Benjamin E Diokno: 2022 Philippine economic outlook -
broadbased economic recovery and risks
Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the Young Presidents' Organization (YPO) Philippines Inc. Event,
Manila, 2 March 2022.
* * *
Good day, everyone. I would like to thank YPO Philippines for inviting me to this event to share
updates on the Philippine economy.
I will cover the following topics in my presentation:
First, I will start with a discussion on the year that has been.
Next, I will discuss the BSP's outlook on domestic output and inflation, as well as our
assessment of the risks and challenges for the year ahead.
I will conclude with some key takeaways and the BSP's way forward.
With the spread of more virulent COVID-19 variants, cases of COVID-19 continued to surge
worldwide.
Accordingly, governments had to reimpose border restrictions and lockdown measures to
protect people from contracting COVID-related illnesses.
Expectations of a faster-than-expected recovery gradually abated as prolonged lockdown
measures and stringent quarantine restrictions weighed on the growth prospects of select
economies.
Private economists surveyed by Bloomberg repeatedly downgraded their 2021 GDP growth
forecasts for most emerging markets and developing economies, as COVID-related
uncertainties moderated optimism for a swift global recovery.
Despite expectations of a slowdown in global economic growth, the Philippines showed signs of
improved economic activity in 2021.
During the fourth quarter of 2021, the economy grew 7.7 percent, bringing the full-year growth to
5.6 percent.
The economy's growth trajectory may further improve due to the projected expansion of exports
in 2022. Goods exports grew by 16.0 percent in the first three quarters of 2021.
The share of electronic products to total exports continued to increase in 2021 as global
digitalization efforts increased the demand for semiconductors and other electronic components
in 2021.
The BSP projects goods exports to have grown by 16.0 percent in 2021 amid rising global
demand for tech products, such as semiconductors and other electronics.
For 2022, exports are expected to grow by 6.0 percent and imports by 10.0 percent. This reflects
the expected continued rebound in world trade and improvement in domestic consumer
demand.
Employment indicators likewise improved in the third quarter of 2021. The unemployment rate
dropped to 6.6 percent in December 2021, down from a peak of 17.6 percent in April 2020.
Despite the notable improvements in total employment, granular data indicates that the quality of
jobs has yet to fully recover, as recent gains were mostly in low-skilled and less remunerative
occupations.
In an encouraging sign, inflation further eased in January 2022 to 3 percent based on 2018 CPI
series. This supports the narrative that inflation is on a downward trajectory.
Moving now to financial system indicators, we continue to see overall credit conditions providing
ample support to economic activity.
Bank lending appears to have turned the corner in recent months. Bank lending grew anew by
4.6 percent year-on-year in December 2021 from 4.0 percent in November.
Lending activity continues to gain traction amid businesses' optimistic outlook due to the
continued rollout of vaccines and easing restrictions during the latter part of 2021.
The consecutive quarters of positive year-on-year economic growth point to continued economic
recovery, but the BSP maintains its position of keeping an accommodative policy environment to
ensure the sustainability of this recovery. The BSP observed that economic growth appears to
be gaining traction amid improved mobility and sentiment due to the calibrated relaxation of
quarantine protocols and continued progress in the government's vaccination program.
Nevertheless, given the ongoing recovery, the priority of the BSP continues to be maintaining
policy support for the domestic economy and avoiding a premature exit from pandemic-relief
response measures to prevent long-term economic scarring.
The prevailing policy stance is also supported by a manageable inflation outlook and anchored
inflation expectations.
Based on our latest baseline forecasts, which include the potential impact of higher crude oil
prices, inflation is seen to settle at 3.7 percent in 2022 and 3.3 percent in 2023, well within the
government's target range of 2 to 4 percent.
Similarly, results of the BSP's survey of private sector economists conducted in December 2021
showed steady mean inflation forecasts at 3.5 percent and 3.1 percent for 2022 and 2023,
respectively.
However, risks to the domestic inflation outlook appear to be slightly on the upside for 2022 but
are broadly balanced for 2023.
Major upside risks over the near term include a further increase in global non-oil prices due to
strong global demand amid persistent supply chain bottlenecks, potential impact of continuing
constraints on the supply of key food items, and petitions for jeepney fare hikes due to higher oil
prices.
Overall, the Philippines remains in a sound position as its macroeconomic fundamentals
underpin the economy's recovery in 2022. The Development Budget Coordination Committee
expects the economy to grow by 7.0 to 9.0 percent in 2022.
Risks and challenges remain as the emergence of highly transmissible COVID-19 variants
delays the normalization of economic activities.
Nonetheless, the timely imposition of appropriate pandemic-related measures is necessary to
control COVID-19 surges and arrest the spread of the Omicron COVID-19 variant. The continued
vaccination efforts and improving healthcare interventions in managing severe cases should
usher the eventual transition of COVID-19 from pandemic to endemic.
On the external front, we are cognizant that ongoing policy normalization by major central banks
could heighten volatility in financial markets. Some central banks of major advanced economies,
including the Bank of Korea, Reserve Bank of New Zealand, and Bank of England, have already
raised key interest rates.
While the shift to policy normalization of advanced economies could affect capital flows and lead
to financial market volatility, this also reflects opportunities for economies like the Philippines in
terms of increased trade activities.
Nevertheless, the BSP remains steadfast in dealing with such spillover effects through our
expanded policy toolkit.
Although the normalization of the currently ultra-accommodative monetary policy in advanced
economies could lead to a rebalancing of global capital flows and depreciation of emerging
markets' currencies vis-à-vis the dollar, the Philippines is in a favorable position to navigate
tightening global financial conditions given the manageable inflation environment and sufficient
external buffers.
The current level of gross international reserves - at USD108.45 billion - is more than sufficient
to withstand adverse external shocks.
At the same time, structural flows from remittances, IT-BPM revenues, and foreign direct
investments are expected to further bolster the country's external payments position.
Meanwhile, the BSP's adherence to a market-determined exchange rate system and our
macroprudential measures will continue to allow us to curb excessive FX volatility and respond to
instability in financial markets. Should external developments bring about risks to the domestic
outlook for inflation and growth, the BSP stands ready to calibrate policy settings as needed.
In closing, allow me to share three key takeaways:
The spread of more transmissible COVID-19 variants weighed on the global economy's
recovery momentum in 2021 as governments reimposed more stringent quarantine
restrictions.
Global economic growth is expected to pick up although risks emanating from tightening
financial conditions and emergence of vaccine resistant COVID variants pose downside
risks to economic recovery.
The BSP remains committed to maintaining accommodative policy settings for as long as
necessary to ensure a durable path to economic recovery.
Bright spots of recovery have started to emerge. We are hopeful that our whole-of-government
approach will help our country recover from this crisis stronger than ever.
Thank you and mabuhay ang YPO Philippines!