MANILA, Philippines — On the same Friday the central bank announced that so far P1.9 trillion had been released to the economy by its easing, P60 billion flew back to seek refuge on its vaults.
The number would have hit a larger P109.2 billion if not for the Bangko Sentral ng Pilipinas (BSP) capping bids for its own 1-month securities, which essentially give banks and other financial institutions the opportunity to earn interest by just parking their funds. Meanwhile, out in the broader economy, BSP’s trillion-peso bazooka has yet to deliver on its mission of recovery.
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The current phenomenon of money going in and out of BSP highlights the limits of a central bank that has stopped at nothing to counter the lasting economic impact of the pandemic, and demand-killing movement prohibitions that go with it.
“The best way to gauge if all these funds are helping in the recovery efforts is to see the impact on lending, as this is the point of contact between financial institutions and the greater economy,” said Nicholas Antonio Mapa, senior economist at ING Bank in Manila.
“As it is, BSP’s liquidity infusion has largely remained in excess liquidity, measured by the amount of money parked with the BSP,” he said in an e-mail.
Indeed, rising amount of funds bidding for BSP’s own bonds, since they were launched last month, show the central bank has done its part on reviving an economy that entered recession in the second quarter. Bets were even high enough to push down bond rates to an average of 1.8487%, way below inflation of 2.5% as of September.
But money is only as good as how it is used, and in the current health crisis, resources thrown by BSP to the economy are not exactly getting maximized, no thanks to banks too hesitant to lend out while unsure of getting their money back during a crisis.
Outstanding loans by big banks rose a measly 4.6% year-on-year in August, the slowest in over 13 years. The number rises a little to 4.9% as of end-July when smaller savings and rural banks are considered. Steven Cochrane, chief Asia Pacific economist at Moody’s Analytics, said in an e-mail “bank lending has been modest even though banks are fairly well capitalized.”
Lack of fiscal push?
BSP itself recognized the challenge of pushing banks to lend out to consumers and businesses, but at the same time repeatedly said monetary policy can only do so much to address the problem. Fiscal policy should also do the heavy lifting, said Patrick Ella, economist at Sun Life of Canada (Philippines) Inc.
“Until there is a fiscal stimulus, they (BSP) have no choice but to remain aggressively easing and supporting liquidity,” Ella said in an e-mail.
But government so far has dragged its feet in helping crisis-stricken firms and consumers. A huge part of that was a conscious decision to remain restrained on spending to avoid incurring debts while revenues are declining. Another however is that state agencies simply are not spending. In August, spending by government offices shrank 0.7% on-year, the first time they did since June 2019 and it happened during a pandemic.
The government is spending on a lot of things, but at least for programs concerning the coronavirus disease-2019 (COVID-19) pandemic, P389.22 billion had been released to agencies like the social welfare, transport and health departments as of September 14. The amount came from the existing P4.1-trillion national budget this year.
Revenues have shrunk 7.7% as of August, but economic officials have also borrowed $9.9 billion or around P475 billion in foreign loans and grants for COVID-19 response as of October 2, indicating that even with government, funds are not the problem.
In fact, BSP itself has lent out to government to the tune of P540 billion this month, payable until yearend. That amount formed part of the total liquidity funneled by BSP through rate and reserve cuts, which is now equivalent to 9.6% of economic output.
“In this early stage of economic recovery, the role of fiscal policy may have a more direct and rapid impact on households that have lost jobs or income, and on small- and medium-size enterprises that struggle under weak demand and have little available capital,” Cochrane said.
Whatever it takes
For BSP Governor Benjamin Diokno, himself a former Cabinet member under the Duterte administration, he wouldn’t mind doing more but fell short of calling the government to do its part. “The BSP is working hand-in-hand with the National Government to ensure that the coronavirus pandemic will leave little permanent scar on the Philippine economy and its people,” he said in a Viber message.
But economists are uncertain whether further money from the BSP would make any difference.
“We can liken the economic recovery to replanting a field that was once full of crops. The BSP’s role is that of the engineer, who has laid the groundwork for a quick replanting: building irrigation and pumping the field with fertilizer. The soil is now rich, fertilized and well-irrigated, which all help crops grow quickly,” Mapa said.
“However, unless we have the farmer come in and sow the seeds, we won’t likely have any crops to harvest in the near term no matter how much water flows through the irrigation or no matter how much fertilizer is pumped into the field,” he said.