Massive fiscal response may be economy's only hope as pandemic exhausts BSP's tools

MANILA, Philippines — As central bankers reach the limits of their powers, a massive fiscal response may be the economy's only hope now to get out of the coronavirus hole, something the Duterte administration is reluctant to give.

Rising inflation would likely prevent the Bangko Sentral ng Pilipinas from giving additional monetary support once the powerful Monetary Board meets on March 25, Noelan Arbis, economist at HSBC Research, said in a report on Thursday. The key rate would likely be kept at historic-low 2%, he said.

This means "(f)iscal policy is perhaps the only lever that the country’s economy can rely on for the recovery," Arbis explained. 

As it is, HSBC's assessment echoed the sentiments of many analysts who are calling for a bigger fiscal response to the pandemic. This is because the BSP has been doing much of the heavy ifting during the pandemic with its agressive easing moves, albeit ineffective to boost credit growth as pandemic-hit banks become risk averse amid a rise in unpaid loans.

So far, these calls have fallen on deaf ears as economic managers choose "fiscal prudence" to protect the government's credit ratings and avoid financing a wide deficit with more debts. But the pressure to spend more just grows bigger as the country faces a renewed surge in infections and plans to further reopen the economy take a backseat, threatening the state's 6.5-7.5% growth target this year.

A third version of the Bayanihan bill, which has become the nomenclature for pandemic funding proposals, is gaining ground at the House of Representatives, where it is authored and supported by House Speaker Lord Allan Velasco himself.

But, as expected, economic officials are cool to Bayanihan 3, arguing that money is not a problem because both the 2020 and 2021 budgets are currently operating in tandem while the validity of second Bayanihan law was extended until June 30 amid a sluggish release of funds.

That said, Arbis believes a pick up in the spending slack would make a big difference for the economy. "Ensuring that these funds are fully disbursed and utilized in a timely manner would be critical to the recovery," he said.