PRICE increases of major commodities slowed down further in March mainly due to the potential adverse impact of the coronavirus disease (COVID-19) on the domestic and global economic environment.

The Philippine Statistics Authority (PSA) yesterday said inflation decelerated further to 2.5 percent in March 2020, from 2.6 percent in the previous month.

Inflation in March a year ago was higher at 3.3 percent.

PSA said the slowdown in inflation in March 2020 was primarily due to transport whose index dropped at an annual rate of 1.8 percent.

Slower annual increments in the indices of alcoholic beverages and tobacco at 18 percent; and housing, water, electricity, gas and other fuels at 1.1 percent, also pushed down the inflation during the month.

On the other hand, higher annual increases were noted in food and non-alcoholic beverages; furnishing, household equipment and routine maintenance of the house; communication; and recreation and culture.

Excluding selected food and energy items, core inflation slowed down further to 3 percent in March 2020. In the previous month, core inflation was at 3.2 percent, and in March 2019, 3.5 percent.

The March figure was within the forecast range of the Bangko Sentral ng Pilipinas (BSP) of 2 to 2.8 percent.

Benjamin Diokno, BSP governor, said the latest inflation outturn is consistent with the BSP’s prevailing assessment that inflation is “expected to be benign over the policy horizon due to the potential adverse impact of COVID-19 on the domestic and global economic environment.”

During its monetary policy meeting last week, the Monetary Board noted that the balance of risks to the inflation outlook now leans toward the downside for both 2020 and 2021.

“The uncertainty over the strength and duration of the pandemic poses significant downside risks to aggregate demand,” Diokno said.

The Monetary Board noted that while the enforcement of quarantine measures could help in slowing the spread of the virus, the resulting disruptions to industries and private spending are likely to reduce economic growth in the near term.

“COVID-19 has likewise dampened prospects for the global economy, which could negatively impact tourism, trade, Overseas Filipino remittances, and foreign investments,” Diokno said.

“The BSP recognizes that the health and safety of the Filipino people remains the government’s foremost priority. In this regard, the BSP reiterates its support for urgent and carefully coordinated measures with other government agencies to alleviate the spillover effects of the pandemic on people and firms, with a view toward preventing any long-lasting economic and social damage,” Diokno added.

Recognizing the negative effects brought by COVID-19 to the Philippine economy, the Monetary Board released a number of monetary tools starting with the reduction of the key rates of the BSP by 50 basis points (bps).

Central banks lower interest rates to encourage borrowing and investing, thereby possibly stimulating economic growth. But this may hasten inflation.

Rates are raised, meanwhile, when there is too much growth. Higher borrowing rates slow inflation and return growth to more sustainable levels.

The Monetary Board also authorized the time-bound, temporary relaxation of BSP regulations on compliance reporting by banks, calculation of penalties on required reserves, and single borrower limits.

Earlier, the BSP arranged for the purchase of government securities from the Bureau of the Treasury under a repurchase agreement in the amount of P300 billion.

It also reduced the reserve requirement ratio of big banks by 200 bps and policy rate by 50 bps and approved a temporary reduction in the term spread on rediscounting loans relative to the overnight lending rate to zero.

In addition to the monetary policy actions that have been announced, Diokno said the BSP stands ready to deploy all available measures in its toolkit as it continues to assess the impact of the global pandemic on the domestic economy.

CREDIT rating agency Moody’s Investors Service yesterday changed the outlook for Philippine banks to negative from stable on perceived weaker operating environment as a direct result of the enhanced community quarantine in Luzon.

In a statement, Moody’s said a shutdown of the Luzon island, which includes Metro Manila, “will negatively impact the near-term economic outlook for the Philippines, raising asset risks and increasing pressure on profitability for banks.”

“The coronavirus outbreak will result in a material slowdown in economic growth in 2020. Large parts of the country are under a lockdown, which will severely constrict economic activity,” Moody’s said.

