to $100.49 billion from the end-August 2020 level of $98.95 billion

Benjamin Diokno, BSP Governor, said that this level is equivalent to 10 months’ worth of imports of goods and payments of services and primary income.

It is also about 9.2 times the country’s short-term external debt based on original maturity and 5.4 times based on residual maturity.

Diokno added the foreign currency inflows were partly offset by the “revaluation losses from the BSP’s gold holdings resulting from the decrease in the price of gold in the international market and foreign currency withdrawals made by the National Government to pay its foreign currency debt obligations.”

Central banks use foreign currency reserves to keep a fixed rate value, maintain competitively priced exports, remain liquid in case of crisis, and provide confidence for investors.

Reserves are also used to pay external debts, afford capital to fund sectors of the economy, and profit from diversified portfolios.

Economists said the jump may be attributed to profits from investments overseas, and proceeds from overseas borrowings as record low interest rates due to the pandemic made borrowing more compelling.

“The external sector outlook for 2021 reflects more favorable growth prospects as the global economy proceeds from an earlier restart of economic activity in the second half of 2020. Nonetheless, the balance of risks surrounding the outlook continues to lean toward the downside owing to possible resurgence in virus infections across countries as well as pandemic-induced structural changes in labor conditions and trade patterns,” Diokno said.

Diokno on Wednesday announced higher revisions in the country’s balance of payments forecasts for this year and next.

The BSP sees the overall BOP position to post a surplus of US$8.1 billion, or 2.2 percent of GDP, for this year. This is higher than the earlier projected $0.6 billion surplus for the year.

This stems from the reversal in the projected current account balance from a deficit of $1.9 billion to a surplus of $6.0 billion due to the expected narrower trade-in-goods deficit.

The end-2020 GIR level is expected to reach $100.0 billion, taking into account the increased foreign borrowings by the national government (NG) as well as the revaluation adjustments arising from the accounting treatment of the BSP’s gold holdings.

The 2021 GIR level is seen to reach $102 billion in anticipation of continued NG foreign currency deposits as well as positive revaluation adjustments in gold holdings as gold prices could remain elevated in 2021 due to safe-haven investor demand.

Citing the difficult economic environment caused by the new coronavirus disease 2019 (COVID-19) pandemic, the Bangko Sentral ng Pilipinas (BSP) yesterday said it has approved the setting of interest rate ceiling on all credit card transactions.

Data from the BSP showed that as of the first six months of this year, credit card charges range between a low of 18 percent and as high as 58 percent annually.

To take effect on November 3 this year, the annual ceiling for credit card charges is now pegged at 24 percent.

This simply means interest rate charges for unpaid credit card purchases and cash advances should not exceed two percent per month.

Benjamin Diokno, BSP governor, said the interest rate cap on credit card receivables aims to ease the financial burden of consumers and micro, small and medium enterprises “amid a difficult economic environment caused by the COVID-19 pandemic.”

Diokno clarified that the new issuance prescribes a separate interest rate ceiling for credit card installment loans.

For these transactions, credit card issuers may only charge monthly add-on rates up to a maximum of one percent.

Also, no other charge or fee may be imposed or collected on credit card cash advances except for a maximum processing fee of P200 per transaction.

The add-on rate is essentially the monthly interest charged by the credit card issuer on the installment loan.

“These maximum rates and fees shall also take effect on November 3 and shall be subject to review by the BSP every six months,” Diokno stressed.

He explained that the reform initiative is pursuant to the BSP’s supervisory authority over all credit card issuers under the Credit Card Industry Regulation Law.

It is also seen to promote responsible credit card lending in the country.

“Amid the rising use of electronic platforms for payments, the issuance will enable credit cardholders to settle financial transactions under more affordable pricing terms,” Diokno said.

He also said the setting of a maximum ceiling on interest or finance charges on credit card transactions is also in keeping with the country’s current low interest rate environment.

The interest rate on the BSP’s overnight reverse repurchase facility remains at 2.25 percent. This has been the lowest policy rate since the beginning of the pandemic.

The new regulation also waives the requirement for credit card issuers to notify the cardholder of the said changes on interest or finance charges at least 90 calendar days before such changes take effect.

As host countries began easing lockdown measures, money sent home by overseas Filipinos (OFs) went up again in July, but the cumulative year-to-date total is still $400 million lower than that of last year.

