European debt crisis could stall exit plan

MANILA, Philippines - Monetary authorities believe that Europe’s debt crisis and the pace of the global economic recovery could delay the continued implementation of the central bank’s exit strategy.

In an interview with reporters, Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said one of the factors being considered by the central bank’s Monetary Board in its policy decision is the strength of the global and domestic economic recovery.

“Of course if global recovery proves to be weaker and domestic recovery will also reflect the same uncertainty, then we will have to review the timing and the pace of our exit strategy,” Guinigundo stressed.

He pointed out that monetary authorities would await the release of the figures on country’s domestic output as measured by the gross domestic product (GDP) this week amid the mounting concerns about Europe’s debt crisis.

“If despite these unfavorable developments in theglobal financial markets, both global and domestic recovery proves to be more resilient than expected then we will continue implementing our exit strategy,” the BSP official said.

Socioeconomic Planning Secretary Augusto Santos earlier said the country’s GDP likely expanded between 2.9 percent and 3.95 percent in the first quarter of the year on the back of the recovery of the manufacturing sector as well as the strength of the services sector.

The growth in the first quarter was within and even stronger than the target of 2.6 percent to 3.6 percent set by the Cabinet-level Development Budget Coordination Committee (DBCC) for 2010 from 0.9 percent last year.

Another important data, Guinigundo said, the BSP would have to consider in its policy decision on June 3 would be the actual inflation rate for the month of May.

“You have a lot of things to consider, you have to consider global economy then domestic economy, amount of liquidity in the system, inflation before and inflation moving forward, and interest rate trends,” he added.

Inflation averaged 4.3 percent in the first four months of the year from 6.4 percent in the same period last year. The BSP expects inflation to hit 5.1 percent this year or within the target of between 3.5 percent and 5.5 percent.

The BSP’s Monetary Board slashed its key policy rates by 200 basis points to a record low four percent for the overnight borrowing rates and six percent for the overnight lending rates between December of 2008 and July of 2009 to cushion the impact of the global economic meltdown.

It has kept its rates at record lows for seven straight policy setting meetings since July last year but has continued to unwind crisis-related measures adopted in November of 2008 to release liquidity into the financial system to support domestic economic activity to survive the global economic meltdown.

However, the BSP lifted several liquidity-enhancing measures introduced starting November of 2008 to cushion the impact of the global financial meltdown last January 28 after it raised the rate on a short-term lending facility to four percent from 3.5 percent.

Other crisis-intervention measures that were tweaked included the reduction of the peso rediscounting budget from P60 billion to P40 billion and further to P20 billion; the restoration of the loan value of all eligible rediscounting papers to 80 percent from 90 percent of the borrowing bank’s credit instrument; and the revival of the non-performing loan (NPL) ratio requirement of two percentage points from 10 percentage points above the latest available industry average NPL for banks wishing to avail of the rediscounting facility.

Guinigundo said the BSP has yet to raise the reserve requirements for banks that were reduced to 19 percent from 21 percent during the height of the global financial crisis to release more liquidity into the financial system.

“There is nothing left except the reserve requirement and the policy rates. But you could also choose to keep the rate steady. So we have options available,” he added.