However, a full recovery to the same level of output as that prior to the coronavirus pandemic will not likely happen until 2022, the economist said.
The country attained a P19.37-trillion gross domestic product (GDP) in 2019. Coming from a lower base assumed by BPI for this year, a 7-percent growth rate will only bring the country’s total output to about P18.4 trillion next year.
Neri issued the research note after the Bangko Sentral ng Pilipinas (BSP) decided to keep its overnight borrowing rate steady at 2 percent, as expected by most analysts.
The BSP has so far slashed its key interest rates by a total of 200 basis points this year, on top of the 200 basis points shaved off its reserve requirement on banks.
“With inflation inching higher, cutting the policy rate at this time would pull down real interest rates further to negative territory,” Neri said.
The country’s November inflation rose at a faster pace of 3.3 percent year-on-year from 2.5 percent year-on-year in October, as basic food prices shot up due to the recent spate of typhoons.
Neri said the BSP had already done so much to support the economy, adding that additional rate cuts might only produce marginal benefits.
“Interest rates have been low for many months, and yet loan growth continues to slow down and may soon stop growing. Cutting interest rates does not address the underlying problem or the main reason why loan growth is deteriorating,” he said.
“The lack of expansion activities on the part of the private sector owing to demand uncertainty has dampened the demand for loans. Businesses have been conservative in their capital expenditures given the decline in consumer demand. Expanding their operations will not yield acceptable returns if consumer spending continues to be weak,” he explained.
Negative real interest rates are difficult to reverse as policy makers tend to overreact to volatility by the time policy needs to be reversed, Neri said, reiterating that low rates for an extended period could also lead to property, asset bubbles and more income inequality.
Moreover, Neri said negative real interest rates would affect the profitability of financial institutions, making it difficult to maintain the capital they needed for financial stability.
This year, the economist sees the country’s inflation settling at an average of 2.6 percent but moving higher at 2.9 percent in 2021, with upward pressure seen from oil and swine flu.
Philippine inflation will stay within the 2 to 4 percent target of the BSP in the coming months, but there are risks to this outlook, Neri said. If oil moves higher to $50 per barrel next year, Neri said this would translate to a 200 percent year-on-year increase in April and then 20 percent year-on-year increase in the succeeding months.
“Meanwhile, flood and swine flu-related risks remain elevated and can keep us at negative real yields for the policy rate. Should this happen we might see a scenario where the BSP is compelled to hike rates at a time the economy continues to see year-on-year GDP declines. However, if fiscal stimulus can complement monetary easing, BSP can hike rates with minimal interruption on the growth recovery, and may limit the damage on markets especially when carried out with credibility,” he said.
On the labor market, Neri sees the country’s jobless rate easing gradually to 7 percent of the labor force in 2021 from 8.7 percent in October 2020.
With the economy slowly reopening, the economist expects imports to recover further in the coming months in line with the expected improvement in local demand. Hence, US dollar demand is seen to pick up, bringing the peso-dollar exchange rate closer to the 49 level by early 2021 from low 48 levels at present.
“A risk to this outlook is government underspending, especially in infrastructure. With businesses still struggling, the lack of fiscal support and public construction may stall the recovery and dampen the demand for capital goods,” he said.
Meanwhile, a decline in remittances amid the recession in other countries—such as the threat of a double dip recession in the Eurozone on renewed lockdowns—may exert additional pressure on the local currency, Neri said.
Published : January 04, 2021
By : Inquirer Business