BSP ready to counter impact of weak global economy

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) said it is ready to counter any impact of the still gloomy global outlook on the Philippine economy.

“Amid downside risks to global economic prospects on the horizon, contingency measures are in place to ensure adequate liquidity in the financial system, should capital flows reverse course. The BSP will maintain a comfortable level of international reserves to serve as added insurance against external shocks,” the central bank said in its Second Quarter Report on Economic and Financial Developments.

The central bank noted that global economic prospects remain bleak, continuing to challenge policymakers around the world.

“Overall global economic conditions remain fragile as risks of weaker growth in emerging economies have increased due to domestic capacity constraints, weak external demand and possibility of tighter financial conditions should the unwinding of unconventional monetary policy in the US lead to capital flow reversals,” the BSP said.

Geopolitical risks in the Middle East, particularly in Syria and Egypt, contribute to uncertainty as these could lead to oil supply disruptions resulting in higher oil prices.

The BSP noted, however, that while global growth projections were downgraded by the International Monetary Fund (IMF), that of the Philippines was revised upwards.

“The Philippines needs to keep the economy on a steady growth course, requiring policies largely aimed at sustaining domestic sources of growth to help compensate for any weaknesses in external demand. In this regard, close coordination between fiscal and monetary policies will help ensure that the macroeconomic environment remains supportive of sustainable and balanced growth,” the BSP said.

“The favorable fiscal position of the NG provides sufficient policy space to support projects that will continue to stimulate aggregate demand. Growth could further accelerate once the implementation of various infrastructure projects gain momentum.”

Sustaining social programs for health, education, housing, employment, and conditional cash transfers help promote inclusive and sustainable economic growth, the BSP pointed out.

The central bank said it is committed to maintaining price stability and ensuring a macroeconomic environment supportive of sustaining growth.

“The risks to inflation outlook remain broadly balanced, supporting the argument for keeping policy rates steady. Downside risks to the inflation outlook continue to persist owing to uncertainty over the strength of the global economy and its impact on international commodity prices. Meanwhile, the upside pressures could emanate from the likelihood of higher electricity rates and continued strong liquidity growth,” the BSP noted.

Inflation has so far averaged 2.8 percent in the eight months to August, below the BSP’s three to five percent target range. Philippine economic growth, meanwhile, stood at 7.6 percent in the first half of the year, one of the fastest in the region.

The strong economic growth and manageable inflation have enabled the BSP to keep key policy rates steady since the start of the year.

Aside from the bleak prospects in the global economy, the BSP noted the recent announcement of the US Federal Reserve could increase volatility in domestic markets.

The Fed on Sept. 18 surprised markets when it decided to keep its massive bond-buying policy in place after hinting it could start tapering stimulus back in May.

“The pronouncements by the US Fed prompted portfolio adjustments in global financial markets, which in turn, generated increased volatility in the equity, bond and foreign exchange markets. Such volatility could recur over the short term as these markets try to fully assess and price in the impact of unwinding of the US QE (quantitative easing) program,” the BSP said.

“Capital flow reversals, however, could ensue if underlying vulnerabilities in emerging markets are left unchecked.”

Emerging markets, which have been experiencing sell-offs since May, were given a boost by the US Fed action as investors looked for higher-yielding assets.