Moderate inflation good for PHL economic growth

BUSINESSMEN now have a clearer picture of where the economy is headed to, now that 2019 is winding down.

The inflation rate has dropped steadily since peaking at 6.7 percent in September and October last year, and has gone down to below one percent in September this year.

A series of government actions, including the landmark rice tariffication law that liberalized rice imports, and the recent pro-growth monetary policies of the Bangko Sentral ng Pilipinas have all but assured that the economy will regain its robust pace in 2020.

President Duterte’s administration is pursuing the “Build, Build, Build” infrastructure program without letup, while our economic managers are keeping the country’s macro economic fundamentals intact by keeping inflation down and strengthening the fiscal house.

I am more confident this time that a gross domestic product growth of six percent in 2019 is still doable despite the blip in the first and second quarters. The government’s catch-up spending in the second half of the year and the reduced inflation rate that removed an element of uncertainty in the minds of businessmen and consumers alike will spur more economic activities in the months ahead.

The recent twin moves of the BSP to cut the benchmark interest rates by 25 basis points to four percent effective Sept. 27, and reduce the reserve requirement ratios of banks by 100 basis points, or one percentage point, effective the first week of November, to me are clear proof that the government has effectively licked inflation.

BSP Governor Benjamin Diokno is now on a mission to bolster economic growth by keeping the cost of funds lower and effectively freeing up hundreds of billions of pesos into the financial system.

The cut in reserve requirements, according to the BSP, was in line with its financial sector reform agenda to promote a more efficient financial system by lowering financial intermediation costs. It said the adjustment in reserve requirement ratios aimed to increase domestic liquidity in support of credit activity.

With price pressures easing, the BSP is becoming more confident in adopting lax monetary policies to prop up the economy while monitoring external threats, especially the protracted US-China trade war.

The Monetary Board has already reduced the inflation forecast this year to 2.5 percent from the previous estimate of 2.6 percent, and kept the forecasts for 2020 and 2021 steady at 2.9 percent.

“Moving forward, the BSP will remain watchful of economic and financial developments that could affect the inflation environment in line with its commitment to price stability conducive to long-term economic growth,” it said.

Reducing the cost of funds and releasing additional liquidity into the financial system through lower reserve requirement ratios of banks, along with accelerated government spending toward the close of the year, are growth initiatives that will shield us from the tug of war between the US and China and the ensuing global economic slowdown.

Diokno has conceded that the prospects for global economic growth will likely remain weak mainly because of the uncertainty over trade policies. He also cited the upside risks to inflation over the near term, coming mainly from the volatility in oil prices due to geopolitical tensions in the Middle East, and the potential impact of the African swine fever outbreak on food prices.

An early approval of the national budget for 2020, meanwhile, will give investors more confidence on the economy, given the lessons learned early this year. The House of Representatives in late September already approved the proposed P4.1- trillion national government budget for 2020 on third and final reading. This gives the Senate enough time to deliberate on the proposed expenditure program.

We already know that the late approval of the 2019 budget stalled economic growth in the first half of the year. The economic growth in the second quarter slowed to a four-year low of 5.5 percent from 5.6 percent a quarter ago and 6.2 percent a year ago, weighed down mostly by the El Niño dry spell, the delay in the approval of the national budget and the ban on construction activities in the run-up to the midterm elections in May.

With both chambers of Congress aware of the budget’s impact on the economy, our growth prospects are becoming clearer and better. I am confident that 2020 will offer more opportunities to the Filipino people.

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This piece first came out in Business Mirror on Oct. 8, 2019 under the column “The Entrepreneur.” For comments/feedback e-mail to: [email protected] or visitwww.mannyvillar.com.ph./PN

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