Gradual pullout of monetary measures vs COVID-19 urged

MANILA, Philippines — Policymakers should be careful with the withdrawal of monetary policy easing measures as the COVID-19 pandemic gradually comes under control, according to the ASEAN+3 Macroeconomic Research (AMRO).

In a report titled “ASEAN+3 economies’ monetary policy in the pandemic and way forward,” AMRO said the withdrawal of support measures should only start when there is evidence of a sustained economic rebound.

“To avoid a cliff effect on the economy, the exit from the accommodative policy stance and debt relief measures and the phasing out of unconventional policy measures should start when there is clear evidence of a sustained economic recovery,” AMRO said.

The Bangko Sentral ng Pilipinas (BSP) has been doing the heavy lifting to soften the impact of the pandemic on the economy, unleashing P1.9 trillion into the local financial system through various COVID-19 response measures.

Among these measures are the 175-basis points interest rate cuts, the lowering of the reserve requirement ratios for banks, the P540-billion provisional advance to the national government, the P300-billion repurchase agreement with the Bureau of the Treasury settled last September, and the purchase of government securities in the secondary market.

“Moving forward, policymakers should pay attention to challenges in the post-pandemic environment arising from reduced economic resilience, lower potential growth, and widening economic inequality,” AMRO said.

According to AMRO, these challenges need to be addressed by strengthened economic reform, improved social safety nets and skillful macroeconomic management.

Economic managers expect the country’s gross domestic product (GDP) bouncing back with a growth of 6.5 to 7.5 percent this year after contracting by 4.4 to 6.6 percent this year.

The country slipped into recession with a record GDP contraction of 16.5 percent in the second quarter as the economy stalled when Luzon was placed under enhanced community quarantine in mid-March to curb the spread of the virus.

Although there is scope for further easing, AMRO said countries that have external constraints and elevated financial imbalances should be cautious in doing so.

“Financial relief measures, time-bound regulatory forbearance, and debt moratorium can be extended to help hard-hit households and businesses to provide income and liquidity support and avoid an abrupt surge in bankruptcy,” it said.

Likewise, AMRO said unconventional monetary policies should be carefully considered as part of the monetary policy toolkit, given the narrowing policy space.

“However, the design and implementation of these tools, especially for emerging economies, should be done cautiously to minimize potential side effects. Should the country encounter destabilizing capital outflows, capital flow management measures can be cautiously deployed,” AMRO said

It also said the usage of unconventional policies should be temporary, taking into account the potential negative impact on investors’ confidence.

BSP Governor Benjamin Diokno earlier said the Philippine government has demonstrated swiftness, decisiveness, and aggressiveness in combatting the socioeconomic repercussions of the pandemic.

“We committed to lay the groundwork for a post-COVID economy that is well prepared and better-equipped to transition toward – and surpass its past achievements under – the new economy a stronger, more technologically savvy, and inclusive economy,” Diokno said.