PH may find it difficult to return to pre-pandemic growth momentum

THE PHILIPPINES may find it difficult to return to its pre-pandemic growth momentum despite signs of recovery, according to the central bank chief.

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the Philippines had a strong recovery last year but still this was lower than what could have been if the pandemic did not happen.

“Our growth prospects are good. The negative side of it; our economy is significantly lower from what could have been if there had been no pandemic. It will take a long time before we are able to recover,” he said in an interview with The Banker. A video of the interview was uploaded on The Banker’s website.

The Philippine Statistics Authority (PSA) is set to release its first-quarter gross domestic product (GDP) data today (May 11).

A BusinessWorld poll of 23 economists conducted last week yielded a median GDP estimate of 6.1% for the first three months of the year.

If realized, this would be slower than the revised 7.1% growth in the previous quarter, and the 8% growth in the first quarter of 2022.

Last year, the economy grew by 7.6%.

“We are able to recover the output levels, but it’s very hard to recover the old growth path. The new growth path will be higher than 2019 but lower than what could have been,” Mr. Medalla said.

The economy contracted to 9.5% in 2020, reflecting the impact of the pandemic. Philippine GDP grew by 6.1% in 2019.

Mr. Medalla also said inflation was a lot harder to address than he initially thought, adding that above-target inflation could last for up to 18-19 straight months.

April marked the 13^th straight month that inflation breached the central bank’s 2-4% target range.

Headline inflation rose by an annual 6.6% in April, from 7.6% in March. It was the slowest in eight months or since the 6.3% print in August 2022.

The BSP has been aggressively tightening monetary policy, raising 425 basis points (bps) since May last year to 6.25%. Since then, supply shocks are beginning to wane and inflation is expected to be below 4% by the end of the year.

“Despite that, the economy remains strong and the increase in policy rate has not caused negative effects in financial stability. In other words, we are able to use our interest rate policy to totally address inflation,” Mr. Medalla said.

The BSP currently sees full-year inflation at 6% for 2023, before easing to 2.9% in 2024.

Meanwhile, Mr. Medalla noted the next policy move of the US Federal Reserve is another factor to consider when the BSP decides to cut rates.

“Despite the fact that our inflation is falling faster than the US, we may be more reluctant to cut [policy rates] because cutting may result in significant peso depreciation,” he said.

Mr. Medalla said the country has “more than adequate” dollar reserves that could help mitigate the volatility in the foreign exchange market.

When US Federal Reserve delivered four 75-bp hikes in a row last year, the peso slumped to a record-low of P59 against the dollar in October 2022. This “forced” the BSP to sell about 8% of the country’s dollar reserves, he said.

BSP data showed the country’s gross international reserves (GIR) fell to USD 93 billion in September last year. The BSP was able to replenish the dollar reserves this year as it stood at USD 101.51 billion as of end-April.

“Right now, unless there are large changes in US interest rates, I think we’re all right. Listening to what the Fed is saying, they will no longer have large changes in the policy rate and in fact they may pause after the last increase of 25 (bps),” Mr. Medalla said.

The US Federal Reserve delivered a 25-bp rate hike at its policy meeting last week. It has now raised borrowing costs by 500 bps since March last year, bringing the Fed fund rate to 5-5.25%. — By Keisha B. Ta-asan