It noted that with the number of confirmed coronavirus cases increasing, restrictions on activity “may remain in place for a prolonged period, further weakening the economic outlook.”

Moody’s also stressed remittances may decline due to disruptions in the Middle East and the United States, the two largest origins of remittances to the Philippines.

Moody’s maintained that key asset risks for Philippine banks stem from concentrated exposures to large domestic conglomerates.

“These business groups may withstand immediate disruptions but if the situation persists for a prolonged period, debt payment capacity of weaker companies will deteriorate materially. Most conglomerates have significantly increased investment in the past few years, which has resulted in growth in their debt,” Moody’s said.

“Because banks’ loans are heavily concentrated on them, even a default by one of them will weaken asset quality in the overall banking system,” it also said.

“The quality of loans to small and medium-sized enterprises (SMEs) and retail borrowers will weaken because they have limited buffers against stress,” Moody’s added.

Philippine banks’ credit costs are also seen to increase as asset quality weakens.

“Philippine banks credit costs have been among the lowest in Asia, benefiting from healthy economic conditions, and this has supported profitability despite low pre-provisioning profit as a percentage of assets compared to banks in other emerging markets in the region,” Moody’s said.

However, Moody’s said capitalization of Philippine banks will be stable at strong levels even as growth in both retained earnings and loan growth slows.

“The system is largely deposit funded, and risks to the stability of banks’ deposit bases are low. Further, the central bank has been very proactive in providing liquidity to the system to prevent any near-term liquidity stress that can result from a sudden change in economic conditions,” Moody’s said.

“We expect the government to prioritize systemic stability and support for rated banks when needed. Reflecting this, we continue to incorporate a very high level of government support in the ratings of the three largest banks and a high level of support for smaller banks,” it added.

Moody’s also changed the outlook for the banking systems on 11 other Asia-Pacific countries — Australia, China, India, Indonesia, Korea, Malaysia, New Zealand, Singapore, Taiwan, Thailand and Vietnam.

It has maintained its negative outlook on the banking systems of Hong Kong and Japan.

THE Bangko Sentral ng Pilipinas (BSP) yesterday said it sees inflation for March to settle within the 2 to 2.8 percent range with a point inflation projection of 2.4 percent.

This is lower than the February inflation of 2.6 percent and below the midpoint of the government’s target range of between 2 and 4 percent.

Benjamin Diokno, BP governor, said the sharp decline in the prices of petroleum products due to the significant fall in global crude oil prices contributed to the downward price pressures for the month.

As of March 25, the price of Dubai crude was down to $22.51 per barrel. It averaged at $85 per barrel in 2018.

“In addition, the prices of selected food products remained broadly stable in March due to adequate supply and favorable weather conditions along with the price freeze imposed on basic necessities by the Department of Trade and Industry (DTI) and the Department of Agriculture (DA),” Diokno said.

Meanwhile, Diokno said electricity rates in Meralco-serviced areas were slightly higher during the month.

“Going forward, the BSP will continue to monitor economic and financial developments, and stands ready to implement appropriate policies in support of its primary mandate of price stability conducive to balanced and sustainable economic growth,” Diokno stressed.

Price increases of major commodities is expected to slow down further this year as the ongoing health and quarantine measures to contain the coronavirus disease (COVID-19) is expected to dampen domestic demand.

During the last monetary policy stance meeting, the Monetary Board said inflation is projected to average at 2.2 percent for 2020 and 2.4 percent for 2021.

This is lower than the previous forecasts of 3.0 percent for 2020 and 2.9 percent for 2021.

“The COVID-19 outbreak is seen as having a negative impact on global manufacturing and trade, and the ongoing health and quarantine measures to contain it could likely dampen domestic demand, thus contributing to reduced inflation pressures in the coming months,” Diokno said.

Recognizing the negative effects brought by COVID-19 to the Philippine economy, the Monetary Board released a number of monetary tools starting with the reduction of the key rates of the BSP by 50 basis points.

