Philippine Economic Outlook Headwinds, Policy Responses and Prospects

Philippine Economic Outlook

Headwinds, Policy Responses and Prospects - March 30, 2023

Mr. Amando Tetangco, Jr.

Honorary Fellow and Former BSP Governor

Official banner (edited by: Angela Mae Juan)

The COVID-19 pandemic generated one of the most significant economic shocks in recent years. It presented itself as one of the country's biggest challenges, which impacts the economy – leading to business closures and employment losses. Compared to the 2008 Global Financial Crisis, the pandemic's impact on the Philippine economy is more severe.

The COVID-19 pandemic's distinctive economic disruptions prompted the government and central bank to take exceptional fiscal and monetary policy actions. It is mentioned that the government launched the Four-Pillar Socioeconomic strategy to combat COVID-19. Specifically Pillar 1, as a support for vulnerable groups in case of emergency; Pillar 2, marshaling resources against COVID-19; Pillar 3, monetary responses to keep the economy afloat, and lastly; Pillar 4, a program to create jobs and support growth. Additionally, congress passed a bill, the "Bayanihan to Heal as One Act" (Bayanihan I and II), designed to boost the Philippine economy's resilience and expedite recovery.

The Banko Sentral ng Pilipinas (BSP) also responded to the COVID-19 pandemic using extraordinary liquidity measures. In order to relieve liquidity constraints and prevent the domestic economy from suffering long-term damage, the BSP used monetary instruments. Particularly "provisional advances, remittance of dividends to the national government, and purchases of government securities in the secondary market" as stated by Mr. Tetangco.

In light of the pandemic and increasing inflation, the BSP tightened monetary policies. As of April 2022, the BSP provided the financial system with around PHP2.2 trillion in liquidity, equivalent to 11.2% of the nominal GDP in 2021. These liquidity measures kept the economy moving, which in turn helped mitigate the effects of the COVID-19 pandemic. Furthermore, due to economic contractions and increased spending during the pandemic, the country showed a slightly higher debt-to-GDP ratio as compared to other ASEAN countries, reaching 60.9% at the end of 2022. While the trend in the exchange rate in the Philippines aligns with those of other nations.

Inflation expectations play a significant role in monetary policy. In the Philippines, inflation expectations have increased due to persistently high inflation. The 2022 inflation average is at 5.8%, which exceeded the government target range of 2 to 4 percent. The Philippines along with other nations, reported an inflation expectation of above-target range. Anticipated inflation rate is within the target range of 2 to 4 percent in the fourth quarter of 2023 and to stabilize during the following year. Thus, the BSP will continue to prioritize re-establishing price stability and modifying monetary conditions as needed.

In terms of recent bank failures, the BSP stated that the "Philippine banking system remains safe and sound." The country demonstrates resilience in the face of the pandemic and will remain strong in the face of ongoing market volatility in the global market. While the COVID-19 pandemic's effect is more intense than the 2008 Financial Crisis, resulting in negative GDP growth and a sharpest contraction of 16.9%. Due to the "whole-of-government" approach, quarantine, and vaccination measures, the country shows a rebound starting from Q2 of 2021.

The macroeconomic assumptions of the Development Budget Coordination Committee (DBCC) show a prospect of 6 to 7 percent growth of real GDP for this year, while inflation in 2023 will be, on average, 6%. Crude oil price is expected to decrease as the demand begins to soften.

To conclude, Mr. Amando Tetangco, Jr., as honorary fellow and former BSP Governor, highlights the current expectations in the economy for 2023 in the Philippines. It is mentioned that policy measures made during the previous crisis serve as the cornerstones of a more robust financial system and offer valuable lessons that helped resolve issues throughout the following crises. Although the post-pandemic recovery is progressing, in terms of GDP growth, the Philippine economy performed strongly in 2022 and continues to exhibit bright prospects. However, there are still several issues to be addressed and many uncertainties and instabilities in the near future. BSP cautioned to pay attention to economic headwinds.