Data from the Bangko Sentral ng Pilipinas (BSP) showed cash remittances that are coursed through the banks rose by 7.8 percent to $2.783 billion from $2.581 billion during the same month last year.

Benjamin Diokno, BSP governor, said the growth was mainly “due to the 12.6 percent increase in land-based workers remittances, but was slightly tempered by the 9.2 percent decrease in sea-based workers’ remittances.”

Diokno explained that sea-based workers were repatriated amid the ongoing coronavirus pandemic.

For tJanuary to July, the cumulative decline in cash remittances decelerated to 2.4 percent from 4.2 percent in June. Year-to-date total now stands at $16.8 billion compared with $17.2 billion in 2019.

Cash remittances from land-based and sea-based workers continued to be lower than their levels in 2019 by 1.5 percent to $13.232 billion from $13.429 billion, and 5.8 percent to $3.57 billion from $3.789 billion, respectively.

Nicholas Mapa, ING Bank senior economist, said “most analysts had expected remittance flows to contract given challenging labor market conditions in host countries and given the fact that more than 170,000 OFs have returned to the Philippines over the course of the past few months.”

He said the surprise jump in remittances may be traced to the lifting of strict lockdowns in host countries, “which allowed OFs to return to work and remit funds after being trapped in their homes for an extended period of time.”

“One other reason for the 7.8 percent increase in remittances could be traced to exchange rate nuances with the US dollar retreating significantly against global currencies, inflating remittances sent home in euro and yen in dollar terms,” Mapa said.

“We continue to pencil in a return to weakness or at best a moderating in the growth posted in the past two months as job market challenges and layoffs make it difficult for OFs to send home more funds in the coming months,” Mapa said.

But despite the projected weakness in remittance growth, Mapa said the peso “should remain well-supported as the current account remains in surplus due to the freefall in imports.”

“Should remittance growth continue to surprise on the upside, we expect only modest appreciation pressure as BSP will likely take the opportunity to build up its gross international reserves past the $100 billion mark,” Mapa said.

By country- source, BSP said remittances from the United States, Japan, Singapore, Qatar and Taiwan were among the countries that registered continued growth, while declines were noted in Saudi Arabia, United Arab Emirates, Germany, Kuwait and the United Kingdom.

The highest share to total OF remittances at 40.1 percent for January to July emanated from the US, followed by Singapore, Saudi Arabia, Japan, UK, UAE, Canada, Qatar, Hong Kong and Taiwan.

The combined remittances from these countries accounted for 78.9 percent of total cash remittances.

Compared to other currencies in Southeast Asia, the Philippine peso has appreciated and remained stable amid the coronavirus disease 2019 (COVID-19) pandemic, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Yesterday, the Philippine currency closed at 48.63, 0.11 centavos lower than the previous day’s close of 48.52.

Before the government decided to put the country under various lockdown measures in  March, the peso was at 51 to the dollar level.

While other currencies in the region exhibited depreciation, the peso has appreciated by 4.11 percent year-to-date, making it the best performing currency in the region.

Indonesia rupiah has depreciated by 5.51 percent, while Thailand baht has gone down by 4.32 percent.

Other currencies in Asia that appreciated include the Taiwan dollar by 2.57 percent, Japanese yen by 2.47 percent and the Chinese yuan by 1.17 percent.

Benjamin Diokno, BSP governor, said the peso’s strength can be attributed to “sound macroeconomic fundamentals characterized by a benign inflation environment, a strong and resilient banking system, prudent fiscal position and a sufficient level of international reserve buffer.”

“The market and investors continue to focus on the Philippines’ strong macroeconomic fundamentals. Going forward, the peso is anticipated to be broadly stable in line with the supply and demand conditions in the foreign exchange market as well as the continued soundness in the country’s macroeconomic fundamentals,” Diokno said.

He said in the period leading up to the pandemic, the Philippines also enjoyed a favorable ranking among peer emerging economies in terms of debt management and foreign exchange reserves.

“This has similarly contributed to the relative stability of the domestic currency. This is further strengthened by the government’s timely and decisive macroeconomic measures to mitigate the adverse impact of the pandemic,” Diokno said.

