Benjamin E Diokno: Tracking the Philippines' economic recovery
Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the 16th J.P. Morgan Philippine Conference 2022, virtual, 26 January
2022.
* * *
Good day, everyone. I hope you are all safe and well. I thank JP Morgan for inviting me to speak in
this virtual event.
Despite the challenges of the ongoing crisis, the Philippine economy remains on the strong
recovery path.
Allow me to give you an overview of the Philippine economy from the lens of the Bangko Sentral
ng Pilipinas (BSP).
The gradual reopening of economies and progress in vaccine rollout, 2021 shaped up to be a
year of global recovery.
However, the global recovery came with challenges, including sluggish and uneven distribution of
vaccines. The emergence of new COVID-19 variants also forced governments to reimpose
restrictions to contain the virus.
Against this backdrop, the Philippine economy grew by 12.0 percent in the second quarter of
2021 and by 7.1 percent in the third quarter.
The faster-than-expected expansion in the third quarter was driven by the industry and services
sectors.
In contrast, the agriculture sector contracted, owing to weather disturbances and the African
swine fever that affected livestock.
The nationwide rollout of the alert level system, which permitted interzonal and intrazonal travels
covering places in lower alert levels, contributed to higher mobility and improved business
activities in November and December 2021.
The recovery in business activity led to improved employment indicators. Some jobs lost in the
earlier periods of the pandemic were gradually recovered, with total employment in October 2021
already exceeding pre-pandemic levels.
However, high-contact industries, such as accommodation, food service activities, and
transportation and storage continued to record job losses.
Moreover, granular data show that quality of jobs has yet to fully recover.
The BSP's accommodative monetary policy and extraordinary measures ensured adequate
liquidity in the financial system and helped bolster domestic economic activity amid the
pandemic.
Bank lending appears to have slowly turned the corner in recent months. It grew for the fourth
straight month in November, up by 4.0 percent year-on-year from 3.5 percent in October.
This came with optimistic economic outlook of businesses in response to rising vaccine rollout
and easing of restrictions in the latter part of 2021.
Meanwhile, inflation further eased in December 2021. On an annual basis, inflation for food,
alcoholic beverages and tobacco, and non-food items continued to slow down in December
owing to easing supply constraints.
However, prices of electricity, gas, and other fuels further increased amid elevated global prices
of crude oil and coal.
Core inflation, which excludes volatile food and energy prices, likewise declined in December as
supply-side price pressures abated.
Targeted non-monetary measures by the national government helped ease the pressures from
supply-side factors.
The consecutive quarters of positive year-on-year economic growth point to prospects of
sustainable recovery.
Nevertheless, with recovery still in its nascent stage, the BSP is keen to maintain policy support
for the economy. We will properly time our exit strategy as withdrawing support either too early or
too late may have undesirable consequences to the economy.
To date, the BSP's liquidity-easing measures in response to the pandemic amount to 12 percent
of GDP.
The prevailing monetary policy stance is supported by a manageable inflation outlook and
anchored inflation expectations. Based on our latest baseline forecasts, inflation is seen to settle
at 3.4 percent in 2022 and 3.2 percent in 2023, well within the official target range of 2.0 to 4.0
percent.
However, risks to the inflation outlook appear to be slightly on the upside for 2022 but remain
broadly balanced for 2023. Over the near term, major upside risks include increase of global
nonoil commodity prices due to strong global demand.
Additionally, we continue to monitor the developments surrounding Typhoon Odette to determine
if it will have secondary effects on inflation.
Meanwhile, results of the BSP's survey of private sector economists conducted in December
2021 showed steady mean inflation forecasts at 3.5 percent for 2022 and 3.1 percent for 2023.
The domestic economy is expected to rebound stronger this year.
The interagency Development Budget Coordination Committee (DBCC) sets its 2022 GDP
growth assumption to a range of 7.0 to 9.0 percent from 5.0 to 5.5 percent last year, taking into
account continued recovery prospects as more people get vaccinated and as more businesses
rebound from the pandemic.