Central banks lower interest rates to encourage borrowing and investing, thereby possibly stimulating economic growth. But this may hasten inflation.

Rates are raised, meanwhile, when there is too much growth. Higher borrowing rates slow inflation and return growth to more sustainable levels.

In addition, the Monetary Board authorized the time-bound, temporary relaxation of BSP regulations on compliance reporting by banks, calculation of penalties on required reserves, and single borrower limits.

The Monetary Board also approved a temporary reduction in the term spread on rediscounting loans relative to the overnight lending rate to zero.

Diokno maintained that although inflation expectations remain firmly anchored within the full-year target range of between 2 and 4 percent, he said the decision was meant to combat the negative effects of COVID-19 to the general economy.

THE Bankers Association of the Philippines (BAP), the lead organization of universal and commercial banks in the country, yesterday told its members to continue taking “extraordinary steps to continue to serve banking customers.”

“As we move into week 3 of the ECQ (enhanced community quarantine), the impact of the crisis on the economy, including our corporate and consumer borrowers, is becoming more apparent,” said Cezar Consing of the Bank of the Philippine Islands and current BAP president.

BAP is asking its member banks to maintain reasonable lending rates, “with the objective of trying to keep such rates as close as possible to pre-ECQ  levels.”

Banks are also told to keep digital channels open and maintain a level of branch presence that allows for the execution of transactions that cannot be performed digitally.

Banks should also ensure availability of cash in their open branches and the majority of ATMs.

“The Bangko Sentral has reduced both the policy rate and reserve requirements, and has taken steps to ease the regulatory burden borne by banks.  The national government, in turn, has passed the Bayanihan Act, which gives the executive branch extraordinary powers to address the current crisis.  In turn, we are asking our banks to contribute to stable and liquid financial markets,” Consing said.

When the ECQ was announced last week, BSP enabled continued access to banking institutions, and advocated that banks extend the greatest possible help they can to serve “not just our economy, but also the Filipino people.”

It has also reduced the reserve requirement ratio of big banks by 200 basis points and policy rate by 50 basis points.

BAP’s membership consists of 45 member banks–21 of which are local banks and 24 are foreign bank branches.

THE Bangko Senral ng Pilipinas (BSP) yesterday reiterated that it has not issued any instruction to close or suspend remittance services in the country despite the enhanced community quarantine in Luzon to combat the coronavirus disease.

In a statement, BSP said it continues to provide payment and settlement system support to banking and financial market transaction, and maintained that banks are operational.

“Banks, as well as remittance companies, are operating to serve the needs of the public even during the enhanced community quarantine,” the central bank said.

The BSP also said it has not changed the country’s exchange rate policy, and when warranted, it is ready to provide dollar liquidity and ensure that legitimate demands for foreign currency are satisfied.

“At present, the country’s exchange rate policy supports a freely floating exchange rate system whereby the BSP leaves the determination of the exchange rate to market forces,” Benjamin Diokno, BSP governor, said.

He stressed the central bank is ready “to ensure order and temper destabilizing swings in the exchange rate.”

“We have adequate reserves of more than $87 billion to perform our mandate of maintaining the international stability and convertibility of the Philippine peso. When warranted, the BSP will provide dollar liquidity and ensure that legitimate demands for foreign currency are satisfied,” Diokno said.

He explained that smoothening out the exchange rate volatility is “critical in performing our primary mandate of price stability since fluctuations in the exchange rate tend to feed directly into domestic prices of imported goods and services, and indirectly, through the prices of goods and services that use imported inputs.”

Section 65 of Republic Act No. 7653, as amended by Republic Act No. 11211, states that “In order to maintain the international stability and convertibility of the Philippine peso, the Bangko Sentral shall maintain international reserves adequate to meet any foreseeable net demands on the Bangko Sentral for foreign currencies.“

The peso yesterday closed at P51.14 to a dollar, 0.24 centavos lower than the previous day’s close of P50.90.