BSP chief flaunts strong Philippines growth prospects

MANILA, Philippines — The economic growth prospects of the Philippines remain strong, but could have been faster without the COVID-19 pandemic, Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla said.

In an interview with The Banker during the annual meeting of the Asian Development Bank in Incheon, South Korea, Medalla said the country’s gross domestic product (GDP) growth is seen slowing to between six to 6.5 percent this year after accelerating to 7.6 percent last year from 5.7 percent in 2021.

“It was a hard hit from COVID and we had a strong recovery last year. The economy grew by 7.6 percent and this year we expect it to grow by six to 6.5 percent, and maybe next year is not too far away, but more or less the same rates in 2024,” Medalla said.

Despite the headwinds brought about by elevated inflation and the aggressive rate hikes by global central banks led by the US Federal Reserve, the government retained its GDP growth targets at six to seven percent for 2023 and 6.5 percent to eight percent from 2024 to 2028.

“Our growth prospects are good. The negative side of it, our economy is significantly lower from what could have been if there had been no pandemic. It will take a long time before we are able to recover,” Medalla said.

The Philippines slipped into recession, contracting by 9.6 percent in 2020 as the economy stalled due to the imposition of strict COVID-19 quarantine and lockdown protocols.

“We are able to recover the output levels, but it’s very hard to recover the old growth path. The new growth path will be higher than 2019, but lower than what could have been for some time,” he said.

“An area we were surprised was inflation. It was a lot harder to push than we all initially thought. For instance, our target inflation rate is two to four percent and in the past, the longest number of consecutive months that it’s above target due to supply shocks was 15 months. Now, our forecast has been revised, it may last 18 to 19 months, but we’re getting there,” Medalla said.

Supply shocks, both foreign and domestic, have started to wane because of the BSP’s aggressive tightening cycle.

“Demand is no longer contributing to inflation. Meanwhile the supply shocks are beginning to wane and we expect inflation to be below four percent, which is the higher end of our target before the end of the year, and to average around three percent next year,” Medalla said.

Despite the aggressive rate hikes, the BSP chief said the economy remains strong and the increase in policy rate has not caused negative effects in financial stability.

Aside from rate adjustments and active intervention in the foreign exchange market, Medalla said the country has adequate gross international reserves (GIR) level to smoothen sharp peso movements as there is a need to maintain a healthy interest rate differential of about 100 basis points with the US Fed rates.

“We have significant, more than adequate reserves. So the problem is, every time the US policy rate becomes very close to ours – and very close is 100 basis points to 125 basis points – the peso tends to weaken,” Medalla said.

Another monetary tool that could be used, he added, is further lowering the level of deposits banks are required to keep with the central bank to free up additional funds to boost economic activity other than cutting interest rates.

“So, one way of stimulating the economy without reducing the difference between our policy rates (and) US policy rates, is to cut reserve requirements. So, we still have tools,” he said.

Earlier, S&P Global Ratings said the Philippines lost the equivalent of nearly three years of economic growth due to COVID-19 pandemic, making it one of the hardest hit in the region.