He added the country’s debt-to-gross domestic product ratio of 39.6 percent as of December 2019 was lower than those of neighboring emerging economies, while the country’s gross international reserves reached an all-time high level of $98.0 billion at end-July this year and is equivalent to 8.9 months’ worth of imports of goods and services and payments of primary income.

“The stability of the currency has helped temper inflationary pressures arising from increases in international prices of commodities, particularly crude oil, as well as agricultural food commodities. The prevailing benign inflation environment, in turn, allows continued policy space to support economic activity as needed,” Diokno said.
Another reason supporting the stellar performance of the peso, according to Diokno, is the affirmation of investment grade long-term sovereign credit ratings for the Philippines.

“The shock from the COVID-19 pandemic lowered sovereign credit ratings for Australia, Hong Kong, India, Indonesia, Japan, Malaysia, Sri Lanka, Thailand, Vietnam. Consensus among the credit rating agencies is that the worsening fallout from COVID-19 pandemic is expected to leave lasting scars through lower investment, an erosion of human capital, and fragmentation of global trade and supply linkages, and that any subsequent recovery will be protracted and uneven,” Diokno said.

“Even if the economic recession proves temporary, a few emerging trends are keeping credit rating agencies cautious of more rapid reversal of the deterioration in fiscal and debt metrics caused by the pandemic,” he added.

He stressed favorable investor sentiment over the economy’s fundamentals is expected to provide support to the currency amid weaker inflows coming from exports, tourism receipts and overseas Filipino remittances due to the COVID-19 pandemic.

Despite foreign borrowings done in the past four months to support government efforts to address the impact of the coronavirus pandemic, the Bangko Sentral ng Pilipinas (BSP) yesterday assured the public external debt is expected to remain “manageable.”

Benjamin Diokno, BSP governor, said the economy continues to have the capability to service its maturing foreign obligations.

“The country’s external debt ratio remains one of the lowest among Asian countries,” Diokno said.

In addition to monetary policy easing and liquidity measures since the implementation of various community lockdown since March, the Monetary Board approved $5.6 billion in foreign borrowings as of July this year.

The borrowings were sourced from the Asian Development Bank ($2.6 billion), World Bank-International Bank for Reconstruction and Development ($1.5 billion), Asian Infrastructure and Investment Bank ($750 million), Japan International Cooperation Agency ($477 million), and from Agence Francaise de Developpement ($295 million).

“While the country’s outstanding external debt will increase to the extent of the foreign borrowings that will be obtained by government, we would like to assure the public that the impact of these borrowings on key metrics is manageable and sustainable in view of the favorable terms extended by the creditors,” Diokno said.

Diokno explained the Philippines entered the period of health quarantines with “a robust external debt position.”

BSP data showed the country’s external debt stood at $81.4 billion at end-March 2020, down by $2.2 billion from the $83.6 billion recorded in December 2019.

The first quarter 2020 external debt figure, according to Diokno, represented 21.4 percent of the country’s gross domestic product (GDP), much lower than the 57.3 percent recorded 15 years earlier.

“To be frank, this is a good number as external debt was nearly at 60 percent of GDP 15 years ago. The latest ratio indicates a sustained strong position to service foreign borrowings in the medium to long-term. This is because of the 20 years of structural reforms involving industry and foreign exchange liberalization; tax and debt management; and the financial sector, which helped strengthen the regulatory environment and the economy’s capacity to absorb shocks,” Diokno said.

“Along with sound economic management, reforms involving industry and foreign exchange liberalization, tax and debt management, and the financial sector have helped strengthen the regulatory environment and the economy’s capacity to absorb shocks,” he added.

Diokno said 83.6 percent of the country’s external debt as of March this year was medium to long term (MLT), which means that foreign exchange requirements for debt payments are spread out and more manageable. Meanwhile, 57.8 percent of MLT borrowings have fixed interest rates “which minimizes risks from possible interest rate increases.”

“Our debt composition is more or less balanced between public sector at 55.4 percent; and private sector, the remaining 44.6 percent,” Diokno said.

Diokno also maintained that the country’s external debt ratio remains one of the lowest among Asian countries.

“In fact, credit rating agencies affirmed their confidence in the Philippine economy. As you know, 39 countries have been downgraded, while 101 countries were rated with negative outlook revisions as of end-June 2020. This is a vote of confidence for the country, enabling the Philippines to access funding at favorable rates, even during this challenging time,” he said.