Bangko Sentral sees improved economy in second half of 2009

MANILA, Philippines - Bangko Sentral ng Pilipinas (BSP) officials said they expect the country’s economic performance to improve during the second half of this year.

The BSP has reduced its policy rates by a total of 200 basis points since December last year to bring down borrowing costs and encourage economic activities.

BSP Deputy Governor Diwa Guinigundo told reporters that the BSP had no clear indications of how the economy performed in the second quarter but prospects appear better for the second half of the year.

“Based on the fiscal numbers in January to May, while revenues declined by 12 percent, expenditures increased by around 16 percent,” Guinigundo said. “Now assuming that all of those were actually utilized and the cash position of the government should show that, then we should be looking at better public spending and therefore, higher gross domestic product (GDP).”

Guinigundo said it appears that the economy is not using up the liquidity so far released into the system but said the pattern of utilization indicates some groundwork for economic turn-around.

“It does look like the economy is not using all the liquidity even if loans are going up,” he said. “But that is because a lot of companies that are borrowing are using the funds to clean up their balance sheets. They do get loans but they are not necessarily used for new economic activity.”

According to Guinigundo, this was an appropriate response for companies in the midst of an economic downturn that could translate into lower demand for products and services.

“You have a very uncertain economic climate, very challenged,” he said. “So if I were to take advantage of the lower cost of borrowing, I would improve my balance sheets first before expanding my operations.”

“So once I am able to cover this priority operation in the balance sheets and paid off some old loans, then I can turn my attention to expanding my operations or probably sustaining my level of operations before,” he said. “To me, that is sort of repairing what is broken at the height of the crisis and going for a more durable and sustainable kind of economic performance. That is part of the adjustment.”

Guinigundo said its recent survey of banks showed that this was exactly what happened.

“So as we move on, the global economy shows continued improvement, I hope by the second half, we should see better signs of economic growth,” he said. “Inflation is lower, so we can support economic growth.”

The BSP’s key policy rates are now down to historic lows with the overnight lending rate at four percent as monetary officials cut its policy rates by another 25 points last week.

Previously, the lowest overnight lending rate was 4.125 percent recorded on May 15, 1992.

The BSP said its latest inflation forecast indicated that the average rate is expected to drop to 3.3 percent for the whole of 2009, lower than the previous forecast of 3.4 percent.

The BSP said it decided to reduce central bank rates based on the latest baseline forecasts showing average inflation keeping within the target ranges for 2009 and 2010.