Policy rates to remain low — Diokno

THE Philippine central bank will keep benchmark interest rates low to support economic recovery amid a coronavirus pandemic, its chief said on Wednesday.

The Bangko Sentral ng Pilipinas (BSP) may also cut banks’ reserve requirements further to encourage lending and boost economic activity, Governor Benjamin E. Diokno said.

“It’s never too early at this time because the pandemic is not yet over. In fact our policy is that we will keep this policy for long until such time that we see economic growth at 6.5% to 7.5%,” he said during the BusinessWorld One-on-One online interview on Wednesday.

Economic managers expect gross domestic product (GDP) growth at 6.5%-7.5% this year, after GDP likely contracted by 8.5%-9.5% in 2020.

The BSP slashed rates by a total of 200 basis points (bps) last year, bringing down the overnight reverse repurchase, lending and deposit rates to 2%, 2.5%, and 1.5%. Some analysts, including Fitch Ratings, have said there is not much space left for further easing amid negative real interest rates as the BSP expects inflation to settle at 3.2% this year.

The BSP was one of the most aggressive in policy easing last year. The first rate cut was delivered in February, with the central bank citing uncertainty over the coronavirus disease 2019 (COVID-19) outbreak.

“I do not apologize for the speed at which the central bank acted. It calmed down the market and it reduced the borrowing costs for businesses and the National Government,” Mr. Diokno added.

He said there is still room for further cuts in banks’ reserve requirements this year.

“Whether we will cut further will depend on whether there’s still need for more liquidity but at the moment, there’s ample liquidity, so I don’t see the need for an additional cut in the reserve requirement at this time,” Mr. Diokno said.

Bank lending grew by less than a percent in November, the slowest in 14 years as lenders tightened credit standards.

This is despite BSP’s liquidity-infusing measures that have added about P2 trillion into the financial system, or equivalent to about 10% of the country’s gross domestic product.

“Maybe things will change once the economy starts recovering and with the speed of recovery, we may consider additional cuts in the reserve requirement,” the BSP chief said.

In 2020, big banks’ reserve requirements were slashed by 200 bps to 12%, while those for thrift and rural lenders were trimmed by 100 bps to 3% and 2%, respectively. Mr. Diokno has vowed to bring the ratio to a single digit by the end of his term in 2023.

Mr. Diokno, who is also a former Budget secretary, said the country is in a much better position than in the previous crises.

“I’ve seen that whenever we have a crisis in the Philippines, we run out of dollars because we have a huge foreign debt and because we do not want capital exiting the country, we raise interest rates,” he said.

The country’s gross international reserves as of end-November stood at a record $104.5 billion, enough to cover 11.2 months of imports and about 9.3 times the country’s short-term external debt based on original maturity.

“We’re now looking at around maybe $110 billion this year and even $120 billion next year — that is equivalent to close to a one-year import requirement,” Mr. Diokno said.

The BSP chief said the banking system remains stable, adding that they do not see any emerging problems based on data from individual banks and the industry.

The nonperforming loan ratio continued to rise for the 10th straight month to 3.81% as of end-November. This level is still manageable compared with its peak of 17.6% in 2002 due to the Asian financial crisis, Mr. Diokno said.

He said the passage of the Financial Institutions Strategic Transfer (FIST) bill would significantly cut bad loans. The measure, which will allow lenders to offload bad loans to asset management corporations, was approved by the bicameral conference committee in December and is awaiting the approval of President Rodrigo R. Duterte.

“It’s [FIST] just a fallback position. But we don’t see any situation worsening at this time. Even without the FIST bill, the banking industry can handle the crisis,” he said.

Banks’ capital adequacy ratio hovers around the 15% territory, which is well above the 10% minimum requirement of the BSP. Lenders also beefed up loan loss reserves by 65.4% to P352.733 billion in November.

The BSP is aiming to make 50% of payments in value and volume done digitally, but Mr. Diokno admitted a totally cashless society is not possible “within my lifetime.”

“But I can assure you maybe a coinless society by 2025 for sure, because that will be replaced by the QR Code PH, which we are pushing to get our national ID,” he said.

In 2019, the BSP launched the P20 coin, which now coexists with the bill version of the denomination. — Luz Wendy T. Noble

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