Meanwhile, overseas Filipino remittances are seen to have reached a new record high of
US$31.7 billion in 2021 from US$30.1 billion in 2019.
But there are risks to the strong recovery prospects. The emergence of highly transmissible
COVID-19 variants could delay the normalization of economic activities.
While vaccines have helped lessen severe COVID-19 cases and lower hospitalizations, the
reduced efficacy of existing vaccines against more virulent COVID-19 variants may force
governments to reimpose stricter lockdown measures to prevent rapid spread of infections.
These restrictions, if prolonged, could impede the global economy's recovery in the first half of
2022.
Nonetheless, in the case of the Philippines, the timely imposition of quarantine restrictions may
help control COVID-19 surges and arrest the spread of the more transmissible Omicron variant.
On the external front, the ongoing policy normalization by major central banks could affect capital
flows and heighten volatility in financial markets.
On the positive side, the policy normalization of advanced economy central banks may provide
opportunities for economies like the Philippines in terms of increased trade activities.
We expect the Philippine economy's growth trajectory to improve further owing to the projected
expansion of exports in 2022.
From Q1-Q3 2021, goods exports grew by 16.0 percent owing to the recovery in demand from
our major trading partners. Electronic products account for more than half of the country's total
exports.
And we expect exports of electronic products to increase as demand for semiconductors and
other electronic components rises owning to more extensive global digitalization efforts across
multiple sectors.
Also lending support to the improved export outlook are higher commodity prices in mineral and
agro-based products, and an increase in domestic production capacity.
The normalization of the presently highly accommodative monetary policy in advanced
economies is expected to cause a rebalancing of global capital flows and depreciation of
emerging markets' currencies vis-à-vis the dollar. While such a move could potentially affect all
emerging economies, the effect on each individual economy will be uneven.
Our assessment is that the Philippines is in a favorable position to navigate this tightening of
global financial conditions given its manageable inflation environment and sufficient external
buffers.
The current level of gross international reserves (GIR) of USD109 billion is more than sufficient to
withstand adverse external shocks. Structural flows from overseas Filipino remittances, IT-BPM
revenues, and foreign direct investments can be counted on to further boost the country's
external payments position.
Meanwhile, the BSP's market-determined exchange rate system and macroprudential measures
will continue to curb excessive foreign exchange volatility and help maintain order in the financial
markets.
The timing and conditions under which the BSP will unwind its pandemic interventions will
continue to be guided by the inflation and growth outlook over the medium term and the risks
surrounding such outlook.
Consistent with the BSP's data-dependent approach to policymaking, the BSP will continue to
monitor the evolution of various domestic factors, including liquidity and credit dynamics, financial
sector risks, and the state of public health, as well as emerging global developments and
potential spillovers.
In closing, let me to summarize the key messages of my presentation:
First, the global economy began its recovery path in 2021, but this was subdued in large part by
the emergence of new COVID-19 variants and the uneven vaccination rollout across and within
economies.
Second, despite the slowdown in global economic recovery, the Philippine economy remains on
track to recover its pandemic losses, underpinned by strong macroeconomic fundamentals and
expectations of higher domestic and foreign demand as well as stable inflation outlook.
And third, the BSP remains steadfast in its commitment to provide appropriate policy support to
ensure a sustainable path to economic recovery.
When developments warrant a scale-down of policy support as economic recovery gains
traction, the BSP will ensure a smooth transition in winding down its time and state-bound
measures. The BSP will strike a delicate balance between providing adequate stimulus to the
economy and preventing the buildup up inflationary pressures and risks to financial stability.
Thank you for your attention.
Deputy Governor Francis Dakila will be sharing the BSP's thoughts in greater detail during the
Q&A.
I look forward to meeting you all in person in our future engagements.